Australia undecided over rewrite of individual Tax residency rules...

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Australia undecided over rewrite of individual tax residency rules

Monday, 9 July, 2018

A Board of Taxation review of Australia's tax residency rules for individuals has concluded that they are out of date, and in need of 'modernisation and simplification'.

The individual residency rules have not been significantly amended since they were enacted in 1930, and there has been a significant increase in residency-related litigation since 2009. The most recent, the Australian Federal Court decision in Harding v Commissioner of Taxation, which has been litigated since 2014, has attracted much public criticism, as it makes it much more difficult for expatriate Australians to be non-residents for tax purposes.

This, and other factors, prompted the Board to look into the matter without waiting to be commissioned by the Australian government.

Work on the report began in May 2016, under the chairmanship of Mark Pizzacalla, aided by advice from officials of the Department of the Treasury and the Australian Taxation Office. It was completed in August last year, and submitted to Kelly Morrison, Australia's Minister for Revenue and Financial Services, though it has only just been published.

Not surprisingly, Pizzacalla's group found that the rules are no longer appropriate to a world that has moved on by nearly 90 years. One problem in particular is an 'integrity risk' that allows high-net-worth individuals to become 'residents of nowhere' when they leave Australia without becoming tax residents of another jurisdiction.

The report recommends replacing the current rules with an 'improved and simplified' residency test based on a two-step model, as follows:

  1. A primary 'bright line test' that automatically determines the residency status of most individuals by day-counting

  2. A secondary test taking into account individual circumstances and incorporating some existing case law, as well as international practices.

Such secondary tests usually introduce a ‘fudge factor’ allowing the tax authorities to deem a person tax-resident if he or she has some kind of personal connection with the jurisdiction. They are unpopular with taxpayers and their advisors, who lobbied the Pizzacalla committee to restrict the test to the day-counting procedure.

The Board of Taxation claims that many stakeholders supported their dual-test approach, but acknowledged that dissenting views exist. It concluded that further consultation will be necessary.

The government has not been in a hurry to act on the report, and its response has only just been published. Revenue Minister Kelly Morrison has ordered the Board to conduct further consultation, with particular focus on the integrity of the residency rules. She explicitly declined to take a position on the report's recommendations, promising only to 'consider the entirety of the Board's work following the further consultation process, in light of broader priorities'.

Sources



Martin Scarpino