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International Tax & Residency

FEDERAL BUDGET 2021/22

The Government has announced a number of measures relaxing some regulatory test and rules for foreign tax residents, partly to modernise the overly complex residency frameworks that have made cross-border taxation a compliance headache.

A rethink on residency tests

Date of effect: The first income year after the date of Royal Assent of the enabling legislation.

Australia's current tax residency rules are difficult to apply in practice, creating uncertainty and resulting in high compliance costs for individuals and their employers.

 

The Government will replace the individual tax residency rules with a new, modernised framework. The primary test will be a simple 'bright line' test - a person who is physically present in Australia for 183 days or more in any income year will be an Australian tax resident. Individuals who do not meet the primary test will be subject to secondary tests that depend on a combination of physical presence and measurable, objective criteria.

The modernisation of the residency framework is based on the Board of Taxation's 2019 report Reforming individual tax residency rules - a model for modernisation.

Tax residency rules for trusts and limited partnerships

In the 2020-21 Budget, the Government announced that the corporate tax residency rules would be amended to address the uncertainty that currently exists when trying to determine the residency status of a company that has been incorporated overseas.

These amendments have not yet been made, but the Government has announced that it will also consult on broadening the scope of the amendments to trusts and corporate limited partnerships as part of the consultation process dealing with the company residency rules.

Early engagement process for foreign businesses

Date of effect: 1 July 2021

The ATO will introduce a new early engagement service specifically aimed at foreign businesses that are looking to invest in Australia. The service aims to provide confidence to foreign investors on how the Australian tax laws will apply and will be tailored to specific investors. It is envisaged that the ATO's service will accommodation specific project timeframes and provide access to expedited private rulings.

SMSF residency tests relaxed

Date of effect: The first financial year after Royal Assent of the enabling legislation

Expected to be 1 July 2022

The residency rules for Self Managed Superannuation Funds (SMSFs) and small APRA regulated funds (SAFs) will be relaxed by extending the central control and management test safe harbour from two to five years for SMSFs, and removing the active member test for both fund types.

This change will enable SMSF and SAF members to contribute to their super while temporarily overseas, (as members of large APRA-regulated funds can do).

An SMSF must be considered an Australian Superannuation Fund in order to be a complying superannuation fund and receive tax concessions. If a super fund fails to meet the definition of an Australian Superannuation Fund then it is likely to become a non-complying, if this occurs the fund's assets and income are taxed at the highest marginal tax rate.

This measure will enable SMSF and SAF members to keep and continue to contribute to their fund while predominantly undertaking overseas work and education opportunities.

183-day test modified for NZ sportspeople and support staff

Date of effect: 2020-21 and 2021-22 income and FBT years

COVID-19 has meant that a number of New Zealand sportspeople and teams have been based in Australia for an extended period of time. Under the 183 day test in the double tax agreement between Australia and New Zealand, these sportspeople and support staff could be exposed to tax in Australia. The Government will ensure New Zealand maintains its primary taxing right in relation to sporting teams and support staff who are located in Australia for league competitions because of COVID-19.

Additional international information exchange countries

From 1 January 2022, the list of jurisdictions that have an effective information sharing agreement with Australia will be updated to include Armenia, Cabo Verde, Kenya, Mongolia, Montenegro and Oman.

Residents of listed jurisdictions are eligible to access the reduced Managed Investment Trust (MIT) withholding tax rate of 15% on certain distributions, instead of the default rate of 30%.

More information

We've compiled the key points from Budget 2021/22 for your review, but as always if we can be of assistance, please contact your accountant on 02 9957 4033 for guidance on how these measures impact you, your family, and your business.

Below are further details on specific measures:

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Disclaimer

This article is provided for information purposes only and correct at the time of publication. It should not be used in place of advice from your accountant. Please contact us on 02 9957 4033 to discuss your specific circumstances.

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