Federal Budget 2021-22: Long awaited reforms to tax residency tests for individuals and companies
Tax Law - 12 May 2021
The Government has announced updates to both the individual and corporate Australia tax residency tests. This will continue to bring further clarification to the corporate residency test announced in last year’s Budget and will extend to trusts and corporate limited partnerships.
The Government has also announced that the individual residency tests will be updated to reflect recommendations by the Board of Taxation from 2019 to modernise the Australian individual tax residency tests.
Individual tax residency
Currently, individual taxation is determined using tests that rely heavily on terms such as ‘domicile’, ‘permanent place of abode’ and ‘usual place of abode’, which are not defined in the legislation. Often an individual needs to resort to case law, which all turn on individual facts and circumstances. Further, the weight of these facts are often subjective and will change from case to case resulting in a lot of uncertainty around the individual tax residency rules.
The proposed changes begin with a two-step pronged test as follows:
- Whether the individual has spent 183 days or more in Australia (the ‘bright line test’); or
- Whether the individual is a Government Official deployed overseas.
Answering yes to either question means the individual will be considered an Australian resident for tax purposes.
Conversely, where the individual does not answer yes to either question they will need to consider further factors depending on whether they are commencing or ceasing residency.
While the factors involved are still subjective and the outcome will ultimately depend on the individual’s circumstances, the Government states the new tests will be easier to apply and provide greater certainty.
The new residency rules will apply from 1 July 2021 following Royal Asset of the relevant legislation.
Corporate tax residency
Corporate tax residency is currently determined by considering whether the company:
- Carries on business in Australia; and
- Has its central management and control in Australia; or
- Has its voting powers controlled by shareholders who are residents of Australia.
In the 2020-21 Budget, the Government announced that it would be making amendments to clarify the corporate residency test for foreign incorporated entities.
In the 2021-22 Budget, the Government has announced that it intends to broaden this amendment to the corporate tax residency rules to include trusts and corporate limited partnerships. This will provide greater certainty to foreign investors investing or carrying out business in Australia through trusts and corporate limited partnerships.
The information contained in this blog is general in nature and should not be considered to be legal, tax, accounting, consulting or any other professional advice. In all cases, you should consult with a professional advisor familiar with your factual situation for advice concerning specific matters before making any decisions. By reading this blog, you confirm your understanding of this disclaimer.