Australian Resident for Tax Purposes

An Australian Resident for tax purposes refers to a person who comes to permanently live in Australia. In this case, you must declare all of the income you’ve earned in Australia and overseas on your Australian tax return. This applies even if you’ve already paid tax on it overseas.

AM I AN AUSTRALIAN RESIDENT FOR TAX PURPOSES?

Consideration of whether an individual is an Australian resident for tax purposes must be made by reference to both, the Australian domestic tax law and the relevant DTA (Double Taxation Agreement).

As it is possible for a taxpayer to be a resident of more than one country, when a taxpayer is a resident of both countries, the DTA will provide tiebreaker rules for determining the country of residence.

Remember that the residence of an individual or an entity has a massive relevance for the determination of their assessable income as the assessable income of an Australian resident includes ordinary income derived from all sources under section 6-5(2) of ITAA 1997. Similarly, section 6-10(4) of ITAA 1997 states that the assessable income of an Australian resident includes statutory income from all sources.

For foreign residents, assessable income includes only ordinary income and statutory income from Australian sources under section 6-5(3)(a) and section 6-10(5)(a) of the ITAA 1997. The assessable income of a foreign resident also includes ordinary income and statutory income that is included in assessable income on some basis other than having an Australian source under section 6-5(3)(b) and section 6-10(5)(b) of ITAA 1997.

Non-resident tax rates are the same as the resident tax rate EXCEPT the 32.5% rate applies to every dollar up to $87,000. Therefore, there is no tax-free threshold for non-residents. Non-residents are not required to pay the Medicare levy. But this also means they are not entitled to claim Medicare benefits during this time.

All Australian sourced interest, unfranked dividends and royalties paid to a non-resident are subject to non-resident withholding tax provisions. These include:

 

  • 10% of any interest earned from your Australian bank accounts or term deposits is withheld for tax (where Australia does not have a double tax treaty);
  • 30% withholding tax applies to unfranked dividends where Australia does not have a double tax treaty; and
  • Royalties will be taxed up to 30% depending on the existence of a double tax treaty.

 

These are final taxes so no deductions can be claimed against them.

Non-residents can disregard a capital gain or capital loss if the CGT event happens in relation to a CGT asset that is not taxable Australian property. Taxable Australian property generally includes:

 

  • Taxable Australian real property; an indirect interest in Australian real property;
  • A business asset of a permanent establishment in Australia;
  • An option or right to acquire any of the CGT assets above; or a CGT asset that is deemed to be Australian taxable property where a taxpayer, on ceasing to be an Australian resident, makes an election (see the section on ceasing to be an Australian resident).

 

Non-residents cannot apply for the main residence exemption.

Finally, the 50% CGT discount does not apply for foreign or temporary residents who dispose of “Taxable Australian Property” or assets they have elected to treat as “Taxable Australian Property” on or after 8 May 2012.

So, the difference between being a resident and a non-resident in the Australian tax law is substantial.

WHEN IS AN INDIVIDUAL AN AUSTRALIAN RESIDENT FOR TAX PURPOSES?

In the 2021-22 Federal Budget the following announcement was made so everything below might one day be changed:

The Government will replace the individual tax residency rules with a new, modernised framework. The primary test will be 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 measure will have effect from the first income year after the date of Royal Assent of the enabling legislation.

An Australian resident (for tax purposes) is defined in section 995-1 to be a person who is a resident of Australia for the purposes of the ITAA 1936.

A resident of Australia is defined in section 6(1) of the ITAA 1936 as:

  • A person who resides in Australia;
  • A person whose permanent home is in Australia, unless the Commissioner is satisfied that the person’s permanent place of abode is outside Australia;
  • A person who has been in Australia, continuously or intermittently, during more than half of the income year, unless the Commissioner is satisfied that the person’s usual place of abode is outside Australia and that they do not intend to take up residence in Australia;
  • A person who is either:
  • A member of the superannuation scheme established by deed under the Superannuation Act 1990;
  • An eligible employee for the purposes of the Superannuation Act 1976; or
  • The spouse, or a child under 16, of a person who is a member of the relevant superannuation scheme or an eligible employee.

Case law helps us understand each of these parts of the definition of when an individual is an Australian resident but this is helpfully summarised by the Commissioner in Taxation Ruling TR 98/17 titled “Income tax: residency status of individuals entering Australia.”

‘RESIDES’ IN AUSTRALIA

The primary test for deciding a person’s residency status is whether they would be considered to reside in Australia according to the ordinary meaning of the word “reside”. If a person is held to reside in Australia according to this test, the other tests in section 6(1) of the ITAA 1936 are irrelevant.

