The ATOs individual tax residency changes open for consultation

The new tests are aimed to simplify and provide a level of consistency for all individuals, to ensure fairness in the assessment of individual tax residency. Based on our summary below, there is a level of importance being placed on the day count in Australia and a secondary importance on the factor test, which would previously have been the main consideration. 

The proposed changes will impact employers with a globally mobile workforce, and their global mobility policies around their workforce. This will also impact employment tax obligations and payroll reporting for employers in Australia.

The new proposed changes

Primary Tests (Bright Line Test) – The 183-day Test

If an individual is present in Australia for 183 days or more in an income year, the individual will be considered an Australian tax resident.

Where an individual is not an Australian tax resident under the Bright Line Test, the Secondary Test will need to be looked at to determine individual tax residency.

Secondary Test

The Secondary Test has two types of tests, depending on whether you were a tax resident in the previous income year. 

1. Commencing Residency Test

If you were not a tax resident in the previous income year, you will apply the 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; and
• Have been employed overseas with an employment period of over two years from commencement; and
• Have accommodation available in the place of employment for the entire employment period; and
• 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.

*We note that the ATO is proposing the income year count be six years instead of three years for temporary residents.

These updates are a welcome change to the current residency rules, but we do note that there is room for interpretation and the ATO is open to feedback in relation to the proposed residency tests, which will be due on 22 September 2023. 

If you have any comments regarding the above proposed changes, please reach out to Thomas Isbell or Shivani Krishnamoorthy as we can assist with submitting the responses to the ATO. We will continue to monitor any updates that are provided by the Treasury and release further content as required. 

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