As tax agents in Melbourne Australia, we received a lot of questions from clients about their tax residency and associated income tax implications.
Whether you are an Australian resident for tax purpose will have significantly implication on the amount of income tax you need to pay in Australia.
As a general, Australian residents for tax purpose are taxed on their world-wide income, whereas non tax residents are only subject to income tax on their Australian source income at higher tax rates (including rental income from rental properties in Australia).
TIPS! Non-tax residents can potentially have favourable tax rates for dividends, interest or royalties income from Australia. They are only subject to withholding tax on gross income as a final tax (normally 10%).
WARNING! Residency for tax purposes may be different to your residency status determined by the Department of Immigration. For example, you:
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- can be an Australian resident for tax purposes without being an Australian citizen or permanent resident
- may have a visa to enter Australia, but are not an Australian resident for tax purposes.
How to work out your residency status?
There are one primary test and three statutory tests used by the ATO to determine if you are an Australian resident for tax purposes.
Step 1- Resides test (primary)
Under this test, you are a resident of Australia if you reside in Australia according to the ordinary meaning of ‘reside’ – which means ‘to dwell permanently, or for considerable time, to have a settled or usual abode, and to live in a particular place’.
Some of the factors that can be used to determine residency status include physical presence, intention and purpose, family and business/ employment ties, maintenance and location of assets, social and living arrangements.
If you meet the resides test in Australia, you are considered an Australian resident for tax purposes and you don’t need to apply any of the other residency tests.
Step 2 – the three statutory tests
If you don’t satisfy the ‘resides test’ above in Step 1, you’ll still be considered an Australian resident if you satisfy one of three statutory tests.
1. Domicile Test
You’re an Australian resident if your domicile (broadly, the place that is your permanent home) is in Australia, unless we are satisfied that your permanent place of abode is outside Australia.
A domicile is a place that is considered to be your permanent home by law. For example, it may be a domicile by origin (where you were born) or by choice (where you have changed your home with the intent of making it permanent).
NOTE: In recent case Harding v Commissioner of Taxation, the Full Federal Court views that a permanent place of abode need not be the same particular dwelling (that is, the same apartment, unit or house) in a foreign country.
2. 183-day test
This test only applies to individuals arriving in Australia. You will be a resident under this test if you’re actually present in Australia for more than half the income year, whether continuously or with breaks.
You may be said to have a constructive residence in Australia, unless it can be established that your usual place of abode is outside Australia and you have no intention of taking up residence here. If you have already taken up residence in Australia, this test will not generally apply regardless of the number of days you spend overseas.
3. The Commonwealth superannuation test
This test only applies to certain Australian Government employees who are eligible to contribute to the Public Sector Superannuation Scheme (PSS) or the Commonwealth Superannuation Scheme (CSS). If this is the case, you (and your spouse and children under 16) are considered to be a resident of Australia regardless of any other factors.
CLOUD8 RECOMMENDATIONS AND SOLUTIONS
Your tax residency may have significant tax implications, not only for income tax, but it can also impact the capital gain tax (CGT) outcome of your home and rental property investments.
By structuring and planning ahead, we can minimum your further tax payable and optimise the best tax outcome for your investments.
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