Australia is to replace its tax residency rules for individuals with a primary so-called ‘bright line' test, Australia's federal treasurer, Josh Frydenberg, announced in the country's Federal Budget 2021-22.
The new individual tax residency rules are intended to apply from 1 July following Royal Assent.
Under this new test, a person who is physically present in Australia for 183 days or more in any income year (the Australian tax year ending 30 June) will be an Australian tax resident.
Even if an individual is tax resident of Australia under Australian law, a tie-breaker provision of a double tax agreement may give the result that the individual is instead treated as tax resident of another country during a particular income year."
This represents a simplified version of the 183 day test used by some of its major trading partners such as the US, law firm Baker McKenzie's Sydney practice said in a briefing note.
Even if an individual is not physically present in Australia for 183 days or more, they may still be a tax resident under secondary tests that depend on a combination of physical presence and what are cryptically described in the budget papers as "measurable, objective criteria", it said.
"The Board of Taxation's March 2019 report on modernising the tax residency rules should hold the clues to what these criteria will be. The report set out a number of tests focusing on the right to reside permanently in Australia, Australian accommodation, Australian family and Australian economic interests.
The report also included certain other proposals, including an overseas employment rule, under which Australian tax residency would be lost where an individual is employed for a period of over 2 years overseas and certain other requirements are met".
Baker Mc Kenzie also pointed out a key issue to remember is that even if an individual is tax resident of Australia under Australian law, a tie-breaker provision of a double tax agreement may give the result that the individual is instead treated as tax resident of another country during a particular income year.