The term “reside” is not defined. As there is no definition of the word “reside” in the Australian income tax law, the ordinary meaning of the word needs to be considered. The Oxford Dictionary defines reside as:

“…to dwell permanently, or for a considerable time, to have one’s settled or usual abode, to live, in or at a particular place…”

Whether a person “resides” in Australia is essentially a question of fact and degree.

Accordingly, whether or not a person is considered to “reside” is to be determined by facts and circumstances. TR 98/17 summarises the factors considered by the ATO to be determinative of an individual’s residence, which includes:

  • The duration of any physical presence in Australia;
  • The nature of the person’s family, business and social ties (i.e. if they are accompanied by family, the location of their assets in Australia, and where children are educated);
  • The way individuals arrange their domestic and economic affairs as part of the regular order of their lives; and
  • The purpose for a visit to Australia and a trip abroad. A settled purpose, such as employment or education, may support an intention to reside in Australia. However, the intention must be more than merely being a traveller or visitor who may supplement their savings by obtaining casual employment.

The above factors need to be weighed up to determine whether a person resides in Australia and hence is a resident of Australia for income tax purposes. Importantly, no one factor is necessarily determinative.

THE DOMICILE TEST

A person’s permanent home is often referred to as their “domicile”. A domicile also constitutes a legal relationship with a country, by which the person can invoke the country’s laws as his or her own. There are two types of domicile: domicile of origin, and domicile of choice. However, a person can only have one domicile at any point in time.

“Domicile of origin” comes with birth, and follows the domicile of the person upon whom the infant is dependent. A “domicile of choice” is acquired in a country where a person voluntarily fixes their sole or chief residence, intending to reside there indefinitely.

Under the section 6(1) definition, a person will be an Australian resident if they have an Australian domicile unless they can prove that they have established a permanent place of abode outside Australia.

PERMANENT PLACE OF ABODE

“Place of abode”

A person’s “place of abode” is that person’s dwelling place or the physical surroundings in which a person lives.

“Permanent”

In F.C. of T. v. Applegate (1979) 9 ATR 899 the Federal Court stated that a permanent place of abode does not have to be “everlasting” or “forever”. It means something less than a permanent place of abode in which a person intends to live for the rest of his or her life. An intention to return to live in Austral in the foreseeable future does not prevent the taxpayer in the meantime from setting up a “permanent place of abode” elsewhere.

Commissioner’s Guidelines

In IT 2650, the Commissioner provided guidelines for determining whether an individual who leaves Australia temporarily to live overseas ceases to have their “permanent place of abode” in Australia. The Commissioner states that the following factors need to be taken into account:

  • The intended and actual length of the individual’s stay in the overseas country;
  • Any intention either to return to Australia at some definite point in time or to travel to another country;
  • The establishment of a home outside Australia;
  • The abandonment of any residence or place of abode the individual may have had in Australia;
  • The duration and continuity of the individual’s presence in the overseas country; and
  • The durability of association that the individual has with a particular place in Australia.

With each of the factors listed above, the Commissioner states that the weight to be given to each factor will vary with the individual circumstances of each case and that no single factor is conclusive. In saying that though, the Commissioner indicates that greater weight should be given to factors (c), (e) and (f) than to the remaining factors.

In IT 2650, the Commissioner indicates that as a general rule of thumb, a period of about two years or more would generally be regarded as a substantial period for a taxpayer’s stay in another country. In making this rule of thumb though the Commissioner makes the following exception (in paragraph 25):

Generally speaking, a taxpayer who leaves Australia with an intention of returning to Australia at the end of a transitory stay overseas would remain a resident of Australia for income tax purposes unless he or she can satisfy the Commissioner that a consideration of the other factors… requires the conclusion that during the year of income his or her permanent place of abode was outside Australia. What constitutes a mere transitory stay overseas for these purposes would vary with the circumstances of each case. However, as a general proposition, an overseas stay for less than 2 years would be considered a transitory nature.

THE 183-DAY TEST

A person who is in Australia for a total of 183 days in an income year will be treated as a resident unless it can be established that their usual place of abode is outside Australia. “Usual” in this context is taken to mean current, prevalent, habitual or customary. The test applies to the relevant income year rather than a calendar year.

THE COMMONWEALTH SUPERANNUATION TEST

This is an objective test, which merely requires membership in a specified superannuation scheme.

This test covers current Commonwealth government employees and states that a person will be an Australian resident if they are:

  • A member of the superannuation scheme established by deed under the Superannuation Act 1990;
  • An eligible employee for the purposes of the Superannuation Act 1976; or
  • The spouse, or a child under 16, of a person who is a member of the relevant superannuation scheme or an eligible employee.

The following are examples from TR 98/17

EXAMPLE 1

Jane Cierpinski is single and is a Professor of Biology at the University of Warsaw. She comes to Australia to work on a research project. She is contracted to do the research in Australia for five months.

