If you’re an Australian resident for tax purposes you pay tax on your worldwide income. This can have a massive impact on how much tax you pay. So in this article you'll learn when you're considered an Australian tax resident, even if you don't have permanent residency or visa, what happens on entering the country, and what happens if you are leaving.
What is an Australian Resident For Tax Purposes?
A person is considered an Australian Resident for Tax Purposes if they satisfy one of 4 tests.
What the tax office is looking for is if you go about your daily life in Australia, or if you’re just here temporarily. The difficulty is these 4 tests can be a bit grey, so let's take a look;
The key that is being tested here is the word "resides". For such an important word you’d think the tax act would have a definition, but it doesn’t. Instead the ATO and the courts rely on the normal definition.
The shorter Oxford Dictionary says;
“to dwell permanently, or for a considerable time, to have one’s settled or usual abode, to live, in or at a particular place”
Nice and broad and vague right? Does permanently mean forever or in the one place? How long is a considerable time? 6 months? 12 months, 5 years? What’s an abode? What if you have no fixed address or spend months in different countries each year?
Because this is such a grey area, the ATO has released a Taxation Ruling TR 98/17 which outlines when they consider individuals as residing in Australia. As you might expect it’s an absolute page turner, but nevertheless it is quite helpful, so if in doubt check it out. No single factor is determinative of your tax residency, but your situation is affected by all the facts and circumstances (that is, you can’t game the system on one area). The main areas that the ATO considers in determining where you reside are;
Behaviour in Australia
If your day-to-day activities in Australia are relatively similar to your day-to-day activities before you entered Australia, you may be considered an Australian tax resident.
Intention or purpose of residence
The way you organise your affairs (bank accounts, long term rental leases, no set departure date etc) demonstrates your intention which can override any stated intention
Family, business or employment ties
How much family do you have in Australia and how closely related are they?
Maintenance and location of assets
Have you bought a house? a car? household furniture?
Social & living arrangements
Playing sport in a local team, being a member of a local or community club, redirecting mail to Australia, enrolling kids in school are all important factors of when considering residency.
Physical Presence in Australia
To reside somewhere you need to be physically present and display behaviour that has a degree of continuity; routine and habit.
The domicile test may seem similar to the resides test, but this is about whether your permanent home - your abode - is in Australia. If you can show that you don't "reside" in Australia, but your place of abode is here, then you'll be an Australian tax resident.
So what’s a domicile?
It’s a place considered by law to be your permanent home – usually something more than a residence (i.e it’s your home, not just a physical location). You can have no fixed place of abode – but under law you’ll always have a domicile either by origin, by choice or by law.
What’s a permanent place of abode?
An abode is where you live and sleep at night. Permanent doesn’t mean forever, but is used in a relative sense to contrast against temporary or transitory
Clear as mud? Yep, that’s Australian tax residency for you. Again, the ATO have been nice enough to give us a Taxation Ruling IT 2650 to help you work through how they apply the law and some examples.
But know this - the domicile test mostly applies for people who leave Australia to go work overseas for an extended period.
183 Day Test
If a person is in Australia for 183 days or more in 1 year, they will be considered an Australian Resident for Tax Purposes unless you can prove your usual place of abode is outside Australia. Note the term “usual” this is not the same as the test as under the domicile test where they were looking at “permanent” abode (fun times!). The 183 days does not need to be consecutive, you can come in and out, but if you accumulate 183 days (note it includes the days of your arrival and departure) in a financial year (not calendar year) you’ll be caught under this test.
Intuitively you may think that being outside Australia for 184 days therefore means you're a non-resident - but that is not the case. This test doesn't have negative. It only tests whether you're in country for 183.
This one is for Australian government workers - like those who work in Embassy's overseas. They are classified as Australian tax resident's and subject to Australian taxation. It wouldn't be a good look if the Australian taxpayer is paying a salary for someone in an embassy in a low/no tax country, and that employee paid no Australian tax.
As I said at the start, these tests can be grey and inconclusive. Many a court case occurs over tax residency. The ATO knows this so they have built this nifty little tool that’ll try its best to give you an answer, however if your circumstances are complex, it may not work
Ok, so how does this practically affect you when you become a tax resident of Australia?
