Australian Tax Residency: What Do I Need To Know
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There are significant differences in your tax obligations depending on whether you’re an Australian resident or non-resident for tax purposes. 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) if you are considered a non-resident.
Additionally, Australian tax residents must pay tax on all their worldwide income. They could end up paying double tax in Australia and other countries.
In this article, we will go through how you can determine your tax residency, why it’s important, and your tax obligations depending on your residency status.
Common Terms in Tax Residency
Before discussing the tax rules, let’s clarify some standard terms used in tax residency.
- 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.
Is an Australian citizen a resident for tax purposes?
Not all Australian citizens are automatically considered residents for tax purposes. Tax residency is determined by several factors, including:
- The individual’s physical presence in Australia.
- The individual’s intention to reside in Australia permanently or for an extended period of time.
- The individual’s economic, personal and social ties to Australia.
- The individual’s residency status in other countries.
In general, if an Australian citizen lives and works in Australia and has no intention of leaving the country in the near future, they would likely be considered a resident for tax purposes. However, if they live and work overseas, they may still be regarded as Australian residents for tax purposes if they maintain strong ties to Australia.
Difference between tax residents and non-residents in Australia
The main difference between tax residents and non residents is their tax obligations. 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.
Tax residents are generally taxed on their worldwide income, including income earned in Australia and overseas. They are also entitled to claim certain deductions and tax offsets. Tax residents are required to lodge a tax return with the Australian Taxation Office (ATO) and are subject to Australian tax rates.
Non-residents, on the other hand, are only taxed on their Australian-sourced income, which includes income earned in Australia, such as salary, wages, and rental income. Non-residents are not entitled to claim the tax-free threshold or most tax offsets, which means they are generally taxed at a higher rate than residents.
In addition, non-residents are subject to different tax rates on certain types of income, such as interest and dividends, and are not entitled to the capital gains tax (CGT) discount. Non-residents may also be subject to withholding tax on certain types of income, such as dividends and royalties.
Am I an Australian resident for tax purposes?
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. Upon passing these tests, you will be considered an Australian tax resident.
Domicile test
This test looks at your permanent home by law, which could be your place of origin or a location 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. If you meet this criteria, you are considered an Australian resident for tax purposes.
The Commonwealth Superannuation test
This test applies to Australian government members of the Commonwealth Superannuation Scheme (CSS) or Public Sector Superannuation 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 must still declare yourself 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 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 renting 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 (FRCGW) 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 foreign account covers your day-to-day expenses 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
Here are some advantages and disadvantages of tax residency in Australia:
Advantages
- Access to certain tax benefits and deductions: Tax residents in Australia are entitled to claim certain deductions and tax offsets, such as the low and middle-income tax offset and the private health insurance rebate. These can help reduce their taxable income and lower their tax liability.
- Capital gains tax (CGT) discount: Tax residents in Australia are entitled to a 50% discount on CGT for assets held for more than 12 months, which can result in significant tax savings.
- Medicare: Tax residents in Australia are generally entitled to access Australia’s public healthcare system, Medicare.
Disadvantages
- Worldwide income: As mentioned earlier, tax residents in Australia are taxed on their worldwide income, which means they may have to pay tax on income earned overseas in addition to their Australian-sourced income.
- Higher tax rates: Non-residents are generally taxed at a higher rate than residents, which means tax residents may have to pay more tax on their income.
- Foreign Resident Capital Gains Tax Withholding (FRCGW) tax: When a non-resident sells an Australian property, they must pay the FRCGW tax, which may affect cash flow.
- Tax filing requirements: Tax residents in Australia are required to lodge an annual tax return with the Australian Taxation Office (ATO), which can be time-consuming and complex, especially if they have multiple sources of income or investments.
It’s important to note that the advantages and disadvantages of tax residency will depend on individual circumstances, and it’s always advisable to seek professional tax advice to determine the best tax strategy for your situation.
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Knowing your Tax Residency in Australia is essential!
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 to 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 has resided 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 location they have chosen to reside permanently.
On the other hand, a residence is a temporary place where an individual decides to live. If an individual only leaves their country briefly, Australia remains their domicile. However, if they reside abroad for an extended period, their new location becomes their domicile.
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