Are you an Australian tax resident? Are you sure?
Sally Preston
As tax specialists, we are often asked to consider whether an individual should be treated as a tax resident of Australia. Particularly when an Australian moves overseas to take up a job in another country.
Why is this an important question? Well Australian tax residents are taxed in Australia on their worldwide income. If the person is not a resident of Australia, then they are only taxed on Australian sourced income. So, it can have an important impact on Australian tax reporting requirements and ultimately the amount of tax paid – both in Australia and overseas.
In this article, we will give you an overview of the law, plus the ATO view on the interpretation of the law as well as some examples.
In 2023, the ATO released a tax ruling (TR 2023/1) which updated their view on residency for individuals. It replaced prior rulings, and we refer to this in this article when we discuss the factors for you to consider.
The article will not be covering other relevant considerations such as double tax agreements; what happens if you are a tax resident in two or more countries or the residency of companies or trusts. We are just going to give you an overview of how to determine whether you may or may not be an Australian resident for tax purposes.
The law
The definition of 'resident of Australia' has 4 alternative tests. You are a resident if you meet any one (or more) of the tests but a non-resident if you do not meet any of the tests.
An individual is an Australian resident for tax purposes if they pass one of four distinctive tests:
1. Reside in Australia
2. Domicile in Australia unless a permanent place of abode outside Australia
3. 183 days in Australia unless a usual place of abode outside Australia
4. Member of a Commonwealth superannuation scheme
Residency under the first three (3) tests is determined by considering the relevant facts and circumstances. No single fact determines the outcome which factors count more varies from case to case. This is what makes determining whether you are an Australian resident such a difficult thing – it depends on all the factors specific to you.
The tests
Resides test
This is the primary test of tax residency. If you reside in Australia, you're an Australian resident for tax purposes and you don't need to apply any of the other residency tests.
Some of the factors that can be used to determine residency status include:
physical presence
intention and purpose
family
business or employment ties
maintenance and location of assets
social and living arrangements.
Physical presence
The period of physical presence or length of time in Australia is an important factor when considering whether you reside here, but it is not a determinative factor. Importantly, there is a distinction between 'staying' in Australia and residing in it.
Some points to consider:
Even if the period you are in Australia spans two income years the overall time is what may be considered.
Limitations on your visa may be relevant if the Visa only allows you to stay for a short period of time.
Generally, being in Australia one off for less than 6 months will mean you are unlikely to be a resident under this rule.
Also, if you have previously spent a long time in Australia despite only spending short periods in Australia in an income year, the shorter period of physical presence in Australia is less relevant.
Intention and purpose
A resident will usually have an intention to treat Australia, or a place within Australia, as a home at least for the time being, though not necessarily forever.
Some points to consider:
Your purpose, such as pre-arranged long-term employment or a course of education, may support an intention to reside in Australia
Residency is not established merely by asserting an intention to live in Australia permanently. Similarly, residency is not shed when departing Australia, merely by asserting an intention to never live in Australia again.
Disclosures on passenger cards and visa documents may be considered relevant.
There may be a transition period. For example, you may hold a longer term intention to ultimately live overseas with your family, but circumstances mean your family will remain living in Australia and you will split your time between working overseas and regularly returning to Australia to live with them until those circumstances change. In such a case, you might remain a resident until the relocation is complete.
Where your intention changes and you stay longer in Australia than initially intended, the facts surrounding the entire stay in Australia must be considered, not merely the original intended length of stay.
Family
Your behaviour relevantly includes the way you live as part of the regular order of your life. If the way you live reflects a degree of continuity, routine or habit, coupled with other factors such as intention, it may be consistent with residing in Australia.
Some points to consider:
You may regard yourself as residing in or as a permanent resident in your home country or may be regarded as residents of your home country for its tax purposes. However, your behaviour while in Australia may mean you are also residing here for Australian income tax purposes.
Where you take up long-term accommodation, employment, enrol children in school and take part in regular extracurricular activities, this would demonstrate behaviour consistent with residing here, particularly when coupled with other factors such as an intention to make your home here.
Business or employment ties
The presence (or absence) of your family may be considered to indicate the nature of your connection to Australia. Further, the term and type of your employment or business will also be relevant, particularly as these will usually be accompanied by other factors such as physical presence and assets in Australia.
Some points to consider:
Generally speaking, working overseas but returning to Australia at intervals to an established family and social life will often mean you are still residing in Australia. This is the case even if you spend more time overseas than in Australia in any given income year.
This can be contrasted with a situation where you leave Australia to work overseas and shift your life overseas. For example, if you, and your family (if you have one), relocate overseas for work for some years establishing a permanent base and a routine overseas consistent with 'living' there, returning only occasionally for short stays while taking leave from work, then, depending on other facts and circumstances, you might not be a resident under the ordinary concepts test.
Maintenance and location of assets
Living in a property in Australia that you own suggests the establishment of a home in Australia consistent with residing here. Other assets in Australia, such as motor vehicles, superannuation investments and bank accounts, also assist with establishing this.
Social and living arrangements
Social and living arrangements may indicate you are a resident, particularly when coupled with other factors. These arrangements may include joining sporting or community organisations, enrolling children in school, redirecting mail to Australia or committing to a residential lease.
Domicile test
You are an Australian resident if your domicile (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 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).
Some points to consider:
You always have a domicile and you can only have one domicile at any point in time.
You cannot abandon a domicile of origin without a replacement.
To acquire a domicile of choice you must have both a lawful physical presence in a foreign country and an intention to make your home indefinitely in that country.
