Whilst the Australian tax system has always had special rules targeting non-resident taxpayers, (e.g., withholding rules for dividends, interest and royalties, CGT event K3, Division 855 of the ITAA 1997), changes in the law in recent years have made the determination of a taxpayer’s residency status even more important than ever.
In the past, non-resident taxpayers have enjoyed most of the same tax concessions as resident taxpayers. However, many of these privileges have slowly been stripped away from them in recent years and additional requirements have been imposed on dealings with non-residents, including:
- The removal of the general 50% CGT discount from 8 May 2012.
- The foreign resident CGT withholding rules from 1 July 2016.
- The introduction of different tax rates for ‘working holiday makers’ from 1 January 2017 (refer to page 97 for the latest development in this area).
- The requirement to make income-contingent repayments on HELP debt from 1 July 2017.
TAX WARNING – Income tax residency rules for individuals
The task of determining the residency status of an individual taxpayer is not always an easy one. Whilst there are a number of tests to consider when making this assessment, the two that generally carry the most weight are the ‘ordinary concepts test’ and the ‘domicile test’. Unfortunately, both these tests are rather subjective (ultimately being a question of fact) and can be ambiguous at the best of times, resulting in numerous tax cases in this area of the law.
In May 2016, the Board of Taxation (‘BoT’) commenced a self-initiated independent review of Australia’s individual tax residency rules. The completed report was provided to the Government in August 2017 and released for public comment in July 2018. The BoT concluded that the current residency rules (which have remained largely unchanged since the 1930s) are no longer appropriate and should be modernised.
Whilst the Government has supported the BoT in undertaking further consultation on the proposed design of new residency rules, it is unclear whether any changes will actually come out of the consultation. As this is still an ongoing process, taxpayers will need to continue to apply the existing residency rules as they are and wait to see if any changes eventuate.