Australian Tax Residency: What Do I Need To Know
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It is important to determine if you are considered an Australian tax resident as it affects your tax obligations. Suppose you own property in Australia or are considering buying one. In that case, you may be subject to the foreign resident capital gains withholding tax (FRCGW). Additionally, Australian tax residents must pay tax on all their worldwide income. They could end up paying double tax in Australia and another country.
Common Terms in Tax Residency
Before discussing the tax rules, let’s clarify some common terms.
- Temporary resident: A person who is granted the right to reside in Australia for a set period without full citizenship.
- Foreign national: A person who only has citizenship outside of Australia.
- Foreign resident: A person who primarily lives and works overseas and is not a resident.
- Dual resident: A person who holds citizenship in two countries.
- Permanent resident: A person with the legal right to live in Australia indefinitely but may still hold citizenship in another country.
- Australian citizen: A person with the legal right to live, work, and vote in Australia.
- Resident for Tax purposes: A person who primarily lives and works in Australia for most of the year.
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What is an Australian Tax Resident?
The Australian government has recently announced new tax rules for Australian citizens living abroad. According to the Australian Taxation Office (ATO), a person is considered an Australian tax resident if they meet the following criteria:
- They have always lived in Australia or have come to live in Australia permanently.
- They have lived in Australia for six months or more, working and living in the same place for most of that time.
- They temporarily go abroad but do not establish a permanent home in another country.
- They are international students who have studied in Australia for over six months.
Therefore, if you are an Australian expatriate who has established a permanent home abroad, you may not be considered an Australian tax resident. On the other hand, if you are a foreign national who has lived in Australia for six months or more or intends to stay permanently, you may meet the tax residency criteria.
Difference between tax residents and non-residents in Australia
Your tax residency status affects how much tax you pay to the Australian Taxation Office (ATO). If you are a tax resident, the ATO will tax your worldwide income from all sources at Australian tax rates, some of the highest globally. However, you only need to declare and pay tax on your Australian-based income if you are a foreign resident. Furthermore, foreign residents do not have a tax-free threshold and may not have to pay the Medicare levy.
Determining tax residency in Australia
Determining individual tax residency in Australia involves more than just asking a few simple questions. Tax residents must undertake both primary and secondary tests to prove that they are not residents for tax purposes. If you pass any of the tests, the ATO will consider you a tax resident of Australia.
To determine if you are an Australian tax resident, consider the following tests:
Resides Test
This test checks whether you live in Australia permanently. Factors such as your physical presence, intention, family ties, business ties, assets, and social and living arrangements can all play a role.
If you do not pass the residency test, you will proceed to one of three additional tests. You will be considered an Australian tax resident upon passing any of these tests.
Domicile Test
This test looks at your permanent home by law, which could be your place of origin or a place you have chosen to move to. If your domicile is in Australia, the ATO considers you a resident.
The ATO will consider an individual a tax resident of Australia unless they can provide sufficient evidence that their permanent place of abode is outside Australia. For instance, selling or renting their Australian residence may indicate to the government that they do not intend to continue living in Australia.
183-Day Test
This test applies to foreign residents who are physically present in Australia for more than 183 days, continuously or with breaks. You are considered an Australian resident for tax purposes if you meet this criteria.
The Commonwealth Superannuation Test
This test applies to Australian government members of the CSS or PSS schemes working overseas. If you, your spouse, and any children under 16 move with you, the ATO will consider you and your Australian family residents.
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Real-Life Examples of Tax Residency in Australia
Case 1
Julie was born in Australia but moved to New York for work. She has a one-year work contract and intends to return to Australia after travelling. She rents out her property in Australia and stays with her family in New York.
Under the domicile test, Julie is considered an Australian tax resident because her permanent home is in Australia (where she plans to return to).
Case 2
Jack, also born in Australia, plans to move to Canada. He buys a property there and sells his Australian home. He works for a Canadian company while in Canada.
Under these circumstances, Jack is not considered an Australian tax resident as he no longer has a permanent home in Australia.
Case 3
Sarah was born in the United Kingdom. She travels to Australia, rents a property, and works the same job for more than six months.
Although Sarah is only a temporary resident, she is still required to pay tax in Australia on all her income earned within the country.
What to Do if Your Residency Status Changes During the Tax Year
If you leave Australia and move overseas during the tax year, you still have to declare yourself as an Australian resident on your tax return. You’ll be taxed for your income while living in Australia. But you can claim an exemption for the days when you were not an Australian resident during that tax year.
After you cease residency, you don’t have to declare foreign source income on your tax return. As long as you don’t return to Australia permanently, you won’t need to pay tax on any income sourced worldwide. If you don’t earn anything in Australia, such as by renting out a property, you won’t have to pay any Australian tax.
Ceasing Residency
To prove to the ATO that you’re no longer an Australian tax resident while living abroad, you can take the following steps:
- Provide evidence of your permanent living situation abroad, such as by purchasing a house in a foreign country or showing a year-long tenancy agreement.
- Remove yourself from the Australian electoral registry, demonstrating that you’re no longer a permanent resident.
- Pass any of the ATO residency tests discussed earlier.
- Sell or lease out your Australian property, demonstrating your lack of intention to return to Australia permanently. Note that the Foreign Resident Capital Gains Withholding tax applies when selling a property.
- Show evidence of overseas finances, such as a foreign tax return or a foreign bank account, to demonstrate that your day-to-day expenses are covered by your foreign account rather than your Australian one.
- Purchase a one-way ticket, as having no return date makes it easier to prove your lack of intention to return to Australia.
- Obtain a foreign driver’s license 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 the FRCGW tax, which may affect cash flow.
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In conclusion,
Understanding your tax residency status is crucial for determining your tax obligations in Australia. The ATO considers various factors to determine an individual’s tax residency status. If you need help determining your tax residency status or have any questions, the Odin Tax Team is here to help.
Our team of experienced tax professionals will provide you with the guidance and support you need to ensure you meet your tax obligations and take advantage of all available tax incentives. Don’t hesitate, reach out to the Odin Tax Team today and take control of your tax situation!
Frequently Asked Questions
An Australian tax resident is an individual who has a permanent place of abode in Australia or who resides in Australia for more than half of a financial year.
The ATO considers various factors, including the individual’s place of abode, their permanent home, the location of their family and personal belongings, and the pattern of their employment and business activities.
The difference between domicile and residence lies in their concepts of permanency. An individual’s permanent home is referred to as their domicile, which can either be their place of birth or a place they have chosen to reside permanently.
On the other hand, residence refers to a temporary place where an individual decides to live. If an individual only leaves their country for a short time, Australia remains their domicile. However, if they reside abroad for an extended period, their new location becomes their domicile.
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