Expatriate Aussies face massive hit to tax residency status
A proposal put forward to impose a 45-day residency test in determining a person’s tax status, compared to the current 180 days, has sent shockwaves through Australian expatriate communities around the world.
Australian expatriates are in the sights of the Australian Treasury, with a proposal put forward to impose a 45-day residency test in determining a person’s tax status.
Under current law, residency is confirmed if a taxpayer spends more than 183 days in Australia, unless the Commissioner is satisfied they are genuinely living overseas.
Under the Board of Taxation’s proposed model, a long-term resident would cease to be a tax resident if they spent less than 45 days in Australia in the current income year, and less than 45 days in Australia in each of the two preceding income years. (The specific recommended guidelines to residency can be found at the end of this article, with full details available on the Treasury website).
Such a move would reverse the tax-free status of many expatriate Australians and have ramifications for their property holdings.
In justifying the change the Board said 45 days is longer than the normal annual leave period of four weeks, would ensure tourists and other short-term visitors did not become residents, and was comparable to jurisdictions such as New Zealand and the United Kingdom, which had 40 and 46 days respectively as their determinants of tax residency.
45-day ruling 'would be investment deterrent'
Respondents to a survey conducted by Australasian Taxation Services (ATS) were far less enamoured with the proposals, with 93 per cent saying the ruling, if implemented, would affect their plans in regards to travel to Australia.
There were also implications for investment in Australia, with 52 per cent of the 861 respondents saying they would curtail their levels of investment in the country.
Steve Douglas, Executive Chairman, ATS, said the economic impact of unintended consequences could well be in the billions of dollars of lost economic activity in tourism and construction and further worsen the rental crisis by dampening activity from this important investor landlord group.
“A loss of property investment incentives is already wreaking havoc on the rental market in Australia and these further deterrents to housing supply mean landlords will continue to walk away from property investment and reduce rental supply.
“Landlords are being bashed from pillar to post, with stamp duty, land tax foreign buyer duties and surcharges and now this step aimed at greatly reducing the number of non-residents who will subsequently flee the property market.”
The reforms were intended, according to the Board, to “simplify the operation of the law significantly while mirroring the existing rules to a certain extent.”
Early indications from the public suggest the 80-page report on the new recommendations had not met that brief.
When asked about the clarity of the tax residency test of 45 days in Australia, an overwhelming 93 per cent of survey respondents said the new arrangements were “more confusing and difficult to interpret.”
Just over half (51 per cent) said the existing residency period of 180 days, or more, would be a sensible test of tax residency status.
The news rules also fail to provide an exception when it comes to time spent in the country. This also riled survey respondents, with a quarter saying work travel should be excluded and the same number again arguing that visitations to children of a former relationship who themselves can’t travel should also be exempt from the days-in-country count. More than a third (35 per cent) said funerals and compassionate family visits should be omitted from the tally.
ATS submitted their findings to Treasury before the 22 September consultation period closing date.
In their submission, they noted there have been two significant recent taxation law changes that have had a massive impact on expats’ and migrants’ capital gains in Australian property.
“It is not an unreasonable statement to suggest that these are having large scale unintended consequences as contributors to the current rental crisis in Australia, as anyone owning a property while living abroad is providing valuable rental stock for Australia’s booming population,” the ATS Modernising Individual Tax Residency Consultation Submission noted.
The submission singled out the 2012 removal of the 50 per cent capital gains tax discount for ownership periods while living overseas, and the 2021 removal of 100 per cent principal residence exemption if a property was sold while living overseas.
“At the same time, changes to the cost of FIRB (Foreign Investment Review Board) applications and the state governments’ introduction of foreign buyer and land tax surcharges, as well as increased difficulty for property finance options for foreign based buyers, have all combined to see a significant drop-off of foreign property investment activity,” the submission noted.
“The impact of these can be clearly seen through the drop off of FIRB applications since these changes started in 2015, and subsequent rapid escalation in 2016 and 2017.”
Proposed changes relating to assessment of an individual’s tax residency
1. Commencing Residency Test
Under the Commencing Residency Test, if you were present in Australia for 45 days or more in the current income year, then you will apply the 'factor test' looking at whether you would be a tax resident. This includes:
- rights to reside permanently in Australia: Whether you have a permanent right to reside in Australia for immigration purposes
- Australian accommodation: Whether there is a legal right or arrangement to access accommodation at any time during the income year (including rental properties, own home, living with parents or other relatives)
- Australian family: Whether you have family in Australia
- Australian economic interests: Whether you have an employment contract to work in Australia or carry out a business in Australia or have direct/indirect interests in Australian assets.
If you satisfy two or more factors from the above, you will be considered an Australian tax resident.
2. Ceasing Resident Test
If you were a tax resident in the previous income year, you will apply the Ceasing Residency Test.
As a start you will be considered a non-resident from the date of departure if you:
- have been residing in Australia for the three prior income years
- have been employed overseas with an employment period of over two years from commencement
- have accommodation available in the place of employment for the entire employment period
- spend less than 45 days in Australia for each income year of the employment period.
If the above does not apply -
- If you are a short-term resident (resident for less than three* consecutive income years), you will be non-resident if you spend less than 45 days in Australia in the current income year and satisfy less than two factor tests (mentioned above).
- If you are a long-term resident (resident for three* consecutive income years or more), you will be a non-resident if you spend less than 45 days in Australia this income year, and less than 45 days in Australia in each of the two previous income years.
