TR 2023/1: Modernising the Commissioner’s approach to individual residency

The Australian Taxation Office released Taxation Ruling 2023/1 (‘Income tax: residency tests for individuals’) on 7 June 2023 (the Ruling).

Key takeaways

• The Ruling consolidates the Commissioner’s views contained in a number of previously issued rulings, and is broadly consistent with those earlier materials (subject to recent case law developments and consideration of flexible, cross-border working conditions);
• The Ruling’s principal focus is on the factors comprising the ordinary concepts test, as well as the concept of ‘place of abode’ which is relevant to the domicile test and the 183-day test; and
• Ultimately, the application of the individual residency tests will vary depending upon each individual’s own circumstances and, therefore, there are limits as to how much comfort a ruling such as TR 2023/1 can ultimately provide in the context of such fact-driven subject matter.

Overview

The Ruling is intended to provide guidance as to how the Commissioner will apply the residency tests for persons (other than a company) contained in subsection 6(1) of the Income Tax Assessment Act 1936 (Cth), specifically:

• the 'ordinary concepts’ test;
• the ‘domicile’ test; and
• the ‘183 day’ test.

The Commonwealth superannuation fund test is excluded from the scope of the Ruling, with the Commissioner citing the limited number of funds this test applies to, making it ‘not a commonly arising issue’.

As a consequence of the issue of the Ruling, the Commissioner has withdrawn the following guidance materials, though elements of each of these rulings re-emerge in the Ruling:

• IT 2650: Income tax: residency – permanent place of abode outside Australia
• IT 2681: Income tax: residency status of business migrants
• TR 98/17: Income tax: residency status of individuals entering Australia on residency for individuals

Observations

Key case law developments

The Commissioner’s views in the Ruling are informed by recent case law developments addressing individual residency. These include the following:

• Harding v Federal Commissioner of Taxation (2019) 109 ATR 579, in which it was held that an Australian national who worked and lived in temporary accommodation in Bahrain for years while regularly returning to Australia to visit family had nevertheless ceased to have his ‘place of abode’ in Australia for the purposes of the domicile test;
• Federal Commissioner of Taxation v Addy (2020) 280 FCR 46, which (among other issues) considered the application of the ordinary concepts test and the 183-day test to a British working holiday maker; and
• Federal Commissioner of Taxation v Pike (2020) 280 FCR 429, in which it was held that a Zimbabwe citizen working and living in Thailand, who travelled regularly to Australia to spend time with his de facto wife and children, was an Australian resident according to ordinary concepts.

The Ruling also refers to various other Federal Court and AAT decisions since the previous instruments were issued. ^[1]

Changes from the draft ruling

The Ruling contains numerous amendments to the draft (TR 2022/D2), including:

• several new examples which clarify the Commissioner’s views on a range of fact patterns;
• recognition that the relevance of business or employment ties overseas will depend on whether they can be performed from anywhere in the world; and
• resident tax rates will be applied even where an individual is tax resident in Australia for only a single day.

Statutory definition of ‘resident’

For individuals, a 'resident' or 'resident of Australia' is:

1. a person… who resides in Australia [ordinary concepts test] and includes a person:
   1. whose domicile is in Australia, unless the Commissioner is satisfied that the person's permanent place of abode is outside Australia; [domicile test]
   2. 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; [183-day test] or
   3. who is:
      1. a member of the superannuation scheme established by deed under the Superannuation Act 1990; or
      2. an eligible employee for the purposes of the Superannuation Act 1976; or
      3. the spouse, or a child under 16, of a person covered by sub-paragraph (A) or (B) ... [Commonwealth superannuation fund test]

‘Ordinary concepts’ test

The Ruling sets out in detail the key elements of the ‘ordinary concepts’ test, which asks whether your presence in Australia is usual and settled in contrast to temporal and casual’. ^[2] Interestingly, the Commissioner appears to have refined his approach to focus on a more qualitative assessment of an individual’s physical presence in Australia.  Whether an individual is resident in Australia now depends upon the nature, duration and quality of the person’s physical presence in Australia, and whether there is an intention to treat Australia as home.  The Commissioner notes that the following factors inform the relevant ‘association’ with Australia:

• period of physical presence in Australia
• intention or purpose of presence
• behaviour while in Australia
• family, and business or employment ties
• maintenance and location of assets
• social and living arrangements

The paragraph setting out the ‘ordinary concepts’ test in the draft Ruling has been re-drafted in response to criticism that its original wording did not correctly distinguish between the two key elements set out by Wilcox J in Hafza ^[3] – specifically, whether the person has retained a continuity of association with the relevant place, and whether they have an intention to return to that place and an attitude that the place remains ‘home’. ^[4]  Seemingly erroneously, one of the six factors that the Ruling sets out as relevant to the continuity of association criteria is intention, suggesting that the Commissioner considers intention relevant to both elements of the ‘ordinary concepts’ test.

