Statement to Members Regarding the Proposed Changes to Tax Residency Rules
31 May 2021
Australian Budget 2021-2022
Changes to Tax Residency Rules
The recent Australian FY21-22 Budget announced proposed changes to the Australian tax residency rules following the findings of a 2019 report by the Board of Taxation on “Reforming Individual Tax Residency Rules - A Model for Modernization (2019)”.
The proposed changes appear to be aimed at simplifying the tax residency rules by creating a bright line test to determine when a person ceases or becomes a tax resident. However, the proposed changes are generating a great deal of concern and uncertainty for Australians living abroad who could, if the changes become law, be considered Australian tax residents and therefore subject to tax on their world-wide income.
The principal concern for Australians living and working outside of Australia relates to a proposed ‘45-day’ and resulting factors test to decide if a person will be treated as a tax resident in Australia. Given the extent to which Australians living in Hong Kong, and indeed Asia, travel to Australia for business and leisure, the concern is that many people could exceed 45 days in Australia in a given year, which could then result in their being considered tax residents of Australia.
The proposed rules will involve a two-step approach to determining tax residency.
The 183-day test
The rules outlined in the budget begin with a primary test of 183 days. If a person is physically present in Australia for more than 183 days in a year, then they are an Australian tax resident. Days in Australia will include travel for business and leisure purposes.
If they are in Australia for less than 183 days, then a secondary test will be applied to determine residency – this is referred to as the 45-day test.
The 45-day test
If a person spends more than 45 days in Australia, an evaluation of four factors will then determine if that person will be tax resident. If the person satisfies any two of the four factors outlined below, subject to any double tax agreement that may be in force, they will be considered a tax resident of Australia and subject to tax in Australia on world-wide income.
The four factors are:
- Right to reside permanently in Australia: e.g. an Australian Citizen or a permanent resident
- Australian Accommodation: e.g. retaining a property which you keep for your use
- Australian Family: having immediate family members (spouse and/or children under the age of 18) living in Australia
- Australian Economic Interests: e.g. having Australian assets such as property or other economic interests in Australia
It is the proposed 45-day test and how easily many Hong Kong based Australian expatriates could satisfy at least two of the four tests above that is causing many of the initial concerns. For many Australians that spend more than 45 days in Australia in a year, they could easily satisfy any two of the four factors listed above. For example, simply being an Australian citizen and having a property in Australia and or a spouse or children living permanently in Australia would appear to satisfy these conditions and result in that person being tax resident.
The rules for Australian tax residents leaving Australia and ceasing to be a tax resident appear even more severe. In certain circumstances, Australians moving overseas can retain their tax residence status even whilst working and living outside of the country.
What does it mean for Hong Kong based Australians?
Hong Kong has long been a favoured location for Australians to live and work. There are around 100,000 Australian citizens living in Hong Kong, along with hundreds of Australian owned and operated businesses. Hong Kong is also Australia’s seventh largest trading partner and fifth largest source of direct foreign investment. As such, it is very common for Australians living and working in Hong Kong to spend more than 45 days in Australia in any year, whether such trips would be for business, visiting family and friends or even time spent in hotel quarantine.
Exacerbating the problem for Hong Kong is the fact there is no tax agreement between Australia and Hong Kong, which would otherwise give an Australian national in Hong Kong some increased protection from being taxed in both Hong Kong and Australia. Hence, if the proposed new rules do eventually become law, it will become critically important that Australia finally agrees to conclude a comprehensive tax agreement with Hong Kong, like the one it has with Singapore. In the absence of such an agreement, it could make it harder for Australian businesses to encourage their employees to move to Hong Kong if they could continue to be subject to tax in both Hong Kong and Australia, or certainly increase the cost of seconding such persons offshore if they need to adjust for the increased tax cost.
The proposed new rules are not law yet, and we would expect there to be a great deal of lobbying by industry bodies and the international business chambers before the legislation is submitted to parliament. This is because not only would the changes impact Australians living and working in Asia, it could also severely impact the ability of businesses to conduct normal operations by restricting the amount of business travel back to Australia or as suggested above, the reluctance of employees to relocate from their Australian operations to Hong Kong.
At this stage, it is not clear whether the law will become effective from 1 July 2021 or 2022. Given the number of remaining parliamentary sitting days and the prior consultation that has already been undertaken, it is possible that the legislation could be passed and put into effect by 30 June 2021. If it’s not passed by that date, then the law could become effective on 1 July 2022.
It will be in the interests of the Australian expat community in Hong Kong and elsewhere in Asia to raise awareness of the impact of the legislative proposals and where possible, to make appropriate submissions to the Australian government suggesting reasonable changes.
Some of the potential changes could include:
- Raising the 45-day threshold to one of 90 days, which would be in line with many international tax agreements;
- In light of the continuing pandemic, excluding compulsory quarantine days from calculation of the number of days spent in Australia; and
- Restricting the economic interests factor to perhaps only include businesses or immovable property actively managed by the person themselves.
The Australian Chamber of Commerce in Hong Kong will be working with our members and partners to make appropriate submissions to members of parliament and we will be keeping you informed of developments and progress on this important matter.
The Australian Chamber of Commerce Hong Kong