Residency is a key concept for Australian tax purposes. Together with the concept of source, this determines whether a person is subject to tax in Australia, and what income is subject to tax.
A resident of Australia is subject to tax on income from all sources worldwide. A non-resident is only subject to tax on Australian sourced income.
Given this importance, we have set out some of the key comments made in the draft ruling.
TR 2022/D2: Residency tests for individuals
On 6 October 2022 the ATO released a draft ruling (TR 2022/D2) on the residency tests for individuals for tax purposes. The draft ruling sets out the Commissioner’s view on when a person will be a resident of Australia. The draft ruling consolidates and replaces the material in previous public rulings (IT 2650 issued in 1991, and TR 98/17 issued in 1998), updates the views reflected in those rulings to take into account developments in recent case law (including Harding, Pike and Addy) and recent changes to short term and temporary workers rules (STW visa, PLS and PALM).
The ruling explains residency is about a person’s connection to Australia and that a person can be a resident for tax purposes of more than one country at the same time. However, the ruling does not cover the following: the Commonwealth super fund test, dual residency, double-tax agreements (DTAs), or residency of companies.
Definition and the Four Residency Tests
‘resident’ and ‘resident of Australia’ is defined in s. 6(1) of the ITAA 1936. The four residency tests can be summarised as follows:
Ordinary Concepts Test: a ‘person, other than a company, who resides in Australia’
The Domicile Test: a person ‘whose domicile is in Australia, unless the Commissioner is satisfied that the person’s permanent place of abode is outside Australia’
The 183-day Test: a person ‘who has actually been in Australia, continuously or intermittently, during more than one-half of the year of income, unless the Commissioner is satisfied that the person’s usual place of abode is outside Australia and that the person does not intend to take up residency in Australia’
The Commonwealth Superannuation Fund Test: a person ‘ who is:
(A) a member of the superannuation scheme established by deed under the Superannuation Act 1990; or
(B) an eligible employee for the purposes of the Superannuation Act 1976; or
(C) the spouse, or a child under 16, of a person covered by sub-subparagraph (A) or (B) …’
If any of the four tests are met a person is considered a resident of Australia for tax purposes. If none of the tests are met the person will not be a resident for Australian tax purpose (often referred to as a ‘non-resident’).
As is always the case with tax matters, the facts are critical, and the ruling reiterates this on numerous occasions. It also includes various examples based on specific facts (but also includes an interesting caveat at paragraph 8: ‘the examples in this Ruling are provided to illustrate a point. Having similar facts to those in an example will not always result in the same outcome. Differences in intention, motivations and life circumstances may produce different outcomes.‘).
Some of the relevant factors that should be taken into account, which are referred to throughout the ruling, are included below. No single factor is necessarily decisive and ‘the weight given to each factor varies depending on ‘individual circumstances’ (para 21).
Residency factors to consider include:
- period of physical presence in Australia
- intention or purpose of presence, including:
- passenger cards
- visa documents including visa type and conditions
- length of stay in Australia or overseas
- nature of accommodation
- behaviour while in Australia, including:
- whether accompanied by family (or not)
- school enrolments
- family, and business or employment ties
- employment contract
- businesses in (or out of) Australia
- maintenance and location of assets, including:
- real property in (or out of) Australia
- motor vehicles in (or out of) Australia
- social and living arrangements
- sporting and community organisations
- mail redirection
The majority of the ruling consolidates long-standing views expressed by the ATO in its previous rulings. However, the updated comments with reference to the recent decisions are worth noting.
Ordinary Concepts Test
Here, we refer to the following comments (noting that where footnotes in the ruling refer to cases we have added the name of the relevant case):
- Because the ordinary concepts test asks whether you reside in Australia, the factors focus on your connection to Australia. Having connection to, or being a resident of another country does not necessarily diminish any connection to Australia.[13 – Pike] For this reason, the ordinary concepts test is not about dominance or exclusivity of residence in one place versus another. Nonetheless, continued connections overseas will inform the nature of your connection to Australia.[14 – Addy]
- The period of physical presence or length of time in Australia is an important factor when considering whether you reside here, but it is not a determinative factor.[15 – Case 35] Importantly, there is a distinction between ‘staying’ in Australia and residing in it.[16 – Addy] Merely staying in Australia is normally insufficient. You must have some connection to Australia that characterises your presence as ‘residing’ in it.
- In assessing your intention or purpose for being in Australia, objectively observable factors and behaviours and contemporaneous statements about intent, such as those included on passenger cards[23 – Addy] and visa documents, are relevant (but not determinative). The type of visa you hold can also be evidence about your purpose for being in Australia.
In this context, and the proviso of having a ‘permanent place of abode’ outside Australia, some relevant comments include:
- The word ‘permanent’ does not have the meaning of everlasting or forever, but is used in the sense of being contrasted with temporary or transitory.[39 – Applegate]
- In this test, the expression ‘place of abode’ refers to the physical surroundings in which you live, extending to a town or country.[40 – Harding] Therefore, it is not necessary to be living in a particular dwelling in a certain way for your place of abode to be considered permanent, provided that the nature of your presence in a town or country is consistent with both abandoning residency in Australia and living in that town or country in a permanent way.
- You cannot have your permanent place of abode both in Australia and overseas. Having a permanent place of abode overseas involves having definitely abandoned residency in Australia.[41 – Harding] Therefore, if you have a place of abode in Australia and overseas, a comparison must be made to ascertain which of the 2 is your permanent place of abode. It is only if your permanent place of abode is overseas that you are not a resident under the domicile test.
- Conversely, if you move from country to country or place to place, you will not have a permanent place of abode overseas and will remain a resident of Australia. This is regardless of whether or not you have any dwellings in Australia, or whether Australia more generally can be described as your place of abode. While the expression ‘place of abode’ may extend to a country, the pattern of moving around within a country is likely to indicate that you are travelling or have otherwise not commenced living permanently in that country.
This refers to a persons ‘usual place of abode’ (as distinct from the ‘permanent place of abode’ referred to in the Domicile Test), and in the context of the 183-day Test the ATO notes:
- Even if we are satisfied that your usual place of abode is outside Australia, you will still be a resident under this test unless we are satisfied that you do not intend to take up residence in Australia.
- It will commonly be the case that if your usual place of abode is overseas, you do not have the necessary intention regarding taking up residency in Australia. This aspect of the 183-day test excludes people who stay in Australia for longer than 6 months but whose presence is as a visitor; that is, they do not intend to stay in Australia for a long period or to live in a way that would characterise them as residents.
- The Full Federal Court in Harding observed that even if a person stayed in Australia for a number of years, they may still not be a resident under this test.[51 – Harding] This illustrates that ‘intend to take up residence’ does not merely mean intend to stay for a long time. It means intending to live here in such a manner that you would reside here.
If you are determining whether a person is a resident (or not) then this draft ruling, including examples, is a very useful guide worth reviewing.
However, the ruling does not make any comments on the application of DTAs. So, if the person is coming from or to a country that Australian has a DTA with, then once the person’s residency has been determined under Australia’s domestic rules, be sure to refer to the DTA as this may alter the outcome or the amounts that will be subject to tax in Australia.
Finally, we note the ruling is currently a draft ruling, with comments due by 25 November 2022. If referring to the draft to determine a person’s residency take note to revisit the position when the ruling is finalised.