Government mulls reforms to tax residency rules

The Federal Government is considering an overhaul of the rules governing residency for tax purposes in Australia, recommending a person's residency be defined by the number of days they spend in the country in a 12-month period.

The Board of Taxation has undertaken a review of what it means to be an Australian resident for taxation purposes, proposing the first reform to definitions in more than 80 years.

The advisory board has recommended residency be defined by whether a person spends more than 183 days in Australia over any 12-month period.

This means any person who has physically been in Australia during more than one half of the year of income but does not permanently reside here or intend to take up residency is automatically considered a resident for tax purposes.

While this rule already exists, the Board of Taxation has suggested that this be the lone rule by which the Government determines a person's residency. This is already the case in nations such as New Zealand and the UK.

Currently, there are several other tests used to determine a person's residency. The primary test for establishing residency is known as the 'resides' test, meaning that the person resides in Australia. Other tests include the 'domicile and permanent place of abode' test and the 'Commonwealth superannuation funds' test.

Labelling the existing rules around residency as "uncertain and complex", the advisory board said the inadequacy is of increasing prevalence and has the potential to weaken the integrity of the income tax system.

"These tests are complex to apply, require an understanding of common law and often require an individual to seek third-party tax advice. Further, given this uncertainty, the board understands that this may lead reasonable minds to reach different conclusions (even when based on analogous facts and circumstances), undermining the equity and integrity of the current residency rules," the report reads.

The board also points to the potential redundancy of the 'Commonwealth superannuation' test. Introduced in 1939, the test is intended to ensure that Commonwealth officers are treated as residents regardless of any extended absence from Australia. However, the relevant super funds under the test are no longer open to new members.

"As such, the effectiveness of this test in meeting its original stated objective should be subject to further consideration," the board said.

The board's report states there is an absence of a clear articulation of modern residency policy and fail to account for the considerable advancement over the years in the way in which individuals work, live and travel. As a result, there is and has been great difficulty in applying the current rules.

Read more: Board of TaxationTurnbull Government
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