Australia | Employment Tax | New ruling on individual tax residency

June 2023

Global Mobility Tax

Australia | New ruling on individual tax residency

Summary

The Australian Taxation Office (‘ATO’) has issued Taxation Ruling TR 2023/1 to reflect the Commissioner’s view on when an individual would be considered a tax resident of Australia.

The ruling was previously released as Draft Taxation Ruling TR 2022/D2. The final ruling (TR 2023/1) takes into consideration feedback provided during a consultation period (of which Vialto Partners was involved) and has been updated to give some additional clarity and provide further examples.

TR 2023/1 takes into account developments in more recent case law such as Harding v Commissioner of Taxation [2019] FCAFC 29 (‘Harding’), Pike v Commissioner of Taxation [2019] FCA 2185 (‘Pike’) and Addy v Commissioner of Taxation [2019] FCA 1768 (‘Addy’). This ruling replaces previous residency rulings IT 2650, IT 2681 and TR 98/17.

The ruling does not represent a change in legislation or the tests for residency that the previous Government announced in the May 2021 Federal Budget based on the recommendations put forward by the Board of Taxation – we are yet to see if the current Government will adopt those recommendations.

The Detail

TR 2023/1 reiterates that determining if an individual is a resident of Australia requires a holistic review of the individual’s facts and circumstances.

Some of the key points the Commissioner highlights in TR 2023/1 include:

• As residency is determined based on an analysis of an individual’s facts and circumstances, there is no ‘bright line test’.
• An individual’s physical presence outside Australia does not preclude that individual from residing in Australia. In other words, the Commissioner’s view is that individuals who have established residency in another country can still be a resident of Australia if they continue to maintain connections with Australia.
• For Australian domiciled taxpayers looking to cease being a resident of Australia, the Commissioner has to be satisfied that an individual has established a permanent place of abode outside Australia. This requires an individual to abandon their residency in Australia and commence living permanently overseas. The Commissioner’s view is that one cannot have a permanent place of abode both in and outside Australia and if a permanent place of abode is available in Australia, it is unlikely the individual has established a permanent place of abode outside Australia.
• TR 2023/1 makes it clear that the Commissioner’s view is that any individuals entering Australia on a working holiday visa cannot be considered a resident of Australia by virtue of the terms and conditions as well as declarations signed in the course of obtaining their visa. Such individuals could only become a resident if they demonstrate an intention to reside in Australia (usually by way of application for a longer term visa).

The Commissioner provides a series of examples in TR 2023/1 which demonstrates how the Commissioner administers the residency tests outlined in subsection 6(1) of the Income Tax Assessment Act 1936.

What this means

Vialto welcomes the additional clarity in the Commissioner’s interpretation of the definition of ‘resident of Australia’ as well as the use of modern examples which take into account current living arrangements as opposed to those used in IT 2650 and TR 98/17 which were based on living arrangements at the time (more than 25 years ago). Notwithstanding the additional clarity, the following should be noted:

• As determining tax residency requires an analysis of an individual’s facts and circumstances, the ruling provides little comfort for employers in meeting obligations such as PAYG withholding for their employees. Employers should ensure that they have a reasonable basis for adopting certain tax residency positions for employees which should include reviewing how they collect and record TFN and Withholding Declarations.
• Employers may want to re-consider whether to bring their employees into Australia on a working holiday visa. This becomes particularly important where such employees are covered under their employer’s tax equalisation policy and potentially increasing tax costs where these could be avoided.

Next steps

Given the Commissioner’s emphasis that an individual’s tax residency turns on their facts and circumstances, employers should ensure that employees obtain advice in respect of their tax residency status to ensure their obligations are being correctly met in respect of their employees. Employers should also review their employee populations, particularly employees that are in Australia on a working holiday visa, to ensure that obligations are being met correctly for such employees.

Australian domiciled individuals who are living outside Australia should also review their own facts and circumstances to determine whether they either have ongoing connections to Australia as well as maintained a permanent place of abode in Australia in light of the Commissioner’s updated views.

Contact us

For a deeper discussion on the above, please reach out to your Vialto Partners point of contact, or alternatively:

• Shane Smailes, Partner | shane.smailes@vialto.com
• Chris Ying, Director | chris.ying@vialto.com

Further information on Vialto Partners can be found here: www.vialtopartners.com

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Vialto Partners (“Vialto”) refers to wholly owned subsidiaries of CD&R Galaxy UK OpCo Limited as well as the other members of the Vialto Partners global network. The information contained in this document is for general guidance on matters of interest only. Vialto is not responsible for any errors or omissions, or for the results obtained from the use of this information. All information is provided “as is”, with no guarantee of completeness, accuracy, timeliness or of the results obtained from the use of this information, and without warranty of any kind, express or implied, including, but not limited to warranties of performance, merchantability and fitness for a particular purpose. In no event will Vialto, its related entities, or the agents or employees thereof be liable to you or anyone else for any decision made or action taken in reliance on the information in this document or for any consequential, special or similar damages, even if advised of the possibility of such damages.

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Further information on Vialto Partners can be found here: www.vialtopartners.com

Vialto Partners (“Vialto”) refers to wholly owned subsidiaries of CD&R Galaxy UK OpCo Limited as well as the other members of the Vialto Partners global network. The information contained in this document is for general guidance on matters of interest only. Vialto is not responsible for any errors or omissions, or for the results obtained from the use of this information. All information is provided “as is”, with no guarantee of completeness, accuracy, timeliness or of the results obtained from the use of this information, and without warranty of any kind, express or implied, including, but not limited to warranties of performance, merchantability and fitness for a particular purpose. In no event will Vialto, its related entities, or the agents or employees thereof be liable to you or anyone else for any decision made or action taken in reliance on the information in this document or for any consequential, special or similar damages, even if advised of the possibility of such damages.

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