Tax residency changes ‘fail to consider post-covid scenarios’
Changes to the individual tax residency rules will provide greater clarity for taxpayers but may not fit with common work arrangements in the post-covid world, says Grant Thornton.
The proposed changes for modernising the individual tax residency rules will provide more certainty and lead to largely positive outcomes for both individuals and employers according to Grant Thornton parter Thomas Isbell.
However, certain aspects of the proposed rule changes may not operate well with the post-covid world with the reforms based on a model developed back in 2019, said Mr Isbell.
The Board of Taxation made a raft of recommendations to the government for modernising the rules in 2019 in its report Individual Tax Residency Rules – a model for modernisation.
The former government announced it would replace the individual tax residency rules with a new modernised framework based on the model proposed by the Board of Taxation.
Treasury has now released consultation with further details on the proposed framework, seeking feedback on the design features.
The proposed model for the new framework adopts a two-step approach. The primary test is the 183 day ‘bright-line’ test which specifies that any individual who is physically present in Australia for 183 days or more in any income year would be an Australian tax resident.
To address concerns that an individual would be able to manipulate the 183-day test by spending 183 days in Australia across two income years, a secondary test based on 45 days of physical presence and other factors other factors would indicate that the individual has a sufficient connection with Australia to be treated as a resident for tax purposes.
Mr Isbell said a lot has changed since the proposed model was developed in 2019 in terms of how people work and what global mobility means.
“A very common scenario that we’ve seen blossom in the past three years is that I might be employed by a bank in London but I go and spend 60 days in Sydney a year. That doesn’t mean I’ve relocated my life or changed my residence but it might mean that I get to spend time more time with family,” he said.
“What’s going to happen under these new tests is that will put me at risk of triggering a tax residence position here, which if we don’t take into consideration the double tax agreements that are enforced, could give rise to a significant risk of double taxation.
“In my view that’s not something we’d want to do. We want people earning British pounds or US dollars to come here and spend that money in pubs and restaurants. We don’t want all those people to be disenfranchised from visiting Australia for extended periods of time.”
Another potential issue within the proposed framework is the overseas employment test.
Under the proposed overseas employment rule which provides a mechanism for long-term tax residents to immediately cease being a tax resident, irrespective of the strength of their connection to Australia, where they depart Australia to take up overseas employment for a period of more than two years.
However, the rule cannot be used where an employer and the individual are associates.
“There’s a lot of family businesses working in venture style arrangements or as entrepreneurs who will be somewhat disadvantaged from that,” said Mr Isbell.
Introducing bright-line tests may also see taxpayers potentially manipulate their behaviours and lead to outcomes that aren’t aligned with what the legislation is trying to achieve, he said.
“Particularly where a taxpayer is considering whether they want to trigger a residence position for a CGT purpose, for example, which may [impact] their income tax level when you overlay it with the double tax agreement,” he dusted.
“That’s something that could be open to manipulation.”
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