Am I an Australian tax resident? While this question may seem simple at first glance, the Australian Taxation Office (“ATO”) has ensured that it certainly is not always the case.
The ATO views residency differently to other agencies and it is not determined solely by your citizenship and the implications for those who inadvertently become tax residents can be very expensive.
To determine whether someone is a resident in Australia for taxation purposes (“tax resident”), a series of tests need to be applied:
The resides test is the primary test and looks at whether you ‘reside’ in Australia and is determined by your past and current behaviour, your intentions, location of assets, family, social and living arrangements among other factors.
If you do not pass the resides test, you may still be a tax resident if you pass any of the following statutory tests;
This test looks at where your permanent home is and also looks at similar factors to the resides test.
183 day test
If you are present in Australia for more than half of the income year, continuously or intermittently, you may be a tax resident unless:
You usual place of abode is outside Australia; and
You have no intention to take up residence here.
This is only applicable to current Commonwealth government employees.
The tests are self assessed and are a question of fact, therefore it is advisable to build a case based on clear evidence of your position, although the outcome may not always be definitive. We often hear clients say “but I am in Australia less than 183 days a year” and solely rely on this fact notwithstanding other factors point to them and their family residing in Australia.
Why does residency matter?
Your residency is used to determine two things:
1. Assessable income; and
2. The tax rates that will apply.
Tax non-residents are generally only assessed on income with an Australian source so foreign income is generally not assessable. There are also certain capital gains and other income subject to withholding tax or franking that are not assessable.
Tax residents are generally assessed on income from all sources, including worldwide income with some exceptions where double taxation agreements apply.
However, if you pass a residency test and you hold a temporary visa, you may be deemed to be a temporary tax resident. If you fall within this category, most of your foreign income and certain Australian sourced income will not be assessable. Temporary tax residents are taxed at tax resident rates.
The following table sets out the tax rates for tax residents for the 2015-2016 financial year:
The following table sets out the tax rates for tax non residents for the 2015-2016 financial year:
Not only do tax non residents miss out on the tax free threshold of $18,200, they are also taxed at a higher tax rate for the first $37,000 of assessable income. A tax non resident can pay up to $8,453 more in income tax on the same amount of assessable income as a tax resident. Non-residents also do not qualify for the General 50% CGT discount for new investments.
What happens when residency status changes?
When you become a tax resident (not a temporary tax resident), you are deemed to acquire your foreign assets at market value on the date the status changes. This value is then used when calculating future capital gains.
When ceasing to be a tax resident, you may be deemed to dispose certain Australian assets for the market value on the date of the status change, although there is an election to defer the capitals gains event.
More questions than answers?
If you’re a little confused now, we can assure you that you are not alone. Please feel free to contact our office if you have any questions regarding the above and we will be happy to assist.
DISCLAIMER: This article is intended to provide a general summary only and should not be relied on as a substitute for professional advice.