International Tax Accountant in Fremantle, Nedlands and Perth
International Tax | Australian tax Residency
Navigating the intricacies of tax residency is crucial for individuals who live and earn income from both Australia and another country concurrently, as it dictates their taxation obligations. Determining tax residency in the globalised economy has become more important than before as employers often relocate their employees to other countries. Many employees may not even realise if their employment global reallocation can affect their tax residency. Assessing your tax residency incorrectly can result in incorrect reporting of income, such as foreign income, capital gains tax and income tax liabilities.
Australian tax residents are taxed on their worldwide income, and non-residents are only taxed on income derived from Australian sources. However, special rules apply to New Zealanders and temporary residents.
In this article, we will discuss the tax residency tests based on the ATO’s latest interpretation of individual tax residency in TR 2023/1. Understanding the ATO’s views will help you understand how the ATO is likely to determine your tax residency.
Australian tax resident
There is a misconception that a person’s residency under the Immigration Act determines their tax residency in Australia. A tax residency in Australia is based on the Australian Income Tax Laws. Therefore, having a temporary visa does not mean the person will never be treated as an Australian tax resident. A temporary resident is usually not a tax resident of Australia. However, in certain cases, it can be considered an Australian tax resident.
A person is an Australian tax resident under section 6 of the Income Tax Assessment Act 1936 if the person satisfies any one (or more) of the following residency tests:
1. Ordinary concepts test
The person resides in Australia.
2. Domicile test
The person has a domicile in Australia unless the Commissioner is satisfied that person’s permanent place of abode is outside Australia.
3. 183 day test
The person has been in Australia for at least half of the income year, continuously or intermittently, unless the person’s usual place of abode is outside Australia and the person does not intend to take up residence in Australia.
4. Commonwealth superannuation fund test
The person is a member, an eligible employee, or the spouse, or a child under 16 of the member or eligible employee of the superannuation scheme established by deed under the Superannuation Act 1990.
If a person does not satisfy any of the above Australian tax residency tests, he or she will be treated as a non-resident of Australia.
The residency test is subjective because each test requires an assessment of all the facts and circumstances in relation to the tested person, and no single factor is determinative. Furthermore, the weight given to each factor varies based on each individual case. Therefore, determining a person’s tax residency can be complex in some cases as it is subjective, and there are no ‘bright-line rules’.
The ordinary concepts test is generally used to determine the residency of a person who is physically present in Australia. The domicile test and Commonwealth super fund tests are generally used to assess the residency of Australian residents who are not currently present in Australia, or present only intermittently during the income year. The 183-day test is usually used to determine the residency of an individual who comes to Australia.
We will delve into each of the tests in the next section.
1. Ordinary Concepts Test
The ordinary concept test looks at whether a person resides in Australia. As the meaning of ‘reside’ is not defined in the Australian income tax law, its interpretation is based on ordinary meaning, which is ‘to dwell permanently or for a considerable time, to have one’s settled or usual abode, to live, in or at a particular place’ (ATO TR 2023/1 para 19).
This means a person is an Australian tax resident under the Ordinary Concepts Test if the person usually lives and settles in Australia and their presence in Australia is not temporary or casual. In assessing the Australian residency of a person under this ordinary concept test, the following factors must be considered:
- length of time of physical presence in Australia
- intention and purpose of presence in Australia
- behaviour while in Australia
- family, and business or employment ties
- maintenance and location of assets; and
- social and living arrangements
Since the above factors are interconnected, they all must be considered when assessing whether a person resides in Australia. However, each of the above factors is not necessarily decisive, and the weight of each factor may vary depending on each individual case.
In establishing whether a person resides in Australia and is, therefore, an Australian tax resident, the test looks at whether the person still maintains connections with Australia. The test does not require Australia to be the dominant residence of an individual who lives in two countries or has a physical presence in Australia.
In the case of an individual who intends to leave Australia and cease to be an Australian tax resident, they will need to demonstrate that they have severed their connections with Australia. Becoming a resident of another country does not necessarily mean that they cease to be an Australian tax resident if they still maintain their connections with Australia.
Period of physical presence in Australia
When assessing whether a person resides in Australia, the length of time a person is physically present in Australia is an important factor, even though it may not be determinative. The test looks beyond merely being present in Australia. It requires the presence in Australia to have the element of connectivity with Australia, which is demonstrated by the behaviour of the person. The person’s presence in Australia must be consistent with residing in Australia.
The ATO will also consider any limitations imposed by visas in assessing whether a person resides in Australia. For example, a short-term visa holder is unlikely to establish a sufficient connection with Australia during their short visit.
