London’s calling and you’re about to head overseas on an adventure. You plan on being away indefinitely and hope to land the dream job in the UK. Sounds like a great plan, but what about the tax consequences? Will you need to lodge a tax return? What about the salary you earn while you’re away – it won’t have to be declared here. Or will it? The answer depends on whether you are considered an Australian resident for tax purposes.
The main point is: a resident for tax purposes is not the same as being an permanent resident or Australian citizen. It’s a separate test and in fact you can still be an Australian citizen but not resident for tax purposes. Yep, it’s confusing! But why is the distinction important?
If you are an Australian resident for tax, you are required to pay tax on your worldwide income from all sources. You have the benefit of the tax-free threshold, you pay the Medicare Levy and receive the benefits of the Medicare system.
If you are non-resident, you are taxed in Australia on the income you earn only from Australian sources. This includes employment income, rental income, Australian pensions, investment income (although there are some exceptions) and capital gains on Australian assets. You do not receive the benefit of the tax free threshold (that is, you pay tax on your first $1 of income) and you do not pay the Medicare Levy.
How to decide if you are a resident for tax purposes?
The primary test of residency is the “resides test”. If you have always lived in Australia or have come to Australia to live permanently, you will be an Australian resident for tax purposes. You don’t need to go any further. However, if this doesn’t apply, you can still be an Australian resident if any one of the following three tests applies:
- The domicile test: you have a permanent residence in Australia and don’t maintain a permanent abode outside of Australia.
- The 183 day test: you are present in Australia for more than half of the income year (continuously or with breaks), it can be claimed that you effectively has residence in Australia unless it can be established that your usual permanent abode is outside Australia and you have no intention of taking up residence in Australia.
- The superannuation test: government employees working overseas and who are members of the commonwealth superannuation schemes (CSS or PSS) are designated as Australian residents.
On their website the Tax Office provides some common examples of residency and the tax implications:
| If you: | you are generally: |
| leave Australia temporarily and do not set up a permanent home in another country | an Australian resident for tax purposes |
| are an overseas student enrolled in a course that is more than six months long at an Australian institution | an Australian resident for tax purposes |
| are visiting Australia, working and living in the one location and have taken steps to make Australia your home | an Australian resident for tax purposes |
| are visiting Australia and for most of that time you are travelling and working in various locations around Australia | a foreign resident for tax purposes |
| are either holidaying in Australia or visiting for less than six months | a foreign resident for tax purposes |
| migrate to Australia and intend to reside here permanently | an Australian resident for tax purposes |
| leave Australia permanently | treated as a foreign resident for tax purposes from the date of your departure |
If you intend to be treated as a foreign resident, the Tax Office will consider your individual circumstances. You must be able to show that you have severed all connections with Australia. Factors which will be taken into consideration include (but aren’t limited to):
- Whether you have retained your family home in Australia. It’s okay to have kept the property, but is it still vacant or have family members living in it rent free? It’s more persuasive if it has been rented out to unrelated tenants on a long term lease.
- Do you still have personal possessions (furniture, motor vehicle etc) in Australia?
- Have subscriptions, mobile phone, club memberships etc been cancelled?
- Do you maintain a bank account in Australia AND are is it being regularly and frequently accessed (for example, are you having your international salary deposited into the account and are still using it for day to day expense)?
- If you have a spouse or dependent children, where are they residing? Do you maintain strong family connections with Australia?
- Address used for notices of work etc.
- The frequency and duration of any trips to Australia.
- Are you still registered on the electoral roll with an Australian address?
No one factor will outweigh others and it is necessary to consider all factors together.
A last couple of issues to note. Currently the Government is introducing a policy which restricts the capital gains tax main residence exemption to residents only. This may mean that if you become non-resident and then sell a property which has been your home, you may be subject to capital gains tax. This is something to watch.
If you have a Higher Education Loan Program (HELP) or Trade Support Loan (TLS) debt and are non-resident, you are now required to continue making repayments of the debt. You are required to declare your worldwide income through MyGov and will have the same repayment obligations as Australian residents.
As with all areas of tax, it’s complex and you must consider your individual circumstances. If you need help with determining your residency, I offer a FREE 30 minute initial consultation. You can easily book online here and I look forward to helping you sort your finances!