Introduction to Australian Tax Residency
What follows below is a summary of Australia's current approach to determining an individual's tax residency - but it important to appreciate that the Australian Government indicated in 2021 that it would, "replace the individual tax residency rules with a new, modernised framework".
The intention of the new framework is to include a simple ‘bright line’ test — a person who is physically present in Australia for 183 days or more in any income year will be an Australian tax resident. Individuals who do not meet the primary test will be subject to secondary tests that depend on a combination of physical presence and measurable, objective criteria.
The Government indicated that the new tax residency tests would have, "effect from the first income year after the date of Royal Assent of the enabling legislation". Currently, the earliest date on which the new rules could come into effect is July 1, 2023, but we regard a later date, perhaps July 1, 2024, as now far more probable.
We have allocated a separate page to considering the detailed impact of the New Tax Residency Rules and developed a New Tax Residency Rules Flowchart to illustrate how it would apply in practice.
The following is a summary of the Current Tax Residency Tests applicable in Australia.
In general, although it is stressed that any assessment of tax residency is very dependent on individual circumstances, most Australians who leave the country with their immediate family with the intention of residing outside the country for two or more years and establishing a home overseas are likely to be treated as non-resident from the date of departure. Note that, very recently, we have seen the ATO begin to accept that an individual may become non-resident even if their spouse or partner remains in Australia, but this needs particular advice.
That means that expatriates will not be liable for Australian tax on their offshore income, but remain liable for Australian tax on their Australian sourced income (e.g. rental income). Clarity with respect to your tax residency is a matter of utmost importance - particularly if you are moving to a low or no income tax regime - and you should seek professional advice before moving overseas and indeed signing any employment contract.
Resuming Tax Residency in Australia
Once your overseas assignment is over and you decide to return home, not only are you are coming home to family and friends but you are also coming home to a complex taxation system. There are some important issues to bear in mind, and ideally address, before you return to Australia.
When you return to Australia with the intention of staying permanently you will generally be treated as a resident for tax purposes from the date of your return. This means that you will become subject to tax on your worldwide income and liable to capital gains tax on the sale of assets, no matter where they are located. In addition, there are some special rules associated with the application of Capital Gains Tax (CGT) and the taxation of pension benefits.
Current Tests of Tax Residency
As we mention above, tax residency can be a complicated area and any determination is very dependent on an individual's personal circumstances. However, we cannot stress enough the importance of clarity around the issue of residency and a failure to address this issue can prove to be an exceptionally expensive oversight. We very generally cover the tests of residency below but, as mentioned above, a review of tax residency is currently underway.
In short, an individual is primarily a resident of Australia for taxation purposes if he or she resides in Australia within the ordinary meaning of the word "resides". However, residence in the normal sense is quite different from the notions of domicile and nationality. For example, a taxpayer may be held to be resident in Australia, "even though he lived permanently abroad, provided he visited Australia as part of the regular order of his life."
A person need not "intend to remain permanently in a place" to be found to reside there, but it seems that where the relative length or shortness of their stay in Australia is not decisive, the circumstances in which the person went and stayed have to be considered. The Tax Office treats every case on its own particular merits.
Some common situations, and the Australian Tax Office's (ATO), approach in terms of residency are covered in the table below:
|If you...||Then you...|
There are four tests of residency contained within the definition of 'resident' in subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA). They are alternative tests in the sense that even if an individual is not a “resident” according to ordinary concepts (see a) below) within the common definition then they may fall within one of the other tests. The four tests for residency are:
- Residency – the “resides” test
- Residency – the “domicile” test
- The 183 day rule, and
- The Superannuation test
The flowchart below provides a general overview of the tax residency tests and then we explore them individually in more detail below.
A. Residency according to "ordinary concepts"
This test provides that whether a person resides in Australia is a question of fact that depends on all the circumstances of each case, with the following factors to be considered:
- Whether personal effects are kept in Australia or in the country of origin.
- The extent to which any assets or bank accounts are acquired or maintained in Australia and in the country of origin.
- Whether a migrant has commenced or established a business in Australia.
B. The domicile test
An individual is a resident of Australia under the domicile test if he or she has a domicile in Australia unless the Commissioner is satisfied that the person's permanent place of abode is outside Australia. Under the Domicile Act 1982 , a person acquires a domicile of choice in Australia if the person intends to make his or her home indefinitely in Australia. The domicile test is discussed in Taxation Ruling IT 2650. Domicile generally means the country in which you were born unless you migrate to another country - then you adopt a "domicile of choice".
C. The 183 days test
A returning expatriate or new migrant having regard to their terms of their migrant visa, who is present in Australia for more than 183 days (continuously or intermittently) in a tax year is, generally speaking, considered a tax resident of Australia. This is unless the Commissioner is satisfied that their usual place of abode is outside Australia and that they do not intend to take up residence.
