Reforming Individual Tax Residency Rules – A Model for Modernisation

Background

In May 2016, the Board of Taxation (the Board) commenced a self-initiated review of individual tax residency. In August 2017 the Board presented its findings to Government in ‘Review of the Income Tax Residency Rules for Individuals’ (the 2017 Report).

Following extensive consultation and research, the Board concluded that the current individual tax residency rules are no longer appropriate and require modernisation and simplification.

In particular, the current rules do not reflect global work practices, and impose an inappropriate compliance burden on many taxpayers in all but the simplest of cases – this has led to increased uncertainty and disputes. In addition, the Board identified a number of integrity concerns that arise due to the way in which the current rules operate.

The Board recommended that the Government replace the current rules with an improved and simplified residency test based on a ‘two-step’ model – a simple bright-line test followed by a more detailed analysis in more complex cases. While stakeholders overwhelmingly supported the Board’s conclusion, further consultation was necessary to develop the framework for a new definition of individual residency.

Government response and terms of reference

The Government responded to the Board’s 2017 Report in May 2018. Before taking a position on the Board’s 2017 Report, the then Minister for Revenue and Financial Services, the Hon Kelly O’Dwyer MP, asked the Board to undertake further consultation as outlined in the 2017 Report.

The terms of reference provided by the Minister in May 2018 requested the Board to consult on its key recommendations in the 2017 Report, including how Australia could draw on residency tests in other countries. The Government expressed its support for the Board undertaking this consultation to ensure the new residency definition can be appropriately designed and targeted. As part of this process, it was also requested that the Board address the concerns raised in its report on the ‘resident of nowhere’ phenomenon and the deficiencies of the superannuation rule.

Working Group

In accordance with the Government’s response, the Board undertook consultation in late 2018.

The Board established a working group comprised of three Board members: Rosheen Garnon (Chair), Craig Yaxley and Dr Mark Pizzacalla. The working group met on numerous occasions, carried out consultation and prepared this Report outlining the Board’s proposed new individual residency rules (assisted by the Board’s Secretariat).

Consultation

The Board commenced public consultations in September 2018 with the release of the Review of the Income Tax Residency Rules for Individuals: Consultation Guide. The consultation guide outlined a series of design principles aimed at developing new residency rules, with a particular focus on the following:

• options for a two-step model for individual tax residency;
• integrity risks to circumvent existing residency rules (e.g. ‘residents of nowhere’); and
• options to replace the ‘superannuation test’.

The Board conducted a series of roundtable consultation meetings in Sydney, Melbourne and Perth.

Submissions

The Board received 15 submissions with one being confidential.

Board Report

The Board completed its report in March 2019.

Additional Government Response

On 12 December 2019 the Government announced the publication of the Reforming Individual Tax Residency Rules – A Model for Modernisation report, noting it as a valuable contribution to public debate. The Government stated it will continue to consider the implications of the Board’s findings.

Further information

For further information about the Board’s work on the Board’s report: Reforming individual tax residency rules – a model for modernisation, please contact the Board of Taxation Secretariat at taxboard@treasury.gov.au or 02 6263 4366.

Submissions received