Intention and purpose of presence
Intention is also an important element in determining whether a person resides in Australia, even though it is not determinative. In determining a person’s intention to reside in Australia, the ATO will consider the intention and the circumstances, observable factors, behaviours, and contemporaneous statements of the intent. The ATO will also consider the individual’s main purpose, transition period and changes of intention. In verifying the intent, the ATO may check the passenger cards and visa documents.
This means it is not sufficient to assert that you intend to leave Australia permanently before leaving Australia in order to cease being an Australian tax resident.
Behaviour while in Australia
In assessing whether a person resides in Australia, the ATO also looks at whether the person’s behaviour over a considerable time demonstrates behaviour consistent with residing in Australia in terms of continuity, routine, and intention of residing in Australia. This can be indicated by the nature of accommodation, whether the individual is accompanied by his family and children, where their children go to school and the involvement in regular extracurricular activities.
For example, an individual who is a resident of their home country and maintains a house in their own country may assume they are a non-resident of Australia. However, the individual may be considered an Australian tax resident if their behaviour is consistent with residing in Australia, if they are accompanied by their family, if their children attend school in Australia, and if they are involved in social activities while they live in Australia.
Family, and business or employment ties
In deciding whether a person resides in Australia, the ATO also examines the location of a person’s family, business, or employment ties. The degree of a person’s ties with Australia is stronger with the presence of family in Australia. Similarly, the terms and types of employment or business associations in Australia indicate whether the person resides in Australia.
In the case of an Australian resident who works overseas and returns to Australia to visit their family, this indicates that the person still maintains family ties with Australia.
Maintenance and location of assets
The location of a person’s assets, such as bank accounts, investments, and motor vehicles, is examined to determine their connectivity with Australia. The ATO will also consider the significance of the assets and why they were acquired and maintained by a taxpayer.
Social and living arrangements
The ATO will assess whether an individual’s social and living arrangements align with residing in Australia, and this can be demonstrated by being active in sporting or community organisations, enrolling children in school, redirecting mail to Australia or committing to a residential lease.
2. Domicile Test
The Domicile test determines where the domicile of a person. A person has a domicile in Australia, unless the ATO is satisfied that the person’s permanent place of abode is outside Australia.
A person can have a domicile under the following conditions:
- A person has a domicile of origin which is their birth country
- A person has a domicile of dependence if the person acquires someone else’s domicile due to the lack of capacity to acquire their own domicile. In the case of a minor, their domicile of dependence is the domicile of their parent.
- A person has a domicile of choice when a person acquires the domicile voluntarily.
A person can only have one domicile at any point in time, and that domicile continues until the person acquires a new domicile. This means you cannot abandon a domicile of origin without acquiring a new domicile.
Furthermore, to acquire a new domicile in another country, you must be allowed to live legally in the foreign country and intend to make it your home indefinitely. For example, getting a visa to migrate to a country reflects an intention to make a home indefinitely in that country.
Permanent place of abode
A person who has a domicile in Australia is not an Australian resident if the ATO is satisfied that the person’s permanent place of abode is outside Australia. A person is considered to have a permanent place of abode overseas where they:
- have abandoned their Australian residency; and
- commenced living permanently overseas
To establish a place of abode outside Australia, an individual needs to demonstrate that they live in a country outside Australia and that it is not temporary or transitory. The test is not satisfied by simply owning a dwelling outside Australia or living in that dwelling in a certain way.
In examining whether a taxpayer has a permanent place of abode outside Australia, the ATO will consider the following factors:
- Length of overseas stay
- The nature of the accommodation, i.e. permanent or temporary nature
- The connectivity with Australia
To form an opinion whether a taxpayer’s has a permanent place of abode outside Australia, the ATO will also take into account the taxpayer’s facts and circumstances such as intention, conduct, actions and objectives connections.
The place of abode outside Australia must be permanent. The judicial interpretation of permanence focuses on the nature and quality of use that the taxpayer makes of a particular place of abode overseas. The permanence looks beyond the taxpayer’s intention. This means merely having a place of abode outside Australia does not make an Australian a non-resident. Similarly, an individual who moves from country to country indicates a lack of permanent residence overseas and, therefore, will continue to be treated as an Australian tax resident.
The ATO also considers the length of overseas stay in determining whether the taxpayer has a permanent place of abode overseas. The ATO has provided a rule of thumb that the length of time must be at least 2 years to be considered a substantial period of time. This means a taxpayer who lives outside Australia for less than 2 years is unlikely to establish a permanent place of abode overseas. However, this does not necessarily mean a taxpayer who has been living outside Australia for more than 2 years will be treated as a non-resident if they have not ceased their connection with Australia.
