Head of Education (Tax)
Australia’s income tax system is built on the foundational concepts of residence and source. Individual residency status is the first step in determining how the income tax laws apply. Much of the tax law applies differently to residents and non-residents, (for example, which types of income and capital gains are assessable and which rates of tax apply) and as such, it is of fundamental importance to the system that individuals know their residency status when interacting with the income tax system.
Board of taxation report: Reforming individual tax residency rules – a model for modernization March 2019
The current definition of a resident for tax purposes was enacted in 1930 (and since then has been largely unchanged. But while the definition has not changed, work practices have, with an increasingly global mobile workforce. This has changed both the frequency and the nature of interactions with the residency rules (See: Board of Taxation: Review of the income tax residency rules for individuals, August 2017).
Another factor resulting in increased consideration of the residency rules was a legislative change in 2009, narrowing the application of s. 23AG of the ITAA 1936. This was a provision that resulted in an income tax exemption to income derived by resident expatriates on work undertaken overseas. The removal of this exemption has resulted in increased litigation, with the Board of Taxation (BOT) noting in the 2017 report that:
Between 1930 (when the resident definition was introduced) and 2009, there were approximately 25 decisions handed down by a tribunal or court on individual residency. Since 2009 (up to the time of writing this report), there have been more than 30 cases heard relating to individual residency, with a significant number of these cases relating to circumstances in which section 23AG may have previously been thought to apply.
Where an individual changes residency, the Australian tax law can apply differently. For example significant differences apply in way exemptions in the CGT provisions apply, with non-residents not being eligible for the main residence exemption or a full CGT discount. The breadth of what must be disclosed to the ATO also differs, as to how any tax or levy impost is calculated. Some other tax concessions cease, while others apply. Accordingly understanding who is a resident of Australia, when the residency status changes and what impact that has under tax law is crucial.