ATO proposed change to TAX guidelines affecting Australian expatriates in Vanuatu

In the 2021 AUSTRALIAN Budget, The Australian Tax Office proposed new guidelines on how the ATO will consider who is a resident or non-resident in Australia under Australian Tax law. This will change how tax will be paid by expatriates living overseas

If and when implemented, it will have a profound effect on the way that Australian expatriates are recruited and paid internationally. There are many expatriate Australians currently employed in the Public and Private Sector of Vanuatu. If an Australian earns income in Vanuatu but is considered a resident for Tax purposes in Australia, all overseas income will need to be declared and assessed by the ATO. This means that any income earned in Vanuatu will need to be taxed if the individual fails to convince the ATO that they are not resident in Australia.
Currently, the main guideline for tax planning of Expatriate Australians is based upon four tests for the definition of residency status.

The Resides Rule

This test is a subjective interpretation of where an individual is actually residing based on economic ties, dependencies, social and living arrangements.

The Domicile Rule

Under this test, if the individual is not residing in Australia under the Reside Rule, but shows clear ties to Australia through ownership of a home that is not being rented, or have dependents, and there is intent to live in Australia, they are considered resident for tax purposes unless their permanent place of Abode is outside of Australia.

The 183 Day Rule

Under the 183 day rule if an Australian stayed in the country for 183 days over a period of 12 months, they were deemed to be resident for tax purposes and income earned outside of Australia was taxable under Australian law.

The Superannuation Test

If an individual has superannuation paid by an Australian company, they are deemed to be resident for tax purposes.

The Proposed Changes

The Australian Residency rules were enacted over 80- years ago and there had been criticism that in the current environment of global work practices and an increasingly mobile labour force, a review of the rules was needed to provide a more consistent approach on determining the residenvy status of individuals who currently work overseas.

The Bright Line Test

The changes are based on recommendations by the Board of Taxation which conducted a review of the rules to determine residency in 2018. The board’s proposed residency rules called for a two-step approach, with the first being a 45 day Bright Line test – where an individual who spends 45 days or more in Australia is a considered a tax resident. The Bright Line test and is similar to rules of residency in other Countries like the UK and the US.

Adhesive Residency Rule

The second test under the proposed changed is the introduction of Adhesive Residency Test. The concept of an Adhesive Residency is that the Australian Residency “clings” to you for a period of three years after you have left Australia.
The ramifications on Vanuatu will be felt in how employers recruit non-citizens and the employment contract negotiations. These changes will mean that any Australian employed under two year contracts in Vanuatu may have to consider that their Salaries could be taxed when they return to Australia. The cost of living in Vanuatu is amongst highest in the Pacific but the absence of income tax on wages and salaries, and the attractive lifestyle here, has made it financially feasible to attract Australian contractors. Among those affected would be teachers who have been recruited from Australia, Managers of large Aid Donor Projects like the current Cook Barracks, and Senior Management at some banks.
For those other expatriate Australian who qualify to be Non- Resident, but still have ties to Australia through owning property, family and other factors, they now need to consider whether the option of taking out Vanuatu Citizenship is an attractive proposition if they are earning high incomes.
The timing of when the new changes will be implemented is uncertain with the current COVID-19 situation. It has been suggested that these changes will come in to effect in 2022.