Getting a visa to move to a country usually shows an intention to stay there. However, just having a work visa, even for a long time, usually isn’t enough proof that you want to make that country your permanent home.
3. 183-day Test
The 183-day test requires the person to be present in Australia for at least half of the income year, continuously or intermittently, unless the person’s usual place of abode is outside Australia and the person does not intend to take up residence in Australia.
This test applies to inbound Australians. It requires the person to be physically present in Australia for at least half of the income year, either continuously or intermittently.
Usual place of abode
Your usual place abode is the place you usually live or would live, but you are absent from it due to, for example, a transient lifestyle or other temporary circumstances (TR 2023/1 para 88).
In deciding whether you have your usual place of abode outside Australia, the test does not require a person to own a dwelling outside Australia. This test examines and compares the nature and quality of the use made of any place of abode you may have overseas and your living arrangements in Australia. This means selling your house overseas may not necessarily mean you have abandoned your usual place of abode overseas.
The ATO will consider the following factors in determining if your usual place of abode is outside Australia:
- 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 for coming to Australia; and
- the travel arrangements you made, including whether you departed from and returned to the same place outside Australia.
Intention to take up residence in Australia
Establishing residency in Australia involves more than just being present in Australia for at least 183 days. The person must also demonstrate that they intend to reside in Australia if they want to be treated as an Australian tax resident, in addition to establishing that they no longer have their place of abode overseas.
Conversely, an individual who has been present in Australia for at least 183 days and wishes to argue that they are non-resident must demonstrate that their usual place of abode is overseas and that they do not intend to reside in Australia. This means a person who has lived in Australia for several years can still be considered a non-resident if they do not intend to take up residence despite the significant amount of time they have stayed in Australia.
4. Commonwealth Superannuation fund test
This test only applies to active members of the Public Sector Superannuation Scheme or the Commonwealth Superannuation Scheme. The test applies to continue treating certain Australian Commonwealth Government employees who leave Australia as Australian tax resident if they are a member of these funds.
Temporary workers
Temporary workers in Australia for a short term are usually considered non-residents of Australia for tax purposes because of the short-term nature of their stay to establish a sufficient connection with Australia that is consistent with residing in Australia.
Conversely, those with longer stays may potentially be treated as Australian tax residents depending upon each worker’s individual facts and circumstances. However, the longer period of presence in Australia alone does not automatically make an individual an Australian tax resident under the ordinary concepts or 183-day tests. In most cases, the domicile test is not applicable for temporary workers.
Working holiday makers
In most cases, a working holiday maker is not an Australian tax resident as they usually enter Australia under a working holiday visa and leave Australia once the visa has expired. The nature of their stay in Australia is usually temporary, their accommodation is not permanent, and their behaviour does not indicate that they are residing in Australia.
A working holidaymaker would become an Australian tax resident when their intention and behaviour changed to live in Australia, which could be indicated by acquiring a sponsorship and a temporary activity visa.
Double Tax Agreements (DTA)
As tax residency is governed by the domestic income tax law of a country, a person who lives in Australia and overseas could potentially be treated as a tax resident in both countries. This could potentially lead to double taxation if there is no double tax agreement between the two countries. However, if Australia has a DTA with the relevant country, the tax residency will be determined by the tie-breaker rule allocated in the DTA between the two countries. The taxing rights of different categories of income will be based on the applicable DTA.
In conclusion, determining the tax residency of a person is complex as there are many interrelated factors that must be considered, and their assessment is subjective as there is no clear dividing line. Their complexity and subjectivity have been demonstrated by a lot of court cases due to tax residency. By understanding the residency tests and the factors affecting the tests, individuals can better ascertain their tax residency status, thereby mitigating the risks of unintentional non-compliance due to incorrect tax residency assessment.
Ezzura Tax Advisory possesses the expertise to thoroughly analyse and assess your tax residency status. Whether you’re navigating complex global tax regulations or seeking clarity on your residency status, we’re here to provide tailored guidance and support. Don’t hesitate to get in touch with us today for comprehensive assistance tailored to your unique circumstances.
The information provided in this article is intended for general informational purposes only and does not constitute legal or professional advice. This article is based on the current tax laws at the time of writing, and the application of specific provisions may vary depending on individual circumstances. It is crucial to consult with a qualified tax professional to obtain accurate and current advice tailored to your specific situation. Any reliance on the information presented in this context is at your own risk, and we disclaim any liability for actions taken or not taken based on the content provided. Always seek professional advice before making decisions related to tax matters.