A six-month lease of a small furnished unit near her work is such an attractive proposition that she enters into the lease despite intending to leave after five months. She also buys an old car.

She relaxes at the end of her long days by going to the movies, occasionally attending dinner parties hosted by her colleagues, reading novels or writing letters to her friends and parents.

Jane intends to return to Warsaw at the end of the project which lasts for seven months.

She negotiates an extra month on the lease of her unit. Apart from depositing her salary into an Australian bank account to cover normal living expenses, Jane retains all assets and investments in Poland, her country of domicile.

Jane’s behaviour over the seven months in Australia is consistent with residing here. She is regarded as a resident from her arrival.

EXAMPLE 2

Steffen Magnussen is a medical doctor domiciled in Denmark. He signs a contract with and is brought to Australia by, a Brisbane based hospital to work for twelve months. Steffen arrives in Australia on 1 May 1998. Steffen is provided with an apartment by the hospital. Steffen elects to travel to Australia alone because his wife is undertaking post-graduate studies in Denmark.

Steffen is a golfing fanatic and joins the local golf club. He also becomes actively involved in local charities. During her semester break, his wife visits and they head to Noosa for a short holiday. After twelve months, he returns to Denmark. Steffen seeks clarification of his residency status. He also wishes to know whether the dividends from his Danish investments are taxable here and the rate of tax on his Australian source interest.

Steffen is a resident for the duration of his stay for both the 1998 and 1999 income years. Even though he is physically present in Australia for only two months of the 1998 income year, he intends to live in Australia to fulfil his contract with the hospital.

Steffen establishes a pattern of habitual behaviour during his twelve months in Australia. His accommodation arrangements, work, and social and sporting commitments demonstrate he resides in Australia during this time and these outweigh the fact that his wife, apart from her holiday with him, remains in Denmark.

When determining his tax liability in Australia, Steffen should refer to the Australia/Denmark double tax agreement. Assuming that the dual resident “tie-breaker” tests in that agreement operate to treat him as solely resident in Denmark for the agreement, his Danish dividends will not be subject to tax in Australia and the Australian tax on his Australian source interest will be limited to 10%.

THINGS YOU NEED TO KNOW

WHAT IF I AM A RESIDENT FOR ONLY PART OF THE YEAR?

Under the “resides” and “domicile” tests, a person can be a resident of Australia for a part of a year. This means that the person would not be assessable to ordinary Australian income tax on any foreign source income derived during the period he/she was not in Australia. Under these tests, the person will be a resident from the time they arrive or until the time they leave Australia, whichever is relevant to their circumstances.

Where a person is a resident of Australia for only part of the year, the tax-free threshold which applies to residents is only available on a pro-rated basis. Part-year residents have a tax-free threshold of at least $13,464. The remaining $4,736 of the full tax-free threshold is pro-rated according to the number of months during the financial year you were a resident for tax purposes.

WHEN IS A COMPANY AN AUSTRALIAN RESIDENT FOR TAX PURPOSES?

In the 2020-21 Budget the Government announced that:

The Government will amend the law to provide that a company that is incorporated offshore will be treated as an Australian tax resident if it has a ‘significant economic connection to Australia’. This test will be satisfied where both the company’s core commercial activities are undertaken in Australia and its central management and control is in Australia.

 

The corporate residency rules are fundamental to determining a company’s Australian income tax liability. The ATO’s interpretation following the High Court’s 2016 decision in Bywater Investments Ltd v Federal Commissioner of Taxation departed from the long-held position on the definition of a corporate resident. The Government requested the Board of Taxation review the definition in 2019/20. This measure is consistent with the Board’s key recommendation in its 2020 report: Review of Corporate Tax Residency and will mean the treatment of foreign incorporated companies will reflect the position before the 2016 court decision.

The measure will have effect from the first income year after the date of Royal Assent of the enabling legislation, but taxpayers will have the option of applying the new law from 15 March 2017 (the date on which the ATO withdrew its ruling TR 2004/15 Income tax: residence of companies not incorporated in Australia — carrying on a business in Australia and central management and control).

A “resident company” is defined in section 6(1) of the ITAA 1936 as a company that is either:

  • Incorporated in Australia; or
  • While not incorporated in Australia, carries on business in Australia, and has either:
    • – Its central management and control in Australia; or
    • – Its voting power is controlled by shareholders who are residents of Australia.

The Commissioner in Taxation Ruling TR 2018/5, titled “Income tax: central management and control test of residency” considers:

  • Does the company carry on business in Australia?
  • What do central management and control mean?
  • Who exercises central management and control?
  • Where are central management and control exercised?

Some of this Ruling will be replaced by the announcement made in the 2020/21 budget discussed above.

However, the Ruling does state that the place where the actual business decisions are made plays an important part in the determination of where the central management and control of a company is exercised. If central management and control of a company are exercised by a board of directors at board meetings, the ATO takes the view that the company will generally be taken to be resident in Australia if the majority of the board meetings take place in Australia.

