Proposed factor test for tax residency ‘won’t resolve complexities’
The factor tests proposed under changes to the individual tax residency framework are inappropriate and fail to resolve the complexities in the current system, says the Tax Institute.
The Tax Institute has called for a weighted model for individual tax residency rather than a two factor test as proposed by the government in its consultation paper on modernising individual tax residency.
In a submission to the consultation, the Tax Institute said that some of the factors proposed are not appropriate tests for determining individual tax residency.
Under the proposed model, the factor test focuses on a limited number of specific connections an individual may have to Australia.
The test would apply to individuals who have spent between 45 to 182 days in Australia.
An individual would have to meet at least two of the four factors outlined in the Factor Test.
The four factors proposed by the Board are the right to reside permanently in Australia, close family ties in Australia, access to Australian accommodation, and Australian economic interests.
The Tax Institute stated that relevant factors should be easily variable and have flexibility and scope to account for the practical circumstances of modern life.
The association said there may be merit in exploring a weighting system as a secondary factor-based test.
“We strongly advise a weighting system is adopted rather than the black and white ’two of four’ factor test,” it said in a previous submission.
Factor test must align with Australia’s double tax treaties
The Tax Institute noted that Australia’s double tax treaties not only operate to allocate taxing rights and avoid the imposition of double taxation but demonstrate a relationship and understanding between Australia and other countries.
“With limited exceptions, our double tax treaties take precedence over our domestic law and this is appropriate given their objectives,” the submission stated.
The criteria under the factors test should align as closely as possible with those taken into account in the tie-breaker tests for determining individual tax residency contained in Australia’s double tax treaties, the Tax Institute stressed.
“Where the 45-day threshold is applied with the factor test (particularly as currently proposed), or even when either of these tests are considered in isolation, more individuals will be required to seek professional advice on the application of the tie-breaker tests, where they otherwise would not be required to do so,” it said.
“This will unduly increase compliance costs for many individuals who should not naturally fall within the scope of the Australian tax residency rules.”
The Tax Institute said that consistency with the tie-breaker tests to the extent possible will provide greater certainty and mitigate the need for individuals to seek professional advice on the application of multiple rules to their circumstances, particularly where they should not otherwise have cause to do so.
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