Understanding tax residency status in Australia

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Tax Minimisation
By
Andrew Phelan
Andrew Phelan
Business Development Manager
July 31, 2020
7
minute read

A simple guide to what it means to be an Australian resident or non-resident for tax purposes

Living in Australia doesn’t automatically translate into residency. In a similar way, working in Australia doesn’t automatically classify you as an Australian resident for tax purposes. This tax residency status is important, as it makes a significant difference in how you’re taxed in Australia.

In this article we’ll show you how to determine your tax residency status, and explain why it makes a difference.

Understanding your tax residency status is an important step in determining the amount of tax you’re likely to pay. Liston Newton Advisory is here to help you get it right. Get in touch with us today to discuss your living and working situation, and we can help you clearly define your tax residency status.

What is an Australian resident for tax purposes?

Broadly, you’re classified as an Australian resident for tax purposes if you have:

  • Spent most or all of your life in Australia
  • Moved to Australia for the long-term
  • Spent more than half the year working in Australia

The ATO has published four imaginatively-named tests that will determine whether or not you’re classified as a resident for tax purposes.

  • The Resides test
  • The Domicile test
  • The 183-day test
  • The Commonwealth superannuation test

If you satisfy one or more of these tests then you’re likely to be considered a resident for tax purposes. In this circumstance, you’re required to pay tax on all your worldwide income, even if you’ve paid tax on it in another country.

On most taxes paid on foreign income, a tax offset is generally available to reduce the Australian tax on this income. Tax offsets are due to the double taxation agreements that Australia has with many other countries. They are determined by the tax treaties between Australia and the specific country where the income was earned.

Tests to determine residency status

The Resides test

If you reside in Australia—that is, your permanent home is in the country—then you’re likely considered a resident for tax purposes. If so, you won’t need to apply any of the other tests to determine your tax status. The ATO determines if you reside in Australia based on your purpose for being in the country, your living arrangements, how you’re employed, and any individual assets you hold.

If you don’t pass the Resides test, but you pass one of the other three tests, you’ll still be considered a resident for tax purposes.

The Domicile test

If you can prove that your permanent home (your domicile) is in Australia, then you’re considered a resident for tax purposes. For example, if you can prove that you’ve moved to Australia permanently, or you were born in Australia, then your permanent home is considered to be in the country.

The 183-day test

This test applies to people arriving in Australia from overseas. If you’re present in Australia for over half of the financial year—183 days—either continuously or with breaks, then you’re considered a resident for tax purposes.

However, you may be considered a non-resident for tax purposes if:

  • You can prove that you’re in the country with the intention of leaving again
  • There is evidence that your main place of residence is outside the country

The Commonwealth superannuation test

This test only applies to people employed by the Australian Government who are working overseas.

If you’re employed under either the Commonwealth Superannuation Corporation scheme (either CSS or PSS) then you’re considered an Australian resident for tax purposes. This doesn’t apply to those under the Public Sector Superannuation Accumulation Plan.

Non-resident

Non-residency status is reserved for those who are temporarily living in Australia for a short time. This is usually for a short-term contract or holiday where they take on casual employment.

Non-residents will only be required to pay tax on:

  • The income they receive from employment
  • Any rental income
  • Anything they receive as an Australian pension or annuity
  • The income from any capital gains on Australian assets

When classified as a non-resident for tax purposes, there is no tax-free threshold on your income, and you’re not required to pay the Medicare levy.

Temporary resident

Temporary residents are those with a temporary visa that allows them to live in Australia. For example, if you’re living in Australian under a 457 Visa then you’re likely to be considered a temporary resident for tax purposes.

However, in the case that your spouse is an Australian citizen or permanent resident, you can’t claim temporary resident status.

Temporary residents only pay tax on income they make from employment within Australia. So, as a temporary resident for tax purposes, you aren’t required to:

  • Pay tax on income from any controlled foreign company
  • Declare any foreign investment income, like interest in an overseas bank, or distributions from a trust held overseas

This means you can live and work in Australia, but still receive income from foreign investments and not pay any additional tax on this income.

Working holiday

An individual is classified as being on a working holiday if they hold either of the following Visa subclasses:

  • 417 (Working Holiday)
  • 462 (Work and Holiday)

When you’re in Australia on a working holiday, you’re still required to pay tax on your income and lodge a tax return.

However, the tax brackets are different. Under a working holiday status, the first $37,000 earned is taxed at a flat 15%, and any income above this threshold is taxed at regular tax rates.

Dual citizen

A dual citizen is someone that holds tax residency status both in Australia and another country and is required to pay tax in both countries. Be aware that in some circumstances this can see you pay tax on income in two countries—so it's best to determine your tax residency status in each country as soon as possible.

Benefits of being a resident for tax purposes

If you’ve never worked outside of Australia you might not realise the main benefit of being a resident for tax purposes: your entitlement to the tax-free threshold. Being a resident for tax purposes also allows you to claim tax offsets, where appropriate, which isn’t granted to non-residents. And, as you pay the 2% Medicare Levy, you’re also entitled to Medicare benefits.

Benefits of being a non-resident for tax purposes

While non-residents don’t receive the tax-free threshold, they do receive some other benefits. As a non-resident for tax purposes you don’t get taxed on worldwide income, only income that’s earned in Australia. This covers income such as your employment or rental income, any income from a pension or annuity, or capital gains on any Australian assets.

A non-resident is not required to pay the 2% Medicare Levy either, although this means you don’t receive Medicare benefits.

Changing your tax residency status

Changing your tax residency status is only something you would do for a specific reason, such as a change in your living or employment arrangements. So if you’re wondering how to become a non-resident of Australia for tax purposes, you’ll need to provide evidence that demonstrates your new residency status. This can include:

  • Evidence of your permanent living situation: For example, if you’re leaving the country you’ll need to provide evidence that you’ve sold your home or broken your lease. Or, if you’re entering the country to live, you must provide evidence of purchase or lease of a place to reside.
  • Buying or selling furniture for your Australian home
  • Changes in employment: When leaving the country, you can prove that you’re leaving for the long term by providing the ATO with a written notice of intent to quit your Australian job. Conversely, demonstrating that you’ve got a job lined up in Australia can prove your intent to live here for the long term.
  • Your finances: When leaving the country permanently, big changes to your financial affairs—such as cancelling credit cards or closing your bank accounts—can demonstrate your intent to revoke your tax residency status. Again, opening a bank account is a good indication that you’re planning on living in the country for long enough to be considered a resident.

The final word

Your tax residency status can have a big impact on the amount of tax you pay on your income.

And while most Australian citizens will be considered residents for tax purposes, there are some situations where it pays to check first.

So if you’re uncertain as to your tax residency status, or you want more information about what this means for you, it’s important to speak to the experts.

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