If you have an Australian domicile and you are living outside Australia, you will retain your Australian domicile if you intend to return to Australia on a clearly foreseen and reasonably anticipated contingency (for example, at the end of your employment contract), even if you stay overseas for a substantial period. This is because you lack the necessary intention to settle in that country indefinitely.
On the other hand, if you only have in mind a vague possibility of returning to Australia, such as making a fortune or some sentiment about dying in the land of your forebears, such a state of mind is consistent with the intention required by law to acquire a domicile of choice in the foreign country.
An Australian-domiciled person is not a resident where the ATO is satisfied that the person's 'permanent place of abode' is outside Australia. This will occur where:
You have definitely abandoned your residency in Australia, and
commenced living permanently overseas.
Relevant factors as to whether your permanent place of abode is overseas include:
Length of overseas stay
o The longer you stay in any one particular place, the more permanent it is likely to be.
o Generally, a departure from Australia with an intention to return to Australia after a finite period would not result in you having your permanent place of abode overseas.
o If you take up an employment opportunity overseas or commence living overseas with no fixed timeframe in mind but as a tentative venture, you are unlikely to have your permanent place of abode overseas.
o If you depart for an unspecified or substantial period, pack up your home in Australia, set up a home in a foreign country and live there with your family returning only occasionally such as for cultural events, special celebrations or annual leave, you are likely to meet the description of someone who has abandoned Australia as a place of residency and commenced living permanently overseas. This is despite the fact that you may at some point intend to return to Australia.
o Two (2) years is considered to be a substantial period of time. What this means is that if your intended length of stay is less than 2 years, you are unlikely to be able to establish that your permanent place of abode is outside of Australia. Whether a stay of precisely 2 years or longer means you fall within the proviso will depend on the circumstances. The critical question is whether a person has in fact abandoned Australian residency and commenced to live in a permanent way overseas.
Nature of accommodation
o The type of accommodation and conditions upon which it is occupied will be relevant in ascertaining whether any place of abode overseas is your permanent place of abode.
o Where you retain your home but lease it out to an arm's length party, the fact that you still own the home will be of less significance.
o Similarly, where you retain your home but only so your family can remain living in it while they make arrangements to join you overseas shortly, its retention will be less significant.
o The home in Australia will assume more significance where it is kept available for your use, you do in fact return to it and the accommodation overseas is consistent with a transitory stay.
Durability of association
o The relative strength of the connections established and maintained overseas and of those retained in Australia will be relevant.
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. unless it is established that your ‘usual place of abode’ is outside Australia and you have no intention of taking up residence here.
In applying the 183-day test, it does not matter whether your presence in Australia is continuous or intermittent; rather, the total number of days in Australia are added together. For administrative ease, presence in Australia for part of a day counts as a whole day.
Relevant factors in considering whether your usual place of abode is outside Australia include:
where you lived before and after your time in Australia
the availability of your overseas dwelling to you (if you have one) while you were in Australia
where your possessions and assets are
the type of visa you have and the length of your intended stay
your purpose of coming to Australia, and
the travel arrangements you made, including whether you departed from and returned to the same place outside Australia.
The Commonwealth superannuation test
This test applies to Australian Government employees working at Australian posts overseas and who are members of the CSS or PSS schemes. It does not apply to members of the PSSAP scheme. If this is the case, you (and your spouse and children under 16) are a resident of Australia regardless of any other factors.
Examples
The Tax Ruling provides some examples of tax residency. Below we summarise some of these that relate to the situation where you have been an Australian tax resident and relocate overseas.
Example 1
In one example, the taxpayer decided to start her own business overseas. The key facts given are summarised as:
the person set up business overseas
The intention was to live overseas in the country
There were no set plans to return to Australia
The person only maintains a bank account and superannuation in Australia and sells or gifts her possessions to her adult children
One of her adult children will live in the family home rent-free. SThe person is accompanied by her spouse who runs a global consulting business from their home.
A home is purchased overseas
They only return to Australia for key family events
Conclusion – the person is no longer an Australian tax resident from the date of departure. They are also not a resident under the domicile test because, although domiciled in Australia, she has abandoned residency in Australia and commenced living permanently overseas.
Example 2
In another example, the summarised facts are:
The person was transferred by his Australian employer overseas for a temporary work assignment of 2 years
They Intend to return to Australia
The family accompanies the taxpayer overseas but then return to Australia as their visit was only intended to be temporary
The taxpayer spends as much time in Australia as he can
He lives in a serviced apartment provided by his employer, maintains Australian bank accounts and pays into Australian super
He makes no investment overseas and remits all excess income back to Australia
Conclusion – resident of Australia under the resides test as he has maintained his connection with Australia. He is also considered a resident under the domicile test as he has a domicile in Australia does not have a permanent place of abode outside Australia.
Example 3
Another example uses a similar set of facts but in this case, the taxpayer's marriage breaks down whilst overseas and so he looks to make the overseas country his home:
He takes up a permanent role overseas
Sells his Australian car and home
Once the Australian house settles he moves out of the employer provided accommodation and purchases an apartment overseas
He returns only to Australia twice in two years – once to collect his belongings and the other for the death of a parent
He ultimately decides to return to Australia and take on running the family business after his father’s death
Conclusion – he ceased to be an Australian resident under the resides test once his intention regarding Australia changed and his connections to Australia were severed. He resumed on making the decision to stay in Australia.
Hopefully this has provided an overview of the tax residency tests and factors to consider. The one take away though is that every circumstance is different, so get advice to your specific circumstances and if in doubt, get help with applying to the ATO for a private binding ruling, that is specific to you and your circumstances.