The tests for tax residency in Australia can be complicated. This is particularly in marginal cases where an individual has started living and working overseas but has connections with Australia.
Unfortunately, the consequences for incorrectly self-assessing as a non-resident can be significant. This is not limited to Australian tax on employment income, but will also commonly extend to capital gains tax consequences. In this article, we set out the most common mistakes to watch out for.
Common mistake #1 – I was in Australia for less than 183 days so I am a non-resident
We commonly see individuals return to Australia for (say) 100 days, 120 days, 140 days in an income year, and assert that they are non-residents because they were in Australia for less than 183 days.
There are four tests for being a resident under the Australian tax legislation.
- The first is where a person resides in Australia, based on the ordinary meaning of the word resides.
- The second is where a person has their domicile in Australia, and does not have their permanent place of abode outside Australia.
- The third is where a person is in Australia for at least half of the income year (183 days). There is an exception to this test where the person has their usual place of abode outside Australia and does not intend to take up residence in Australia.
- The fourth is where a person or their spouse is a member of particular Commonwealth superannuation schemes (the PSS and CSS).
A person will be a tax resident of Australia if they satisfy any one test.
The effect is that it is possible to spend less than 183 days in Australia in an income year, and still be a tax resident of Australia under one of the other tests – particularly the first test.
Common mistake #2 – I have started residing overseas so I am a non-resident of Australia for tax purposes
The case law is clear that a person can reside in more than one place at the same time.
The ordinary meaning of the word resides does not look at whether a person has started residing in a foreign country, but whether the person has stopped residing in Australia.
Resides means where a person has a settled or usual abode and where they live in a particular place.
To determine whether a person has stopped residing in Australia, the relevant considerations are whether they have:
- a continuity of association with a place in Australia – for example, the family home;
- an intention to return to that place; and
- an attitude that the place remains as a home.
If a person has lived in Australia, and then accepts a job offer overseas, but their spouse and dependent children continue to live in the family home in Australia, and the person regularly returns to Australia on their time off, there is a significant risk that the individual living and working overseas will continue to reside in Australia – regardless of whether they have started to reside outside Australia.
Common mistake #3 – I am a tax resident or permanent resident of a foreign country so I am a non-resident of Australia
It is important not to confuse a person’s right to stay or reside in a country with their tax residency status.
The immigration and tax law tests are generally determined by different legislation, often with different definitions.
This is particularly important if the person is relying on the application of a double tax agreement (DTA). In those cases, the person will need to be a tax resident of the foreign country – which may have nothing to do with their immigration status.
What about double tax agreements?
There may be circumstances where an individual is both a tax resident of Australia and a tax resident of a foreign country under the respective domestic laws.
Australia has double tax agreements with a number of countries, and those double tax agreements will commonly include a residency article that deems an individual to be a tax resident of one country or the other, based on a series of tie-breaker tests.
The tie-breaker tests, and the order that they appear, vary between DTAs, so it is important to check the actual DTA in question.
If the DTA deems a person to be a tax resident of the foreign country, and not Australia, it is then important to check whether the particular type of income is deemed to be taxable only in the foreign country, or whether Australia also has rights to tax that income (or capital gains).
Need help?
Practically, there are two important issues.
- The first is understanding the correct legal position. This is so the person can make informed decisions as to how they lead their life – as those decisions may have a material impact on their tax residency. A person may not, for example, accept that job in the Middle East if they are going to be taxed on their employment income at Australian marginal tax rates.
- The second is understanding the type of evidence and documents a non-resident will need to keep to substantiate their non-residency. The taxpayer has the burden of proving their position is correct in the event of an ATO review or audit. It is important to collect evidence while the person is living and working overseas, as it can be difficult to try and collect evidence at a later date.
Please contact a member of our team or send us a confidential enquiry if you would like our help.