Becoming an Australian Resident For Tax Purposes (Entering Australia)
Tax rates for resident's are different to non-residents. For tax residents the first $18,600 is tax free. Additionally, with the low- and middle-income tax offset, you can effectively earn $21,000 and pay no tax.
Medicare Levy & Medicare Levy Surcharge
Medicare levy is a technically not a tax, but the effect is the same. It's a tax by another name. Its purpose is to fund universal health care in Australia.
Anybody who is eligible to receive free health care in Australia (i.e those not on temporary visa's) are liable to pay Medicare Levy once their income reaches the thresholds. Those thresholds are a bit fluid based on your family income and how many children you have. But the standard rate is 2% once your income hits $27,997 (a pro-rata rate applies from $22,398).
Main Residence Exemption
The main residence (i.e house/apartment) of tax residents of Australia are eligible for an exemption to capital gains tax when they sell it. There is no dollar limit, or time limit. You can buy a house now for $1 and sell it in 10 years for $10 million and there is still no tax if you satisfy this exemption. This is a bit of a discussion point recently as property prices have boomed.
Capital Gain Tax Discount
When you sell an asset that profit is captured as income by the capital gains tax provisions. Normally the gain on a realisation of an asset isn't seen as income under "ordinary concepts" so legislation was introduced in the mid 1980's to make this profit subject to taxation (anything bought before the introduction of the legislation may still be disregarded for taxation purposes). To soften the blow and reward investors (and penalise speculators) any asset held for more than 365 + 1 days is eligible for a 50% discount. Meaning any gain made is reduced by 50% (after applying any capital losses) and taxed at the marginal rates (except for companies - they aren't eligible for the discount. Ever).
Cost Base Adjustments
When you become an Australian resident for tax purposes, any assets you currently own will be subject to taxation when you sell them (except your main residence). But it would be unfair that you are subject to tax on the increase in value between when you bought them and when you became a resident - essentially Australia would be taxing you on income when you were a non-resident, and that's a no no. So what happens is that the "cost" of the asset is adjusted for tax purposes to be the market value at the time you became a resident. So when you sell it you only pay Australian tax for the period you were an Australian resident.
Becoming a Non-Resident For Australian Tax Purposes (Leaving Australia)
Severing ties with Australia
This is the counter to the issues covered under the Resides test. What family remains in Australia? What assets do you still have here? What are your social and living
arrangements overseas? Where are you physically present? Selling up all your Australian assets, moving your family overseas and enrolling them in school etc, these are the actions of someone who doesn’t intend to reside in Australia.
If you worked in Australian on a temporary visa and had superannuation contributions made for you, you are eligible to have these amounts paid to you.
For all other Australian tax residents who leave Australia and become a foreign resident for tax purposes, the normal superannuation rules still apply and you can’t access your super until you reach your preservation age.
Main Residence Capital Gains Tax (CGT)
If you leave Australia temporarily you can still have a main residence here and get access to the Capital Gains Tax exemption – even if you rent the property out.
BUT if you become a non-resident, you may be liable to CGT on that property due to recent announced changes to the law.
Deemed Disposal of Assets
When you cease to be an Australian resident for tax purposes, you are deemed to have sold your assets that are not taxable Australian property (so you are taxed on any gain on these assets even if you haven’t actually disposed of them). If you don’t want this to happen, you can elect to treat these assets as if they were taxable Australian property and pay tax in Australia when you actually sell them. Depending on the assets, how much they are likely to increase in value and the country in which you now reside, will all impact whether you should pay the tax now and be done with it, or pay tax in Australia later.
For taxable Australian property, you will be required to pay tax in Australia on the eventual actual sale.
Australian tax residency is a minefield covered in grey smoke and whether you are an Australian tax resident will depend on the facts of each case. That’s why it’s important that you work through the tests in this article, and the resources from the ATO to make an informed assessment of your situation. Once you’ve got the initial self-assessment and you think its kind of grey, reach out to a qualified tax accountant, like umm us.