One of the very first questions you are asked on your individual tax return is: “Are you an Australian resident?” It may seem an unusual or unnecessary question, but the Tax Office wants to get this one cleared up early as it makes a big difference to everything else that follows.
The tax law definition of “resident” is too cumbersome to repeat here, but the Tax Office views residency in an entirely different way to other Australian governmental agencies that deal with things like immigration, visas and citizenship.
Whether you’re defined as a resident for Australian income tax purposes has no impact on your passport or even your status as a permanent resident, and vice versa. The Tax Office is really only interested in your earnings, and uses the term “resident for tax purposes” to decide how much you should be taxed for an income year.
What is an Australian “tax resident”?
Generally, the Tax Office considers you to be an Australian resident for tax purposes if you:
- have always lived in Australia or have come to Australia to live
- have been in Australia for more than half of the income year (unless your usual home is overseas and you don’t intend to live in Australia — for example, you are a working holidaymaker), or
- are an overseas student enrolled in a course of study of more than six months duration.
You may still be a tax resident even though you are not physically in Australia — for example, if you go overseas on an extended holiday. Another situation is if you have moved to Australia from overseas and intend to stay for the foreseeable future and set up connections with Australia, you may also be a resident of Australia for tax purposes.
The tax law contains a series of tests to take to determine your status. But if you “reside” in Australia under the usual meaning of the word, you don’t need to look at any of the prescribed tests. However should you have any questions or doubts about your status as a tax resident, please ask this office.
Why is tax residency important?
The reason the Tax Office gives such weight to residency is that a person’s status as a resident or not can make quite a difference for tax purposes as the law treats residents and non-residents differently.
Some tax implications for non-resident taxpayers to consider include:
Non-residents taxed on Australian source
Australian residents are generally taxed on all of their income, from here and from overseas, and non-residents are taxed only on income sourced in Australia.
Tax rates for non-residents
Non-residents are not eligible for the tax-free threshold (which is $18,200 for 2014-15, and $19,400 for 2015-16) so income is taxed right from the first dollar. Further, for the 2014-15 income year, there is no incremental tax rate up to $80,000 income but a straight-up rate of 33% (see table below).
|Taxable Income||Tax on this income|
|0 - 80,000||32.5 cents for each $1|
|80,001 - 180,000||$26,000 plus 37 cents for each $1 over $80,000|
|180,001 and over||$63,000 plus 45 cents for each $1 over $180,000|
Non-residents do not pay the Medicare levy (and therefore cannot claim Medicare benefits).
Withholding taxes on interest
Non-residents will have 10% of any interest earned from Australian bank accounts withheld for tax, subject to any “double taxation agreement” (see below) that may impose a different rate. The interest is not included in assessable income, but a non-resident will need to provide an overseas address otherwise tax will be withheld at the resident top marginal rate.
Certain tax offsets
Non-residents cannot claim certain tax offsets and various other support schemes available to residents,. Examples include the Schoolkids Bonus, certain family payments and help with healthcare.
A non-resident taxpayer may have the right visas and permissions to work, but another administrative necessity is to have a tax file number (TFN). If you don’t have a TFN, tax will be deducted from your wages at the top tax rate.
Summary of differences in residential status
|Resident for tax purposes||Non-resident for tax purposes|
|Reduced tax rates at lower income levels (availability of tax-free threshold)||Pays tax on every dollar (no tax-free threshold)|
|Taxed on Australian and overseas sourced income||Only taxed on Australian sourced income|
|Pay Medicare levy (can claim on medical expenses)||No Medicare liability (can't make claims)|
|Interest income assessed at taxpayer’s marginal tax rate||Interest taxed at flat 10%, or top resident marginal rate if no overseas address (or TFN) provided|
|Liable for capital gains tax on worldwide assets||CGT only on “taxable Australian property” (most commonly Australian real property)|
|Tax offsets available (if eligible)||Offsets typically not available|
Double taxation agreements
An individual may be a resident of Australia and of another country at the same time. Australia’s “tax residency” tests do not affect a taxpayer’s residency status in another country.
Australia has “double taxation agreements” with several countries so that relevant employees, for example those working for foreign businesses that have a physical workplace in Australia, pay tax on their own country’s terms. Most double taxation agreements have residency “tie-breaker” rules, where a dual resident will be deemed to be solely a taxpaying resident of only one country. Residency determinations should always include a check of whether a double taxation agreement with the other involved country is in place or not. Check with this office if you suspect this may be the case.
If a non-resident derives rental income from an Australian property, they will need to include this in their income tax return.
If the only income from an Australian source is in the form of interest from bank accounts, unfranked dividends or royalties, there will be no need to lodge an income tax return if withholding tax has been paid.
In cases where an Australian goes overseas for employment, even for some years, the maintenance or relinquishing of resident status very much depends on individual circumstances. In the case where an Australian takes up a post overseas but retains a domicile in Australia, the Tax Office is likely to consider that the taxpayer retains residency.
Should however the taxpayer rent out their home here due to an extended time of overseas employment, the likely outcome could be that the Tax Office may consider them as a foreign resident for tax purposes. The outcomes are very much determined on a case-by-case basis.