D. The Superannuation Test
This is a “statutory” test and an alternative to the ordinary tests of residence – that is to say that individual’s may be “resident” under this test when they do not in any way reside in Australia in the ordinary sense. In effect individuals are “deemed” to be residents if they, “are an eligible employee for the purpose of the Superannuation Act 1976 or is the spouse or a child under 16 years of age of such a person." This test applies mainly to people working for the Australian Government overseas.
It is possible for an individual to be tax resident in two countries concurrently, in other words to to have dual tax residency. For example, an overseas assignment may not be long enough to see you break Australian tax residency but long enough to have you considered a tax resident in your new country of residency - for example, a one year assignment to the UK or Japan.
In that situation, a Double Tax Agreement (DTA) may operate to determine each countries taxing rights and ensure that you do not, as the name of the agreement suggests, pay tax in both countries on the same income. Australia has entered into DTA's with a wide range of countries and the treaties will prevail over local legislation to the extent that they are inconsistent. These treaties often follow certain models (e.g. the OECD model) but there can be peculiarities and individual advice will often be required for expatriates in areas such as pensions and capital gains.
The Harding Case - An important Residency Case - In Summary
As we discuss above, part of becoming non-resident involves an individual satisfying the requirement that they have established a "permanent place of abode outside Australia". The Federal Court, in a decision handed down in June 2018, provided some additional background in terms of this requirement, but generated some wider concern that it was now harder to establish non-residency. We have included this case as an illustration of the potential complexity in this area and why appropriate advice is often useful.
Prior to his return to Australia with his family in 2006 Mr Harding had worked in the Middle East for 15-16 years. In 2009 he took up a position in Saudi Arabia and commenced to occupy a fully furnished two bedroom apartment in Bahrain. The intention was that his wife and children would remain in the family home in Australia until the middle child finished schooling, whereupon the family would move to Bahrain in 2011. However, in 2011 his wife chose to remain in Australia and they separated shortly afterwards, with Mr. Harding moved to a smaller furnished apartment within the same building. The question was and whether Mr Harding was a non-resident for the 2011 year - whether he had ceased to reside in Australia and established a permanent place of abode outside Australia.
In short, the court found that Mr Harding's fully furnished overseas apartment did not satisfy the permanent place of abode test - despite Mr Harding having spent six years within the apartment complex. The fact that Mr Harding's intention was to live in the property only until such time as he could buy a larger house was considered significant by the court and indicative of the fact that the combination was temporary in nature - the court noting that by its character, fully furnished accommodation is often of a temporary or transitional nature. Significant weight was also placed in the fact that Mr Harding did not use the apartment as a mailing address, or make any significant acquisitions in relation to the apartment. Following this case, the nature of accommodation in expatriate's host country now becomes a more critical issue. Whilst the court acknowledged that fully furnished accommodation could amount to a permanent place of abode, it is likely that future advice will indicate that this type of accommodation should be very temporary in nature, with expatriates preferably utilising non-furnished accommodation filled with furniture acquired locally or shipped to the location, and being responsible for individual utility costs.
On the other hand, the court adopted a more modern and holistic approach to the issue of whether Mr Harding "resided" in Australia during the period in question. The fact that Mr Harding's wife and family remained in Australia and that he visited on a regular and prolonged basis would typically indicate a "continuing connection with Australia" and consequently a determination that he continued to reside in Australia. However, the court was satisfied that Mr Harding had a clear intention not to return to Australia following his departure in 2009, evidenced by his ongoing connection to the Middle East and career aspirations, and that therefore he did not reside in Australia from the time of his departure.
Finally, on Appeal
In February 2019, the Full Federal Court of Australia allowed Mr Harding's appeal against the earlier judgement above. The court overturned the earlier decision which had held Mr Harding remained a tax resident of Australia because his accommodation overseas was "not permanent enough" and therefore had not established a "permanent place of abode" outside Australia.
In their joint decision, Davies and Stewart JJ considered that the phrase “place of abode” is not a reference only to a person’s specific house or flat or other dwelling. If that had been Parliament’s intention it would have used the phrase “permanent abode” rather than “permanent place of abode. Consequently, they accepted Mr Harding's argument that he had established a permanent place of abode in Bahrain.
For those looking for more background in terms of how tax residency is determined, the ATO has recently released a Draft Taxation Ruling, "Income tax: residency tests for individuals", which provides some guidance on how tax residency will be assessed. The Ruling replaces longstanding guidance provided in IT 2650 and TR 98/17, effectively combining the content and updating it in terms of recent case law. We have made the Ruling available below but stress that assessments in relation to residency are usually complex in practice and require professional insight. Note that a Final Ruling is expected in May 2023.
Income tax: residency tests for individuals: Draft Taxation Ruling: TR2022/D2
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