Determining your Australian Tax residency status

A taxpayer’s residence and source of income are two key principles in determining the tax liability for Australian Income Tax. The definition of a resident or a non-resident for tax purposes are not aligned with the concepts of citizenship or nationality. Residency for tax purposes is determined according to specific tests in tax legislation.

A resident for tax purposes is liable to pay tax in Australia on their worldwide assessable income whereas a non-resident is liable to pay tax in Australia only on their Australian-sourced income. It is therefore important to consult a tax advisor when you may be changing your residency status as this can have a large impact on your Australian tax liability.

An individual is a resident for Australian taxation purposes if they satisfy at least one of the following four tests:

• Resides in Australia – The primary test in determining residency. The ATO will determine the taxpayer’s behaviour for continuity, routine or habit consistent with someone living in Australia.
• Domicile in Australia – A person is taken to be a resident if the person lives in Australia and the individual circumstances indicate they have no permanent place of abode outside Australia. 
• 183-day test – A person resides in Australia for more than 183 days (halfof the year) unless the person’s “usual place of abode” is outside Australia and the person does not intend to take up residence in Australia. 
• Commonwealth Superannuation Scheme – A member of a Government Superannuation Scheme. 

Whether a person is a tax resident is a question of fact and degree and the ATO has released factors in determining residency status. Generally, whether you cease to be an Australian tax resident will rely on the intention to permanently live abroad with your spouse and children (if any) for a period of at least two years and your ties are minimised during that period. However you should obtain tax advice to confirm your position as each person’s circumstances are different. By way of illustration, even the ATO’s own online residency test often returns an “inconclusive” result.

Ceasing to be an Australian Tax Resident

If you intend to cease tax residency status, there are certain steps that should be taken to minimise the risk of being considered a tax resident in Australia such as notifying share registrars and financial institutions to withhold non-resident withholding tax on and interest or dividends, as well as notifying many other important authorities. Speak to your tax advisor at Azure Group when planning to cease non-resident status as the determination of residency can have a large impact on your Australian tax liability.

A “Capital Gains Tax event” will happen with an Australian resident becomes a non-resident. This deems a disposal of all CGT assets for market value at the time the individual ceases tax residency (but this does not apply to Australian taxable property or assets acquired prior to 20 September 1985). This means that even though the taxpayer has not actually disposed of the asset they will be liable to tax on the increase in value to the date they become a non-resident. However, the good news is that the taxpayer can elect to treat all their CGT assets as “taxable Australian property”, meaning all capital gains and capital losses are disregarded on ceasing to be an Austrailan tax resident. They will remain as “taxable Australian property” until the earlier of another CGT event or you become an Australian resident again. 

Once you have determined your Australian tax residence status, you may consider what sorts of income remain taxable in Australia and at what rates.

Australian Tax Liabilities:  Foreign Residents

Unlike Australian tax residents who are taxed on their worldwide income, foreign residents will only be taxed on their Australian sourced income. This will include but is not limited to income from rental properties, interest and dividends.  Whether or not the income is considered to be sourced from Australia is a question of fact and determined on the specific details of the receipt.

Recently, rules have changed around foreign residents and applying the 50% discount to their capital gain.  To apply the 50% CGT Discount for foreign residents, individuals must meet certain eligibility criteria for discounted capital gains on or after 8 May 2012.  There are strategies such as market valuations of CGT assets to apportion the CGT discount to take into account the capital gain you have that was accrued before 8 May 2012.

Changing main residences

If you become a non-resident, you may not have sold your Australian main residence. In such a situation you must consider how this impacts on the CGT main residence exemption for your home. For example, if you rent out your Australian residence while you are overseas, you may still have access to the main residence CGT exemption under the temporary absence extension allowing the taxpayer 6 years to apply the exemption. There are certain factors to consider in determining whether you are eligible so please ensure you speak to your Azure Group Tax Advisor.

Tax Strategies

Opportunities to reduce your Australian tax liabilities arise by:

• Making sure that foreign remuneration is paid to you before you arrive back in Australia.
• Investment income from foreign sources will not be taxable in Australia while you are not a tax resident of Australia. It therefore may be beneficial to crystallise your overseas investment income prior to resuming Australian tax residence.
• Consider the 6 year absence rule when moving overseas
• Obtain a market valuation on your assets when ceasing or becoming an Australian tax resident
• If you become a non-resident, it may in fact be tax-effective to elect the deemed disposal of some CGT assets if you have minimal gain at the time but expect there to be significant gains in the future whilst you are a non-resident. By taking the asset out of the Australian tax “net”, some future capital gains could be exempt from Australian tax.

Double Taxation Agreements

Australia has Double Taxation Agreements with many countries including China for the purpose of:

• Eliminating double taxation by exempting income from tax in one country, or allowing a country to credit tax paid in the other country against its own liability.
• Determining which country has the right to tax income or gains.
• Restricting withholding tax applicable in one country when certain types of income are paid to residents of the other country.
• Determining which country an individual is a tax resident of when both countries claim that individual is a resident of their country.

No tax advice around residency is complete without an analysis of the DTA.

Tax and Withholding Rates

Foreign Resident Tax Rates 2014

If you need to speak to your tax advisor about your personal situation please contact us at ourteam@azuregroup.com.au. 

This article is intended to provide general information only, and is not to be regarded as legal or financial advice. The content is based on current facts, circumstances, and assumptions, and its accuracy may be affected by changes in laws, regulations, or market conditions.  Accordingly, neither Azure Group Pty Ltd nor any member or employee of Azure Group or associated entities, undertakes responsibility arising in any way whatsoever to any persons in respect of this alert or any error or omissions herein, arising through negligence or otherwise howsoever caused. Readers are advised to consult with qualified professionals for advice specific to their situation before taking any action.