Are you an Australian who is thinking of travelling overseas?
Are you from overseas and thinking of coming to Australia, e.g. on a working holiday?
If the answer to either question was yes, you should probably read this before jumping on that plane. That is because whether or not you are an Australian resident for tax purposes can effect what you are taxed on and at what rate.
The concept of residency is absolutely fundamental to Australia’s tax system.
Australian residents can be taxed on their worldwide income, regardless of whether it is sourced in Australia or overseas. On the plus side, however, they can benefit from the tax-free threshold – not paying any tax on the first $18,200 of their taxable income. This threshold is pro-rated if a person becomes or ceases to be a resident during an income year (1 July to 30 June).
In contrast, foreign residents can be taxed on their Australian income but not on income they earn outside of Australia (at least not by the Australian government). On the down-side they can’t access the tax-free threshold – foreign residents are taxed from the first dollar they earn.
If you are an Australian working abroad you may try to argue that you are a foreign resident for tax purposes and therefore the money you earn overseas shouldn’t be taxed by the Australian Tax Office (ATO). Be warned however that the Commissioner has recently enjoyed an impressive success rate arguing that people working overseas are residents of Australia and taxable on their foreign employment income. I will explain what you can do to improve your case.
If you are someone coming to Australia to work, the ATO may try to get their hands on all your income, including rent, dividends and interest you earn from home, not just your Australian employment income. Again, I will explain what you can do to argue against this.
There are four tests to determine residency.
The first test is the ‘resides test’ – this asks whether you reside (as defined by common law) in Australia. If the answer is yes you don’t need to worry about the other three tests. My next post will explain this test.
The other tests are the ‘domicile test’, the ‘183-day test’ and the ‘superannuation test’. I will explain what those tests entail in the following post.
If you have any questions, feel free to put them in the comments.
P.S. For now I am ignoring the effect of double-tax agreements but I will come back to these at a later date. Later, I will also discuss residency for companies (because companies are people too) and other entities.
P.P.S. All advice in this blog is of a general nature. I’ve done my best to make sure it is accurate but I give no guarantees. Make sure you seek professional advice that is specific to your situation.