The Proposed ‘Bright Line’ Individual Residency Tests

A consultation paper has been released by the treasury on proposed reforms to the individual residency rules. If legislated, a simple ‘bright line’ test would be introduced by the proposal and would ensure that an individual who is present physically in Australia for 183 days or more in any income year will be considered an Australian tax resident. People who fail this primary test will be subject to secondary tests, which may be applied in a different way depending on the individual’s situation and which would be based on both the applicant’s actual presence in Australia and a small number of specific, measurable, and unbiased factors.

The main goal of the reforms is to make it considerably simpler than it is now to assess whether someone is an Australian resident for tax reasons. The new rules already went through a long consultation period before being declared in the 2021-22 budget. However, there is no guarantee that the rules will be changed. According to the treasury, this process will assist the Government check whether to update the rules and regulations and whether the changes must be consistent with the Budget announcement and the Board of Taxation recommendations made in May 2021.

In short, the first primary test is the simple 183 days ‘bright line’ test, where an individual is physically present in Australia for 183 days or more in any income year. The second primary test, the ‘government officials test’, replaces the current superannuation test and would work to make sure government officials deployed overseas in the service of the Australian government would be tax residents.

If a person is not a resident under the primary tests, the secondary tests are appropriate and apply differently based on whether they were a resident in the previous income year and if so, how they’ve been an Australian resident. In association with the secondary tests, a 45 days    threshold is used.

The Small Business Energy Incentive

Exposure draft legislation has been released in connection with the Small Business Energy Incentive declared in the May 2023 Federal Budget. The incentive allows businesses with a total annual turnover of less than $50 million to get a bonus deduction equivalent to 20% of the cost of eligible assets or improvements to current assets that support electrification. The maximum bonus deduction is $20,000.

To access bonus deduction:

  • The expenditure needs to be eligible for a deduction under another provision of the tax law, and
  • The asset must be installed ready for use or first utilised, or the changes cost incurred between July 1, 2023 and June 30, 2024.

Additional clarification on what will constitute qualifying expenditure has been offered, and this appears to be rather broad, if somewhat challenging to calculate. The bonus deduction is allowable for a newly depreciating asset if:

  • It uses electricity and is more energy efficient as compared to the asset it is replacing or if it is not a replacement, a new reasonably comparable asset that is available in the market (e.g., upgrading to a more energy efficient asset, or choosing a more energy efficient new asset); or
  • It uses electricity and there is a new reasonably comparable asset available in the market that uses a fossil fuel (e.g., the taxpayer prefers an electric asset over a gas or petrol-powered asset); or
  • It is an energy storage or efficiency-improving asset.

If upgrades to existing depreciating assets make them more energy efficient, allow them to use electricity instead of fossil fuels, or make energy storage, demand management, or monitoring easier, those upgrades may also qualify for the bonus deduction. Exclusions from the bonus deduction include spending on items that can be used with fossil fuels, items that are primarily used to generate energy, capital works, and motor vehicles. The costs of financing, such as interest and loan fees, are also not included.

Technical Amendments to the GST and Deduction Rules

Exposure of legislation for a variety of unrelated changes to laws that fall under the Treasury’s portfolio has been made available. This contains a few technical changes that are being considered for how GST input tax credits can be used if they are not reflected in the applicable activity statement. If an input tax credit that is related to a tax period is not considered in the assessment of a taxpayer for that period, the taxpayer may choose to have the input tax credit applied to a later specified tax period (i.e., claimed in a later BAS) in place of their assessment for that time period (i.e., not claimed in the relevant BAS). This is liable to the ordinary ‘four-year rule’ in connection with claiming input tax credits.

The draft legislation includes changes to the ‘four-year rule’ in connection with claiming input tax credits where the Commissioner has determined the GST time period in which the credit is attributable. A clarification has also been made on the ability to claim an income tax deduction for GST paid by method of reverse charge. To show the fact that GST payable by the method of reverse charge is a legitimate cost that a taxpayer can incur in generating assessable income, the income tax legislation would be changed to make confirmation that these amounts are deductible.