Changes to the Australian Tax Residency Rules Affecting Expats
Just as you thought you had wrapped your head around the expat’s individual tax residency rules, the government announced new rules to determine your tax residency status. So, what’s different? When do the proposed rules come into effect? Are you now a resident for tax purposes or not? We’ll answer all your questions and more.
What Is Wrong With Our Current Tax Residency Rules?
Nothing is perfect, and that includes Australia’s taxation rules for expats. Knowing whether you’re a tax resident or not is confusing at the best of times. Now that government officials are introducing new rules, it’s even harder to determine your residency status. Why do the rules have to change?
Well, for these very reasons, too many Australian expats struggle to work out whether they’re tax residents or not. The current regulations are principle-based. ATO has to judge residency status on a case by case basis. The proposed rules try to minimise the confusion.
For example, the current residency test dictates that if someone is physically present in Australia for a certain length, they are a tax resident. However, if the person can prove their primary residence is elsewhere, they might be a non-resident for tax purposes. The regulations aren’t beneficial for expats trying to assess their residency status.
So, what are the current rules? At the moment, you need to take a primary and secondary test. If you satisfy the requirements of the first test, you won’t need to undertake any more – you will be a tax resident.
The first step to determine your tax residency status is the ‘resides’ test. The ATO website states that the definition of ‘resides’ is ‘to dwell permanently, or for a considerable time, to have one’s settled or usual abode, to live, in or at a particular place.’ However, this definition is not written in tax law – adding further ambiguity.
Accordingly, to determine if you are residing in Australia, ATO looks at your day to day life. If your activities are relatively similar to those pre-moving to Australia, they might consider that you have made Australia your permanent home. ATO will look at:
- Why you’re in Australia
- Whether you have a family, business, or employment ties in Australia
- Whether you have any assets in or out of Australia – e.g. property
Your social and living arrangements – e.g. do you use Australian or foreign bank accounts?
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If you don’t satisfy the resides test, you will have to take the secondary tests to determine whether you’re an Australian resident for tax purposes:
- Domicile test: if your permanent address is in Australia, you’re an Australian resident even if you spend less than 183 days in the country.
- 183-day test: if you spend more than half the tax year in Australia, working and living in the same or similar place, you’re an Australian tax resident.
- The Commonwealth superannuation fund test: if you’re a contributing member of the Public Sector Superannuation Scheme or the Commonwealth Superannuation Scheme, you’re a tax resident of Australia.
Double Tax Agreement (DTA)
If you’re a tax resident of more than one country, you might fear paying double taxes. Fortunately, Australia has double tax agreements with more than forty other countries. If your second country of residence is one, you will get a tax offset against your taxable income.
Essentially, the Double Tax Agreement uses a tie-breaker test to determine which country you pay tax. Unfortunately, if you reside in a country that does not have a relevant Double Tax Agreement, such as Hong Kong, you will have to pay two lots of taxes.
The tie-breaker test looks at the following factors:
- If you have a permanent home in one country
- If you have a habitual abode in one country
- If you have stronger personal and economic relations in one country over the other
For example, an expat with property and a job in Singapore might be their tax resident rather than in Australia.
Introducing the Primary 183-Day Test
The new primary test is the 183-day test, based on your physical presence. It’s essentially the same as the previous test, except it’s moved up in importance. If you spent 183 days or more in Australia during the financial year, you are an Australian resident for tax purposes.
As a result, you will need to pay tax on your worldwide income regardless of whether you reside permanently in Australia.
The new primary 183-day test removes ambiguity. You no longer need to worry about your Australian economic interests or whether you have an Australian family. Most Australian expats will fail the 183-day test and move to the subsequent stage.
Secondary Tests: Commencing Residency
If you pass any of the secondary tests in the previous rules, you are automatically considered tax residents. However, the proposed new rules follow a step-by-step process. The new tests are:
- 45-day test
- Factor test
Australia 45-Day Tax Rule
The 45-day test is straightforward. Did you spend fewer than 45 days in Australia? If yes, then you’re not a tax resident. Did you spend more than 45 days in Australia but less than 183 days? If yes, then you have to move on to the factor test.
The Factor Test
If you spend more than 45 days in Australia and answer yes to two or more of the following, you are an Australian tax resident.
- Right to reside permanently in Australia: Any citizens and permanent residents of Australia, including most Australian expats.
- Australian accommodation: Do you have a property in Australia available to live in, such as an empty home or holiday home?
- Australian family: Do you have a spouse or children below 18 that live in Australia for most of the income year?
- Australian economic interests: Do you have employment in Australia, an active business, or interest in an Australian asset, such as taxable Australian property?
Most expats will meet at least two (if not more) of the new factor tests. Therefore, Aussie expats have to spend less than 45 days in Australia under the new rules to avoid commencing residency.
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What about expatriates leaving Australia? Unfortunately, the new legislation also makes it more challenging to cease Australian tax residency.
If you meet all of the below employment rules, you will be a non-resident of Australia from the day you leave:
- A resident of Australia for the three prior income years
- Employed overseas with an employment period of more than two years
- Available accommodation for the entire employment period
- Spend less than 45 days in Australia each tax year during the employment period
If you don’t meet all of the employment rules, you will need to assess whether you’re a long-term or short-term resident.
Short Term Tax Resident
Have you been an Australian tax resident for less than three years? If the answer is yes, then you’re a short-term resident. If you spend less than 45 days in Australia and don’t pass the above factor tests, then you’re a non-resident from the day you leave Australia.
However, if you satisfy more than two of the factor tests and spend more than 45 days in the income year in Australia, you’re a tax resident.