Also curious – but nevertheless thoroughly ‘modern’, in view of Covid-19 lockdowns and increasingly flexible working arrangements – is the assertion in the Ruling (at paragraph 48) that business or employment ties overseas may be less significant if the business or employment can be, and are, performed anywhere in the world.  In an increasingly connected and flexible global working environment, we anticipate this new nuance to the ordinary concepts test may take on outsized relevance when assessing an individual’s residency moving forward.

The ‘domicile’ test, and overseas stays of Australian residents

Under the ‘domicile’ test, an individual is an Australian resident when their domicile is in Australia, unless the Commissioner is satisfied that their permanent place of abode is outside Australia.  The Commissioner previously set out in IT 2650 the following 2 year ‘rule of thumb’ test to be applied when considering permanent place of abode:

For practical purposes, it is convenient to set some ‘rule of thumb’ on what substantial means. Broadly, 2 years is considered to be a substantial period of time. What this means is that if your intended length of stay is less than 2 years, you are unlikely to be able to establish that your permanent place of abode is outside of Australia. Whether a stay of precisely 2 years or longer means you fall within the proviso will depend on the circumstances. The critical question is whether a person has in fact abandoned Australian residency and commenced to live in a permanent way overseas. ^[5]

This position has been retained in TR 2023/1, however the Commissioner’s views, appear to have been slightly moderated. ^[6]  It may be inferred from Examples 7 and 8, both of which concern an Australian mining company employee who is transferred overseas on a 2-year temporary work assignment, that the facts and circumstances of an individual, rather than the length of time they spend overseas, are more determinative in forming a view on their residency.

A further example of the Commissioner’s moderated views in respect of the domicile test is a recognition that returning to Australia for cultural events, family events and annual leave should not affect the domicile of an individual who had previously left Australia for an unspecified and substantial period and created a home overseas (see example 9), even if the individual may at some point intend to return to Australia.

New examples included in the Ruling

Many of the examples included in the Ruling have been sourced from the Commissioner’s previous guidance, subject to minor amendments. However, the Ruling also contains new examples such as:

• Example 2 – a lawyer employed by a foreign firm is seconded to a large Australian firm for 8 months – considered to be a resident of Australia under ordinary concepts
• Example 13 – a business migrant comes to Australia on a 5 year visa, only to subsequently return home for 4 months shortly after arrival – considered to be a resident of Australia under ordinary concepts from the time of arrival
• Example 16 – a working holiday maker takes steps to meet permanent skilled worker visa criteria – considered to be a resident of Australia under ordinary concepts from the time the person intends to stay permanently

How will the Ruling assist individual taxpayers?

The Commissioner is to be commended for consolidating the various earlier rulings on this topic into a single, detailed ruling. The principles and examples provided in the Ruling helpfully collate the key case law principles that have developed over time.

Public rulings will be binding on the Commissioner in circumstances where the relevant ruling applies to a taxpayer. ^[7] Taxation Ruling TR 2006/10 (Public Rulings) states (emphasis added):

A public ruling applies to an entity if the entity is a member of the class to whom the public ruling applies and the entity's circumstances come within the circumstances addressed in the public ruling. ^[8]

However, the Ruling can only provide limited comfort as to how the law may apply to any particular individual’s circumstances. As the Commissioner noted at item 17 in the accompanying compendium TR 2023/1EC:

 ‘Because no single factor is dispositive and because the weight of factors will depend on context and individual circumstances, it is not possible to replace the holistic consideration required by the residency tests with an illustrative example.”

The Ruling emphasises that, ultimately, each residency decision will turn on its facts, and the Commissioner acknowledges that an outcome in one case will not govern the outcome in a different case, even where the facts are similar.

The highly variable fact matrices relevant to determining the residence of individuals means that, in practice, an individual will need to assess their own circumstances by reference to the ‘vibe’ of the examples in TR 2023/1.  On this issue, we note that the Commissioner’s comments in the compendium suggest that further guidance, such as adopting an administrative approach or providing for certain ‘safe harbours’ (e.g. for employer withholding obligations), is unlikely to be forthcoming.

Proposed changes to individual tax residency

In response to the Board of Taxation’s report on individual tax residency issued in 2019, the previous government announced its intention to replace the existing framework for individuals’ tax residency in the 2021-2022 budget.

The reforms proposed by the Board were intended to modernise and simplify the existing legislative regime, with the aim of reducing complexity and compliance costs.

As at the date of this alert, draft legislation to implement the reforms proposed by the Board has yet to be released. It is therefore hoped that the finalisation of the Ruling is not intended to be a signal that the reforms announced in the 2021-2022 budget are now unlikely to be implemented.