Australia Tax Residency: Definition, Rule and Provisions
Whether you’re a born and bred Australian has little to do with whether you’re an Australian resident for tax purposes. If you’re living overseas as an Aussie expatriate, you might not fall under the tax residency rules.
Why do you need to know if you’re an Australian tax resident or not?
Well, firstly, if you own a property (or are looking to buy one) in Australia, you may have to pay foreign residents capital gains withholding tax – FRCGW. Secondly, Australian tax residents must pay tax on all their worldwide income. Accordingly, you could pay a double tax treaty in Australia and your new country.
Understanding the Definitions
Before we dive into taxation rules, let’s unpack some basic definitions.
- Temporary resident: A non-Australian granted the right to reside in Australia for an agreed period without full citizenship.
- Foreign national: Anyone who only has citizenship outside of Australia.
- Foreign resident: Also a non-resident, anyone who spends most of their time living and working overseas.
- Dual resident: Anyone who has citizenship in two countries.
- Permanent resident: Anyone with the legal right to live in Australia for an undefined period. They may remain citizens of another country.
- Australian citizen: Anyone born in Australia with the legal right to live, work, and vote in the country.
- Resident for Tax purposes: Anyone who lives and works in Australia for most of the year.
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What Is an Australian Tax Resident?
Recently, the Australian government announced new tax rules for Australian citizens living abroad. According to the ATO, Australian tax residents must meet the following objective criteria:
- You have always lived in Australia or come to Australia to live here permanently.
- You have lived in Australia for six months or more, living and working in the same place for most of your stay.
- You go overseas temporarily and do not purchase a permanent home in another country.
- You are an international student who has studied in Australia for more than six months.
Therefore, if you’re an Australian expatriate who has moved into a permanent place of abode abroad, you might not be an Australian resident for tax purposes. On the other hand, if you’re a foreign national who has moved to Australia for six months or more or have the intention to stay permanently, you might meet the tax rules.
What Are the Individual Tax Residency Rules?
Whether you’re an Australian resident for tax purposes affects the tax you pay to the Australian Taxation Office. For example, if you are a tax resident, you will have to declare all your worldwide income from all sources on your tax return. The ATO will charge you at Australian tax rates, some of the highest globally.
However, you have no tax-free threshold if you’re a foreign resident. This means you only declare Australian-based income, and you might not have to pay the Medicare levy. A temporary resident will only have to declare and pay tax on Australian income.
Therefore, if you’re an Australian expat, it might be in your best interest to cut ties with your tax residency status. Otherwise, you could find yourself paying Australia’s high tax rates on your foreign income.
Am I an Australian Tax Resident?
Determining individual tax residency is more nuanced than simply asking yourself the above criteria. Australian residents have to undertake a primary test and secondary tests to prove that they are not Australian residents for tax. If you pass any of the tests, you will be a tax resident of Australia in the ATO’s eyes.
Check whether you’re a resident using the current tests.
The first test is the resides test. Essentially, this checks whether you live in Australia permanently. If you pass this, you don’t need to undertake any of the other tests.
Factors used to determine your residency status include:
- Your physical presence
- Your intention and purpose (do you intend to stay for an extended period?)
- Your family
- Business or employment ties
- Your assets, including maintenance and location
- Social and living arrangements
If you don’t pass the resides test, you’ll have to move on to one of the following three. If you pass any of them, you will be considered a tax resident of Australia.
Domicile refers to your permanent home by law. It could be by origin or choice – e.g. you were born in Australia or decide to move to Australia. You’re an Australian resident if your domicile is in Australia.
Unless you can provide sufficient evidence that your permanent place of abode is outside Australia, the ATO will judge you as a resident of Australia. For example, if you sell or rent your Australian accommodation, the Australian government might recognise that you do not intend to live in Australia.
The 183-day test applies to anyone arriving in Australia as a foreign resident. Essentially, it asks if you’re physically present in Australia for more than half the income year (183 days), either continuously or with breaks. If you are, then you are an Australian resident for tax purposes.
If you’re an Australian expat returning to Australia regularly, you might meet these criteria. Similarly, temporary residents might fall under the taxation rules with this test.
