This article was written by Wendy Miller.
The big-ticket items in the international space are changes to the rules around individual tax residency for foreign residents. There have been minimal other changes in the international tax space, with the relevant changes focusing on removing the preferential tax regime for OBUs as well as expanding the international tax treaty network.
Individual tax residency reforms to introduce greater simplicity
The Government will legislate to replace the existing individual tax residency rules with a new framework:
- primary test: a person who is physically present in Australia for 183 days or more in any income year will be an Australian tax resident; and
- secondary tests: individuals who are not resident under the primary test are to have their residency determined based on a combination of physical presence and measurable, objective criteria.
This framework is based on recommendations by the Board of Taxation in its 2019 report Reforming individual tax residency rules – a model for modernisation.
Whilst the intention to move away from the existing complex residency tests is a good one, implementation of the secondary tests will be key to ensuring the simplicity of the primary test are not undone.
This measure will have effect from the first income year after the date of assent of the relevant legislation.
Abolishing Offshore banking units (OBU)
Legislation was introduced into Parliament on 17 March 2021, to remove the preferential tax regime for OBUs by:
- removing the concessional 10% effective tax rate that applies to income derived from eligible offshore banking activities;
- closing the OBU regime to new entrants from 26 October 2018; and
- removing, from 1 January 2024, the current withholding tax exemption that applies to interest and gold fees paid by OBUs on certain offshore borrowings.
The Government will consult on alternative measures to support the industry and help ensure activity remains in Australia.
Update to “Exchange of Information Jurisdictions” to expand investors eligible for concessional withholding tax
The jurisdictions that have information sharing agreements with Australia will be updated to include Armenia, Cabo Verde, Kenya, Mongolia, Montenegro and Oman, effective from 1 January 2022.
Residents of listed jurisdictions are eligible to access the concessional managed investment trust withholding tax rate of 15% on certain distributions (instead of the general rate of 30%).
Acceleration of tax treaty negotiations
The Government has allocated funding to accelerate the existing program of tax treaty negotiations.
ATO early engagement service for businesses investing in Australia
From 1 July 2021, the ATO will introduce a new early engagement service to encourage and support new business investments into Australia.
The service will:
- provide “up front” confidence to investors about how Australian federal tax laws will apply;
- be tailored to the particular needs of each investor;
- integrate with the tax aspects of the FIRB approval process (where applicable) so that investors only need to provide information once; and
- where necessary, incorporate access to expedited private binding rulings and advance pricing agreements.
Restoring licensing exemptions for foreign financial service providers and exploring tax residency of trusts and corporate limited partnerships
See section 3 (Funds) for discussion on consultation to restore previous licensing exemptions for foreign financial service providers (such as fund managers) and on the tax residency rules for trusts and corporate limited partnerships.
Relaxation of self-managed superannuation funds (SMSF) tax residency requirements
See section 10 (Superannuation) for commentary on the relaxation of residency requirements for SMSFs and small APRA-regulated funds.