The recently released federal budget has been geared towards helping the nation recover from the pandemic. Treasury head, Josh Frydenburg, indicated the government was not inclined towards taking austerity measures but rather aimed to lower taxes, limit the size of government, and ensure the delivery of essential services. He added that the budget would drive down the unemployment rate that currently sits at about 5.6%.
To support this effort, the government plans on attracting foreign investment and talent through reforms in tax residency. This will see the introduction of a bright lines test on liability. This will act as a primary test in determining if individuals can be considered Australian tax residents if they have been physically present in Australia for at least 183 days in a year.
If a person fails this primary test, they are then evaluated under the secondary Factor test. It takes into account four secondary concerns, which are a combination of bodily presence and other objective, measurable factors. They include whether the person has Australian accommodation, has the right to permanent residency, has an Australian family, and the existence of local economic connections.
The bright lines test is expected to place Australia at par with competitive job markets like the UK and attract investment away from other complicated tax jurisdictions like the US. The current tax residency laws were developed in the 1930s. The new changes have been drawn from a 2019 Board of Taxation report’s proposals. This report sought to make tax residency laws easier to understand and implement in a self-assessment regime.
Existing laws rely on the current domicile test, the resides test, and the usual place of abode test. The Board of Taxation report found that these were ‘uncertain’ and not suitable in deciding residency status.
According to CPA Australia’s manager of external affairs, Dr Jane Rennie, these reforms should help make Australia more competitive and gain more appeal as a place to work and invest. The Tax Institute’s Scott Treatt however notes that these are only piecemeal changes. He said that a though it would result in more tax residents, a more holistic reform of the system would prove more effective.
The ATO will further support these reforms with a ‘concierge’ service that will quickly offer much-needed advice to foreign investors on the tax implications of proposed transactions and possible relocation to Australia. It is expected to help bring clarity and resolve complex cases.
To further draw talent, the government intends to also remove the cessation of employment taxing point for tax-deferred employee share schemes (ESS). This will reduce the tax burden on these employees. Support will also be provided to help remove red tape and adjust tax rules to better encourage the use of ESS.