The Australian Taxation Office (ATO) has issued a final ruling, TR 2023/1, on the tax residency of individuals. This ruling is critical in determining the extent to which the ATO can impose a tax on an individual. Australian tax residents are assessed on their worldwide income, while non-residents are generally only assessed on income from Australian sources.
The ruling addresses recent court decisions and acknowledges the increased global mobility of employees when determining tax residency. This is especially relevant given the prevalence of global working arrangements, which was further heightened during the COVID-19 pandemic.
The ruling provides updated views on three residency tests for individuals:
- The ‘ordinary concepts’ test
- The ‘domicile’ test
- The ‘183-day’ test
The fourth test, the ‘Commonwealth superannuation fund’ test, is excluded from the ruling due to its limited application.
While the ruling provides clarity on various aspects of the residency tests, it is still necessary to undertake a thorough, holistic review of an individual’s way of life to reach a view on their tax residency. The Commissioner states that “no single fact determines the outcome and the significance of facts varies from case to case. Because of this, there are no ‘bright-line rules’, or any single factor that can be said to be paramount”.
The rules remain complex to apply, with no certainty afforded to individuals on their residency status.
The ruling expands on the ‘ordinary concepts’ test and the ‘domicile’ test. Under the ordinary concepts test, an individual is a tax resident if they ‘reside’ in Australia. This test seeks to ascertain whether the individual’s presence in Australia is usual and settled, in contrast to temporary and casual.
The domicile test most commonly applies to Australian citizens who are living overseas. Under this test, an individual is an Australian tax resident when their domicile is in Australia, unless the Commissioner is satisfied that the individual’s ‘permanent place of abode’ is outside Australia.
The ruling further clarifies the ATO’s views on the residency tests, but taxpayers do not have certainty as to how these tests may apply to their specific circumstances. This is because the outcome of most of the tests are highly dependent on the Commissioner being ‘satisfied’ of various matters, and each residency decision will turn wholly on its facts.
The introduction of a ‘bright line’ test will be a welcome contrast to the current tests which are difficult to apply and highly dependent on the specific facts of each case. Under the current tests, as stated in the Ruling, there are no ‘bright-line rules’ – an outcome in one case does not govern the outcome in a different case, even when the facts are similar.
Australia’s self-assessment system places the responsibility on the taxpayer to comply with taxation laws. When determining their tax residency status, taxpayers will need to make assumptions about the way in which the Commissioner would apply the residency tests, based on the individuals’ particular facts and circumstances. This exercise can be fraught with difficulty as it requires individuals to stand in the shoes of the Commissioner and reach a state of ‘satisfaction’ on various matters.
