Ordinarily resides test continues to cause headaches, warns tax expert

Determining tax residency in Australia is defined by one general rule and three statute rules intended to help simplify the process, but they result in overcomplication.

The four rules, also referred to as tests, included the ordinarily resides test, the domicile test, the 183-day rule and the superannuation test.

Talking on a recent Under the Hood episode, Michael Messner, director of Vantage Accounting, and Lee-Ann Hayes, head of tax education for Accurium, agreed that the first rule, the ordinarily resides test, was outdated.

Hayes noted the overarching purpose of the first test was to determine a resident based on ordinary concepts, such as if someone was considered a resident within the ordinary meaning of the word.

However, this quickly became overcomplicated by outside factors, including where family members reside, where a spouse or children reside, where belongings are kept, the local culture interacted with, and intentions.

Messner added that one of the most difficult features of the ordinarily resides test was identifying an individual’s intentions.

“We have to ask people: what is your intention? Do you want to live in Australia like a normal ‘Aussie’ and have the means to do that? Are you just here temporarily? Things like that,” he said.

“It’s much harder to identify than what it sounds. There’s a lot of confusion around it and also the indications of these. If it’s about your intention, how are you supposed to know if you don’t write them down and think about them? How do you collect contemporary evidence of the facts so you can back up what your intention is?”

Inquiring about a client’s intentions is also difficult for tax practitioners as it is hard to give advice and answers without clients ‘advice shopping.’

Hayes said it was frequently perceived as easy to skip through the test and determine an answer and outlined the importance of going through every test, step by step.

Based on the way people now lived their lives fluidly and could easily access travel and migration, it could be easy to be caught up in being a taxable resident in any country.

“This test is an antiquated law. It’s been here for a very, very long time and it’s from a time when we weren’t as mobile as we are now and it just doesn’t suit today’s society of having a strong economic presence overseas,” Hayes said.

“Applying our rules was easy when you were expected to stay in the same place, whereas now, you can get on a plane and go and live anywhere. So, the idea of just following these tests highlights that they just don’t suit our current situation.”

Messner added: “That’s the right point to make. When this test originated, we were always in the same place. Nowadays, we move from Townsville to Melbourne, then over to Perth, internationally and then we’re back, right? The test just isn’t designed for that.

The podcast episode highlighted that the UK and Canada also used to determine residency through the ordinarily resides test, yet abandoned it based on its complexity and complications.

Messner and Hayes said the question surrounding why the Australian government still upheld the test was a “very controversial area.”

“It would be a very brave government to do that. I think the issue comes down to the fact that we don’t want any revenue leakage,” Hayes said.

“The minute you create simplicity, I guess you get revenue leakage that the government had potential for, with people that were in, before being out and vice versa.”

“It’s sort of a weighing up between the integrity and the simplicity. And I think, well, clearly, we’ve leant more towards integrity, rather than simplicity for historical reasons.”

Messner agreed with this observation and believed the government’s intention when making law was to rope in as many people as possible to secure the revenue base.

“I’m very respectful of the tasks of overhauling this test, and I think my argument is that it shouldn't be a political football,” Messner said.

“It should be a panel of experts that are appointed and come up with high-quality solutions that have been technically worked out with clear instructions on how to make this process simpler. This would probably get the best outcome.”

“It might not be a political win with voters, but let’s move beyond this and just do what’s right for the country.”