Following the unveiling of the Federal Budget in May 2021, one of the biggest future changes to Australia’s tax system has gone largely unnoticed. The government intends to reinvent the rules for tax residency.
While changes to these rules don’t necessarily grab the headlines quite like economy-boosting and largely popular individual income tax cuts, they can be much more important to the tax outcomes of medicos moving between Australia and overseas for fellowships.
An individual’s tax residency has wide-ranging consequences. Mainly, Australian tax residents will be taxable on their worldwide income, including income from professional services, business activities and investments derived overseas. For other controlled entities such as service companies or trusts, changing residency can also result in wider ranging tax consequences for the entities concerned.
Currently, the tax residency rules are a hybrid of legislation and legal concepts (such as a domicile). Broadly, someone who is a tax resident of Australia would be somebody who is deemed to reside in Australia. As a subjective test, this typically involves looking at one’s intentions, family ties and living arrangements, in addition to their physical presence in Australia.
For medicos who move overseas for a fellowship, losing Australian tax residency primarily depends on whether they are deemed to have established a “permanent place of abode” overseas, as well as their intention to return to Australia in the short term.
These current rules generally confirmed that medicos who went overseas for at least two years would lose their tax residency status and therefore no longer have to pay tax in Australia on services provided overseas.
The new rules
While the proposed new tax residency laws are still yet to be tabled in Parliament, we understand they will be based on a new objective test, similar to rules already in place in other jurisdictions, notably the United States and the United Kingdom.
A new “bright-line” test will mean that individuals who spend 183 days or more in Australia during a financial year will automatically be considered Australian tax residents. Broadly, for Australians going overseas, individuals will need to work overseas for at least two years and spend less than 45 days in Australia each year in order to lose their tax residency.
For situations that are less clear, whether an individual spends more than 45 days in Australia during the year will be important, along with a number of other determinative factors:
- The right to reside permanently in Australia;
- Australian accommodation;
- Australian family; and
- Australian economic interests.
It is expected that these new rules will mean that more individuals coming into Australia will become tax residents, and that individuals who leave Australia will keep their tax residency for longer.
How will Medicos be affected?
When the proposed rules receive Royal Assent, medicos who depart Australia to take up fellowship training overseas may be impacted by these new rules. Medicos may find that they are considered an Australian resident under the proposed rules. This is because departing individuals will have to meet strict requirements for the length of time they are leaving Australia and the number of days they can spend in Australia during this period.
In the proposed new tests, a person’s intention is no longer taken into account. As we have seen with the COVID-19 pandemic, a person’s movement can often be brought on by circumstances outside of their control and it is likely that their tax residency will now become another unintended consequence in the future.