Tax rules outdated and complex, says Board of Taxation

The Board of Taxation has deemed income tax residency rules, which have remained largely unchanged since enactment in 1930, in need of modernisation and simplification, says Minister for Revenue and Financial Services, Kelly O’Dwyer.

The review of the rules, which began in 2016, found the existing residency rules no longer appropriate given the fundamental basis of individual income taxation, and recommended they were reformed.

The Board considered the rules:

• No longer reflected global work practices in an increasingly global mobile labour force;
• Imposed an inappropriate compliance burden on many taxpayers with relatively simple affairs as the rules are inherently uncertain to apply, include outdated concepts and rely on a “weighting” system that leads to inconsistent outcomes; and
• Are an increasingly prevalent area of dispute for taxpayers and the ATO given the fundamental difference in tax consequences for residents and non-residents.

The recommendations included modernising the residency rules via replacing the residency definition with new, enhanced principles-based rules that focussed on “certainty, simplicity and integrity”, and implementing two separate residency tests for inbound and outbound individuals respectively.

The Board also identified opportunities for tax arbitrage, for example, when individuals became “residents of nowhere” when they leave Australia, and do not become tax residents of another jurisdiction.

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Minister O’Dwyer said the Board had undertaken an extensive consultation process, and these were complex issues that deserved further analysis and consideration.

“Before the Government takes any position on these matters I have asked the Board to consult further on key recommendations, including how Australia could draw on residency tests in other countries,” she said.