The Commonwealth Superannuation Test
Finally, the commonwealth superannuation test is for Australian government members of the CSS or PSS schemes working overseas. Plus, if your spouse and any children under 16 move with you, they are also considered Australian residents.
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Examples of an Australian Resident for Tax Purposes
Let’s apply the rules to some case studies.
Firstly, Camille was born in Australia but moved to Hong Kong to work. She has a one-year work contract. Afterwards, Camille plans to travel before returning to Australia to live and work permanently. Camille rents out her property in Australia while abroad and stays with her family in Hong Kong.
Under the domicile test, Camille counts as an Australian resident for tax purposes because her permanent address is in Australia (she intends to return).
On the other hand, Toby – also born in Australia – plans to move to the US. He buys a property there and sells his Australian home. While in the US, he works for a US company. Therefore, he no longer counts as an Australian resident for tax.
Finally, Amy was born in Singapore. She decides to travel to Australia, rents a property and works in the same job for more than six months. Although she is only a temporary resident, she must pay tax in Australia for all her Australian income.
What if My Residency Status Changes During the Income Year?
So, what happens when you make the move from Australia overseas? Well, you still need to declare that you are an Australian resident on your tax return. You will be taxed for the income you earned while residing in Australia. However, you can claim an exemption for the number of days that you were not an Australian resident in that tax year.
After ceasing residency, you no longer need to declare foreign source income on your tax return. As long as you do not return to reside permanently in Australia, you won’t need to pay tax on any worldwide sourced income. If you don’t earn anything in Australia (e.g. you don’t rent out your house there), you won’t need to pay any Australian tax.
When you live overseas, paying tax in Australia is not in your best interest. So, how can you prove to the ATO that you should no longer be a tax resident?
- Submit evidence of your permanent living situation abroad – if you can do so, buy a house in your foreign country or show proof of a year-long tenancy agreement.
- Remove yourself from the Australian electoral registry to show that you’re no longer a permanent resident.
- Take the ATO residency tests we outlined above.
- Sell or lease out your Australian property to prove that you have no intention of returning to live in Australia permanently. Although, bear in mind the Foreign Resident Capital Gains Withholding tax when selling a property.
- Share evidence of overseas finances – such as a foreign tax return or opening a foreign bank account. Show that your day to day expenses are with your foreign account, not your Australian bank.
- Buy a one-way ticket. If you have no return date, it’s easier to prove that you don’t intend to go back to live in Australia.
- Obtain a foreign driver’s licence from your new country.
Advantages and Disadvantages of Tax Residency
If you earn income from multiple countries, there are few advantages of being a tax resident in each of them. After all, if you are, then you’ll have a double tax agreement. Additionally, if you cease your individual tax residency, you won’t have to pay the Medicare levy. If you’re living abroad, Medicare is no practical use to you anyway.
However, one advantage of being an Australian citizen for tax residency rules is capital gains tax. Firstly, an Australian resident receives a 50% CGT discount on their primary dwelling. If you live abroad, you won’t be eligible. Secondly, when a non-resident sells an Australian property, they must pay FCGW tax, which may affect cash flow.
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As an Australian expat, it’s in your best interest to avoid paying tax on all your income sources. If you live outside Australia, you should seek professional advice about proving you’re no longer an Australian tax resident. Understanding the tax residency rules is challenging but costly if you make an error.
Frequently Asked Questions
How Do You Determine Residency for Tax Purposes Australia?
Generally speaking, if you have lived and worked in Australia for six months or more, you’re a tax resident. The Australian government has four tests you can complete to determine how much tax you should pay in Australia. These include the reside test, domicile test, 183-day test, and commonwealth superannuation test. If you pass one test, you’re a tax resident.
What Is the Difference Between Domicile and Residency?
Domicile refers to your permanent home. This could be the place you were born or choose to move to permanently. Your residency is where you decide to live temporarily. If you only go abroad for a few months of the year, your domicile is Australia. However, if you’re abroad for years at a time, your new country becomes your domicile.
What Is the Legal Definition of Residence?
Your legal residence is where you live at any one time. It doesn’t have to be your permanent home. For example, your residence might be in Australia while your long-term abode is in another country.