The Government has announced a significant change to Australia’s individual tax residency rules, as well as some other cross-border proposals of note.
Key take-aways
- Simplification of individual tax residency rule whereby individuals who are physically present in Australia for 183 days or more will be an Australian tax resident under the ‘primary test’ and those who don’t meet this criterion will be subject to a secondary test.
- Relaxation of residency requirements for SMSFs and SAFs by extending the safe harbour for the central management and control test from two to five years for SMSFs and removing the active member test for both fund types.
- List of countries with effective information sharing agreements with Australia updated to include Armenia, Cabo Verde, Kenya, Mongolia, Montenegro and Oman.
Simplification of individual tax residency rules
The Government has announced the well overdue overhaul of Australia’s individual tax residency rules. While little detail was included in the budget announcement itself, it has been proposed that the new residency framework would be based around the recommendations made by the Board of Taxation in its 2019 report titled “Reforming individual tax residency rules – a model of modernisation”.
Under the proposed rules, individuals who are physically present in Australia for 183 days or more will be Australian tax resident under the ‘primary test’. Those who don’t meet this criterion will be subject to a secondary test which will be made up of several measurable objective factors. While this sounds like simplification, the devil will likely be in the detail, particularly around the setting of the relevant ‘factors’. Complications are also expected to arise in the context of treaty interactions and transitional provisions.
The measures are to come into effect from the first income year after enabling legislation receives Royal Assent.
Consultation on amending trust and corporate limited partnership residency rules
In the October 2020 budget, the Government announced changes to the residency test for companies to address uncertainty for foreign incorporated entities following guidance issued by the Australian Taxation Office in the wake of the High Court’s decision in Bywater.
The Government has now announced its intent to broaden consultation on the changes, so as to include the residency test for trusts and corporate limited partnerships.
Relaxing residency requirements for self-managed superannuation funds
Failing the ‘residency’ requirement can render self-managed superannuation funds (SMSFs) and small APRA-regulated funds (SAFs) non-complying, which can have serious financial consequences. In a positive development, the Government proposes to relax residency requirements for SMSFs and SAFs by extending the safe harbour for the central management and control test from two to five years for SMSFs and removing the active member test for both fund types. These changes will make it easier for members to retain and contribute to such funds whilst they are temporarily overseas for work or educational opportunities.
The measure is to have effect from the start of the first financial year after the amending legislation receives Royal Assent, with an expected start date of 1 July 2022.
Maintaining New Zealand’s primary taxing rights over its sporting teams and support staff
The Government will ensure that New Zealand maintains its primary taxing rights over members of relevant sporting teams and support staff even where such individuals exceed the 183-day test in Australia’s tax treaty with New Zealand, because of circumstances arising from the COVID-19 pandemic. This measure will apply to the 2020-21 and 2021-22 income and fringe benefits tax years.
Updating list of exchange of information countries
The Government will update the list of countries with effective information sharing agreements with Australia to include Armenia, Cabo Verde, Kenya, Mongolia, Montenegro and Oman. Residents of listed countries are eligible to access the reduced Managed Investment Trust (MIT) withholding tax rate of 15% (rather than 30%) on certain distributions. The updated list will be effective from 1 January 2022.