Long Term Tax Resident
However, if you have been an Australian tax resident for more than three years (applicable to most expats), you need to wait to cease residency. You need to spend less than 45 days in one income year for three years before you can change your status.
However, you would have had to weave between many different residency tests to get to this stage. Most expats will have determined their tax residency before getting to this step.
Gill is an Aussie expat living in Singapore. She is retired. Gill moved to her newly purchased Singapore home two years ago and kept an Australian rental property in New South Wales. Gill spends a few weeks in Australia each summer checking on the property, which totals less than 45 days.
Regardless of her residency status, she must pay tax on her rental income. Whether she’s a foreign resident or not will impact the income tax rates.
Under the old rules, Gill would have first taken the resides test. With a permanent abode in Singapore and little intention of staying in Australia, Gill isn’t a tax resident. While she has Australian assets, her behaviour suggests that she does not intend to live in Australia.
Let’s see what happens if we use the same facts and apply the new rules. In the first year Gill leaves Australia, she spends less than 183 days in the country. However, this isn’t necessarily enough to cease her tax residency. As Gill is retired, she doesn’t satisfy the employment test. Therefore, she needs to determine if she is a long or short term resident.
As she was an Australian tax resident for more than three years before departing Australia, she cannot cease her tax residency until she has spent fewer than 45 days in the country for three consecutive years. As a result, Gill is a tax resident for her first two years living away from Australia.
When Do the Proposed Rules Come Into Effect?
The new residency tests are only proposed rules. If they are approved, we could see them implemented in the following income year. However, if they’re heavily lobbied, it could take a few years or more.
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So, to clarify:
- You’re a resident if you spend more than half the income year (183 days) in Australia.
- If you spend fewer than 45 days in the country, you’re not a resident of Australia.
- If you spend between 45 and 183 days in Australia, you must undertake the factor test. Any Australian citizen with a place to live, family, and economic interest in Australia is a resident.
- If you satisfy less than two factors, you’re not a resident.
Rules for ceasing residency when Aussie expats leave have also changed. Unless you have guaranteed overseas employment and accommodation, you might be a resident for tax purposes.
The new tax rules have simplified the process. However, they have also made it harder for Australian tax residents to cease residency.
Frequently Asked Questions
At the moment, you can spend up to six months in Australia without paying tax – as long as you fail the resides, domicile, 183-day tests, and Commonwealth superannuation test. However, the proposed new rules mean that some people spending between 45 and 183 days in Australia will pay Australian income tax.
ATO judges your tax residency on how long you’re physically present in Australia, your familial and economic ties, and your intentions. Even if you proclaim that you don’t intend to live in Australia, ATO will probably decide you’re a tax resident if you still use an Australian bank account and have an Australian business.
The changes to the Australian tax residency rules that were announced in the 2021-22 Australian Federal Budget will affect most Australian expats, including those living in Singapore. The main changes are:
- A new primary test based on the number of days spent in Australia. If you spend 183 days or more in Australia in an income year, you will be an Australian resident for tax purposes. This is a stricter test than the previous rules, which only required you to spend 183 days in Australia in a calendar year.
- A new secondary test that applies if you spend less than 183 days in Australia in an income year. This test considers a number of factors, including your intention to reside in Australia, your family and economic ties to Australia, and your property ownership in Australia.
The changes to the tax residency rules are likely to mean that more Australian expats living in Singapore will be considered Australian residents for tax purposes. This is because Singapore is a popular destination for Australian expats, and many of them spend more than 183 days in Australia each year.
Will Aussie expats living in Hong Kong be affected by the changes to the Australian tax residency rules?
Yes, Aussie expats living in Hong Kong are likely to be affected by the changes to the Australian tax residency rules. The new primary test for tax residency is based on the number of days spent in Australia, and if you spend 183 days or more in Australia in an income year, you will be an Australian resident for tax purposes. This is a stricter test than the previous rules, which only required you to spend 183 days in Australia in a calendar year.
Hong Kong is a popular destination for Australian expats, and many of them spend more than 183 days in Australia each year. This means that they are likely to be considered Australian residents for tax purposes under the new rules.
If you are an Aussie expat living in Hong Kong, it is important to understand the changes to the tax residency rules and how they may affect you. You should speak to an experienced tax advisor to get advice on your specific circumstances.
What about Australian expats living in the UAE? Will the changes to the Australian tax residency rules affect them?
es, Australian expats living in the UAE are also likely to be affected by the changes to the Australian tax residency rules. The new primary test for tax residency is based on the number of days spent in Australia, and if you spend 183 days or more in Australia in an income year, you will be an Australian resident for tax purposes. This is a stricter test than the previous rules, which only required you to spend 183 days in Australia in a calendar year.
The UAE is a popular destination for Australian expats, and many of them spend more than 183 days in Australia each year. This means that they are likely to be considered Australian residents for tax purposes under the new rules.
If you are an Australian expat living in the UAE, it is important to understand the changes to the tax residency rules and how they may affect you. You should speak to a tax advisor to get advice on your specific circumstances.
Here are some additional things to keep in mind:
- The changes to the tax residency rules will apply from the 2024-25 income year.
- If you are an Australian resident for tax purposes, you will need to pay Australian tax on your worldwide income, regardless of where you earn it.
- You may be able to claim a foreign tax credit for the tax you pay to the UAE on your UAE-sourced income.
- You will still need to lodge an Australian tax return even if you are not an Australian resident.
If you have any questions about the changes to the Australian tax residency rules, you should speak to a qualified tax advisor.