The Tax Office views “residency” in an entirely different way to other Australian governmental agencies that deal with things like immigration, visas and citizenship.
An individual will be an Australian resident for tax purposes if they “reside” in Australia, adopting the ordinary meaning of the term, or satisfy at least one of the three statutory tests. These are:
• Domicile test. The person’s domicile is in Australia unless the Commissioner of Taxation is satisfied that the person’s permanent place of abode is outside Australia
• The 183 day test. The person is present in Australia for at least 183 days in an income year, unless the person’s usual place of abode is outside Australia and they do not intend to take up residence in this country
• Commonwealth superannuation fund test. The person is a contributing member of the fund for Commonwealth government officers.
The Commissioner considers that the length of time a person is present in Australia is not in itself determine if they are a resident for tax purposes (although it can be a factor). However weight is given to evidence of continuity, routine or habit consistent with someone who resides in Australia.
The factors the Tax Office says it typically gives weight to are:
- intention or purpose of presence
- family and business/employment ties
- maintenance and location of assets, and
- social and living arrangements.
Rulings also state that patterns over a six month period (or rather 50% of a financial year, or 183 days) is generally sufficient to determine whether behaviour is consistent with being a resident. Overall however, while there are many ways of determining if your personal situation makes you a “resident” or a “non-resident”, you will be an Australian resident for tax purposes if you:
- have always lived in Australia
- have moved to Australia to live here permanently
- have been in Australia for more than half of the financial year (unless your usual home is overseas and you do not intend to live in Australia), and
- have been in Australia continuously for six months or more and your usual place of abode is in Australia.
Resident for Tax Purposes: Advantages and disadvantages
The main difference in tax status is that non-residents are not eligible for the tax-free threshold, so income is taxed right from the first dollar. For the 2012-13 year, there is no incremental tax rate up to $80,000 income but a straight-up rate of 32.5%, although thereafter the rates equal Australian resident rates. (Tax rates for 2011-12 were 29% up to $37,000, 30% to $80,000, thereafter equal to resident rates.)
Non-residents do not pay the Medicare levy (and therefore cannot claim Medicare benefits), and will have 10% of any interest earned from Australian bank accounts withheld for tax, subject to any “double taxation agreement” which may impose a different rate (see below). 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 much higher rate of 45%.
Non-residents can’t claim to have tax reduced by way of schemes called “tax offsets” and various other support schemes available to residents, such as financial help for children’s schooling expenses, family payments, help with healthcare and so on. Also some deductions available to Australian residents for expenses “incurred in earning income” may be unavailable to non-residents.
For example, a non-resident on a 457 visa who has moved to Australia from overseas typically won’t be able to access (from October 1, 2012) the Living Away From Home Allowance concessions, which are more readily available to resident taxpayers.
Residency: Coming here
A non-resident may have the right visas and permissions to work, but another administrative necessity is to have a tax file number (TFN). This is an important requirement for everything to do with Australian tax, but is also necessary for another significant reason; if you don’t have a TFN, tax will be deducted from your wages at the top tax rate.
And yet an individual may be a resident of Australia and of another country simultaneously, as Australia’s “tax residency” tests are not affected by a taxpayer’s residency status in another country. Australia has “double taxation agreements” with several countries, so that certain categories of workers pay tax on their own country’s terms, such as self-employed professionals, teachers and those working for foreign companies that have a physical workplace in Australia.
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 of the countries. 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 gets rental income from an Australian property, they will need to include this in their income tax return. But if the only income with 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.
The tax law exempts anyone qualifying as a “temporary resident” from Australian income tax on all ordinary and statutory income from a foreign source. The exemption does not apply to foreign employment income earned during a period of temporary residency here. Temporary residents are also treated as non-residents for capital gains tax purposes, with some slight exceptions (ask this office for more details if applicable to your situation). Further, they may also be exempt from the withholding tax provisions in respect of investment income.
A person is considered a temporary resident if they:
• hold a temporary visa under the Migration Act 1958 (where they are permitted to remain in the country for a specified time or until a specified event occurs)
• are not an Australian resident within the meaning of the social security provisions
• do not have a spouse who is an Australian resident.
There are no special income tax rates for temporary residents. A person who meets the requirements to be a temporary resident will be classified as such notwithstanding that they would have been classified as a resident under normal rules.
Residency: Going there
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.
Further consideration of the residency status of Australians going overseas will be touched upon in a future newsletter.
Summary of differences in residential status
|Resident for tax purposes||Non-resident for tax purposes|
|Reduced tax rates at lower income levels||Pays tax on every dollar (no tax-free threshold)|
|Taxed on global income||Only taxed on Australian sourced income|
|Pays 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 45% if no overseas address (or TFN) provided|
|Liable for capital gains tax (CGT) on worldwide assets||CGT only on “taxable Australian property” (most commonly real property)|
|Tax offsets available and allowances such as LAFHA||No offsets, typically no LAFHA (limited exceptions for temporary residents)|
If you have recently arrived in Australia, the ATO’s online Are you a Resident? tool will help you find out if you are a resident for tax purposes.
If you’ve been living in Australia and have recently left (or intend to leave soon), check the Determination of Residency – leaving Australia tool at the ATO website. This tool will help you consider your liability to pay Australian personal tax on your income.