Non-Residency – The Tests and the Impacts on Your Taxes
Many Australians will, from time to time, cease calling Australia home and reside overseas. Such a move can be a complex project with many moving parts. One aspect of ceasing residency in Australia that is often overlooked or poorly managed is the impact that non-residency has on the ownership of assets and the taxation of income.
For some Australians with family, work, or business relationships overseas, there may be times when they are spending an extended amount of time away from Australia. In simple terms – If you are a resident of Australia for tax purposes, you are taxed on your worldwide income. If you are a non-resident of Australia, you are taxed only on your Australian Sourced income. The ATO typically want to treat people as Australian Residents – so they can tax all revenue.
There are several factors that need to be considered when assessing residency. There may be situations where the tax impact of being a resident vs non-resident can have significantly different tax consequences.
The Resides Test
Under this test you are determined to be a resident if you reside in Australia according to the ordinary meaning of “reside” which is - to dwell permanently, or for a considerable time, to have a settled or usual abode, and to live in a particular place. Common ways to show you meet this definition would be proof of employment, business operations, or family relationships.
The Domicile Test
You will meet this test if your “domicile” meaning a place that is considered to be your permanent residence by law is located in Australia. There must be a clear distinction as to what is permanent as to being temporary or a transition. Some factors used to determine if this test is met are the length of overseas stay, the existence of an established home overseas, and family or financial ties.
The 183 Day Test
You will a resident for tax purposes under this test if you spend 183 days or more in Australia. Your presence in Australia does not need to be continuous, all days you are present in Australia will be counted toward the 183 minimum. Also, note that the 183 days are counted across the financial year and not the calendar year.
The Commonwealth Super Fund Test
This test is only relevant to certain Australian Government employees who are eligible to contribute to the Public Sector Superannuation Scheme (PSS) or the Commonwealth Superannuation Scheme (CSS).
What does the ATO look when assessing tests?
When determining whether you have met one of the above tests, the ATO won’t necessarily look at one thing but a combination of things together. Some of these things include:
• Travel intentions – have you booked a return flight for example
• Is the whole family with you
• Have you left your home empty, or have you leased it out?
• Are you still employed in Australia?
• Where is your mail going?
• Are you still registered for sporting or social clubs in Australia?
• What did you put on your immigration forms when departing Australia?
• Have you opened any bank accounts overseas?
• Are the kids still enrolled in school in Australia?
It is important to understand that one of these things on their own will most likely not decide your residency for tax purposes but combined may show the real intention.
Pros and Cons
Like all things, there are pros and cons when it comes to residency for tax purposes and the mix will depend on personal circumstances. To determine where you sit it is important that you reach out to your Accountant to help determine what the tax outcome might look like.
Meeting residency test
Depending on the country where you may be residing, Australian tax rates may be better (very unlikely, but possible), so having to declare your income on an Australian Tax return may be more attractive. There are also Capital Gains tax benefits to be an Australian resent for tax purposes such as 50% CGT Discount, main residence exemption from CGT if you sell the family home.
Not meeting residency tests
As a non-resident, you only need to lodge an income tax return in Australia if you have income that is sourced in Australia such as salary and wages, business income, or Capital Gains on Land and Buildings. If you can’t meet a residency test, and you have this income then you will be taxed as a non-resident. On the plus side, if you don’t have this income then you can most likely take advantage of lower tax rates in another country. You can also avoid paying the Medicare levy.
Other occasions where it suits to be deemed a non-resident for tax purposes may be when working in a foreign country with low/nil local tax rates. It is absolutely critical that you take the necessary steps to break residency in cases such as this. There have been cases where an individual has gone to work overseas thinking they would be earning tax free cash – only to be hit with a shock from the ATO upon audit.
If you are planning to relocate overseas or are unsure if an overseas trip or visit may have an impact on your tax position in Australia, be sure to reach out to one of our taxation experts.