Tax residency has become a hot topic lately, with a suite of cases on individual residency hitting the courts in the last couple of years. The key issue being the determination of their tax liabilities in Australia. Generally speaking, temporary tax residents are only taxed on Australian sourced income, whereas Australian tax residents are taxed on worldwide income (see more below).
The ongoing pandemic has added extra complexity in determining tax residency status with some individuals spending greater or less time than anticipated in a country due to travel restrictions and other factors. The result is often change in tax residency status and an unexpected tax liability.
You may have also seen the recent announcements on the proposed “bright-lines” test for individual residency in Australia.
As it’s a very topical issue, we’ve provided a snapshot of the Australian individual residency rules.
What kind of resident am I?
There are specific tests to determine whether an individual is a resident or non-resident for Australian tax purposes (these differ to those used by the Department of Immigration). Individuals may also be considered a “temporary resident” (discussed below).
Why is residency important?
The determination of an individual’s tax residency status is important for various reasons.
The most fundamental distinction is that a resident will be subject to Australian income tax on worldwide income (including capital gains), whilst a non-resident is subject to Australian income tax on Australian sourced income only (including capital gains on “taxable Australian property”).
Further, residents and non-residents are subject to different tax rates and tax-free thresholds (i.e. non-residents get no tax-free threshold), and certain tax discounts and concessions are not available to non-residents (e.g. the capital gains tax (“CGT”) 50 percent general discount).
Individuals may be classified as temporary residents for tax purposes.
Being a temporary tax resident has its advantages, as they are generally treated in the same manner as non-residents. This is to say that their tax in Australia is limited to Australian sourced income and all remuneration (regardless of source) for employment services rendered whilst they are a temporary resident. This can be a benefit where the temporary resident has offshore trust or company structures, where residents may otherwise have tax issues.
The temporary tax resident rules can be tricky to navigate, and many incorrectly assume that people in Australia on a temporary visa (such as the 482 Visa or a 444 Special Category Visa for New Zealanders) are automatically a temporary tax resident. However, there are other conditions that need to be satisfied, specifically the status that you and your spouse (or defacto spouse) have under the Social Security Act.
Importantly, individuals who come to Australia on a temporary visa, but then start up a relationship with an Australian citizen or permanent resident, may no longer be considered temporary residents for tax purposes.
We’ve seen many cases, where individuals have lost their temporary tax residency (i.e. become residents for tax purposes) and been faced with significant and unexpected tax liabilities.
Has COVID-19 affected your tax residency?
Determining residency (and the source of income) can be difficult where individuals have spent greater or less time than anticipated in a country due to travel restrictions imposed because of COVID-19.
Some guidance has been issued by the ATO on their website here.
Proposed “bright lines” test
As part of the 2021–22 Federal Budget, the Government announced that it will replace the individual tax residency rules with a new “bright lines” test, based on the Board of Taxation’s recommendations.
Broadly, an individual will be an Australian tax resident where they are physically present in Australia for 183-days or more in any income year. Where the 183 day primary test is not met, for example on coming to or leaving Australia, secondary tests that depend on a combination of physical presence and measurable objective criteria will apply. These rules are similar to the residency rules introduced in the UK in the last decade.
This measure is proposed to have effect from the first income year after the date of Royal Assent of the legislation.
Other aspects to consider
- If you are becoming or ceasing to be an Australian tax resident, there may be tax implications (e.g. capital gains tax), and you may have a part year residency.
- It’s possible to be a resident in more than one country, in which case, individuals will need to turn to any double-tax treaty for a tie-breaker rule.
- Residency impacts other areas of the tax laws e.g. attribution under the controlled foreign company (“CFC”) rules.
- Residency status is important for working out your Australian tax liabilities and needs to be determined annually
- Don’t assume that a temporary visa means you’re a temporary resident, other criteria apply
- Consider the impact of COVID-19 on your residency
- Keep contemporaneous documentation to support your position on residency and obtain tax advice where necessary.
If you or your employees have had a change in circumstances that may impact your residency status, talk to your local William Buck advisor as early as possible.