Ready to take the plunge?
So you have packed your bags, ready to go wherever work takes you. It might take you to countries that are a low tax jurisdiction, or you may be in a country that has similar taxes to Australia. Whether your employer has paid for all the accommodation or you are starting off with a new employer, all that you have to do is lock up and leave. However, when preparing to live the life of an expat, one of the most important question you need to ask is “Will I be an Australian tax resident?”
The question is important as it determines not only what is taxed but also how and where you are taxed. It is also a separate concept to visa/citizenship status. If you remain an Australian tax resident, your worldwide income from all sources is taxed under the Australian tax regime. More favourable tax rates apply to residents but capital gains tax applies to worldwide assets. Non-residents however, are only taxed on their Australian sourced income (some exemptions apply) though at a much less favourable tax rate (no tax free threshold). Capital gains for non-residents generally only applies to Australian real property (listed shares for instance, are exempted). Crucially, changes are proposed to the CGT main residence exemption that will significantly impact tax non-residents too.
How do you determine your tax residency?
Tax law contains four tests to assess your tax residency:
+ Residency test – if you “reside” in Australia, you are an Australian tax resident
+ Domicile test – if your domicile is in Australia then you are an Australian tax resident, unless your permanent place of abode is outside Australia.
+ 183 Day Test – if you are actually present in Australia for more than half of the income year , unless your ‘usual’ abode is outside Australia and you have no intention to
take up residency in Australia then you will be tax resident here
+ Superannuation test – Broadly speaking, Australian government employees working at Australian posts overseas are treated as Australian residents
Unfortunately, there is no one conclusive rule in determining your tax residency. It is dictated by your personal circumstances with all relevant facts having to be considered as no single factor is determinative. It is important to note that the concept of “residing” is very broad and can capture people who are not in Australia, in some cases for up to two years. A common misconception is that 183 days is a marker for residency, when it is simply one of 3 tests to extend the concept of who can be a tax resident. For instance, simply being away for 184 days will not make you a non-resident for tax.
Taxpayers can also be a resident in two places at once, in which case if there is a double tax agreement between the two countries which means there will be a tie-breaker test that usually examines the strongest family and economic ties to determine tax residency.
You may genuinely be a non-resident for tax purposes but have you administered all your affairs such as notifying all relevant government bodies and banks? Failure to properly assess and disclose your tax residency can have wide ranging implications and risks. Firstly, there is the risk of an ATO audit resulting in assessments being raised for tax shortfall, penalties and interest. Secondly, when you repatriate your hard-earned monies back into Australia; you may be asked by ATO to explain where the funds have come from and why it is not taxable income here.
In the last 12 months, the ATO has had a lot of success in challenging taxpayers’ residency status and this again highlights the importance of accurately assessing your tax residency and making sure your way of life is consistent with how you declare your tax residency status.