Foreign-based executives of ASX companies, globe-trotting investors and everyone else will be automatically taxed as Australian residents if they spend more than 183 days in Australia in any 12-month period.
The Turnbull government has been urged by its own tax advisory board to take a new approach to determining residency by throwing out most other complicated tests and instead basing it on a more simple “days count” test where a person is present in Australia for 183 days or more in a 12-month period.
That’s a key recommendation of the first proposed rewrite in 80 years of the “uncertain and complex” tax rules that govern residency.
“The inadequacy of the existing rules is of increasing prevalence and has the potential to undermine the integrity of the income tax system,” the report by the independent Board of Taxation warns.
While this 183 days test already exists, there are several other tests for determining a person’s residency. These include the “reside” test, the ‘domicile and permanent place of abode’ test and the Commonwealth ‘superannuation funds test’.
The current definition of a resident was enacted in 1930, at a time when most Australians did not have access to international travel.
The board warns of a scenario: “commonly understood” among tax advisers, where individuals who leave Australia without establishing a residence in another country can avoid paying tax entirely by arguing they are “residents of nowhere”.
As a “resident of nowhere” – a non-resident but haven’t established tax residency in another jurisdiction – the federal government may decide that they are still a resident until tax residency is established elsewhere.
For outbound individuals, the board recommended individuals be considered non-resident if they work overseas and spend less than 31 days working, or 61 days total in Australia.
Former residents would become non-resident if they spend less than 16 days in Australia, and someone who has never been resident of Australia would remain a non-resident if they spend less than 46 days in Australia.
The Board noted that disputes with the Australian Taxation Office and the need for the agency to issue private rulings have increased since 2009.
It said tax agents had found it harder to give advice on residency issues, and the cost was higher. A basic letter of advice could cost between $5,000 and $10,000 per individual, it said.