WHAT IS A “TEMPORARY RESIDENT”?

There is a special category of taxpayers who are treated as both a resident and a non-resident – They are called “temporary residents”. To be a temporary resident:

  • You must hold a temporary visa granted under the Migration Act 1958
  • You or your spouse cannot be an Australian resident within the meaning of the Social Security Act 1991

If you are an Australian resident for tax purposes and meet the requirements to be a temporary resident, the temporary resident rules mean:

 

  • Most of your foreign income is not taxed in Australia except income earned from employment or services performed overseas while you are a temporary resident. This income is subject to income tax and would still be declared in your return for the year in which you earned it. If you paid tax in a foreign country, you may be entitled to claim a foreign income tax offset when you lodge and declare that income in your Australian tax return.
  • If a capital gains tax event occurs while you are a temporary resident, you are not liable to capital gains tax (nor treated as having made a capital loss) unless the asset is ‘taxable Australian property.’
  • Special rules apply to capital gains on shares and rights acquired under employee share schemes.
  • The interest you pay to foreign residents (for example, foreign lenders) is not subject to withholding tax.

WHEN IS A SUPER FUND AN AUSTRALIAN RESIDENT FOR TAX PURPOSES?

In the 2021-22 Budget, the Government announced:

The Government will relax residency requirements for self managed superannuation funds (SMSFs) and small APRA regulated funds (SAFs) by extending the central control and management test safe harbour from two to five years for SMSFs and removing the active member test for both fund types. The measure will have effect from the start of the first financial year after Royal Assent of the enabling legislation, which the Government expects to have occurred before 1 July 2022.

This measure will allow SMSF and SAF members to continue to contribute to their superannuation fund whilst temporarily overseas, ensuring parity with members of large APRA regulated funds. This will provide SMSF and SAF members with the flexibility to keep and continue to contribute to their preferred fund while undertaking overseas work and education opportunities.

For a superannuation fund to be resident under section 295-95:

  • The fund must either be established in Australia, or any asset of the fund at the relevant time must be situated in Australia;
  • The central management and control of the fund must be in Australia; and
  • Where the superannuation fund has at least one active member, the entitlements of resident active members divided by the total entitlements must be more than 50 per cent of the net value of the fund.

These definitions are discussed at length in Taxation Ruling TR 2008/9, titled “Income tax: meaning of ‘Australian superannuation fund’ in subsection 295-95(2) of the Income Tax Assessment Act 1997”. For example, this Ruling states that an “active member” is a member who is a contributor to the fund or a member on behalf of whom contributions have been made for the current financial year.

Note that a fund will only be a resident when central management and control are in Australia. Accordingly, where the majority of the trustees are permanently non-residents, the fund may fail the central management and control test. This can be rectified by the appointment of a person under the enduring power of attorney as a trustee who is in Australia (see SMSFR 2010/2). However, the Commissioner allows the central management and control test to be overseas for up to two years for an SMSF before it treats the fund as not a resident.

EXAMPLE

Andrew works for a large international group of companies. He and his wife, Jane, are trustees and members of their SMSF. From 1 February 2009, Andrew is transferred to an overseas company for an indefinite period. Under the relevant State legislation, Andrew and his wife each execute an enduring power of attorney in favour of their friend and retired accountant, Trevor. In addition, Andrew and Jane both resign as trustees of their SMSF and appoint Trevor as the trustee.

Trevor is a legal personal representative of both of the members, Andrew and Jane, by holding an enduring power of attorney in respect of each of them. In addition, Trevor is now the trustee of the SMSF in place of both Andrew and Jane. The trust remains an “Australian superannuation fund’ as its central management and control are in Australia.

WHEN IS A TRUST AN AUSTRALIAN RESIDENT FOR TAX PURPOSES?

For a trust estate to be a resident, section 95(2) of the ITAA 1936 requires that either:

 

  • A trustee of the trust estate is a resident at any time during the year of income; or
  • The central management and control of the trust estate are in Australia at any time during the year of income.

 

The definition of resident trust for capital gains tax in section 995-1 depends on whether the trust is a unit trust. A trust that is not a unit trust will be a resident if a trustee is an Australian resident, or the central management and control of the trust is in Australia. A unit trust will be a resident if either:

 

  • Any property of the trust is situated in Australia and the central management and control of the trust is in Australia; or
  • The trust carries on business in Australia, and Australian residents hold more than 50% of the trust’s beneficial interest in income or property.

WHEN IS A PARTNERSHIP AN AUSTRALIAN RESIDENT FOR TAX PURPOSES?

As a partnership is not a taxpayer, it is generally the residence of the partners that is relevant. Separate rules contained in section 94T of the ITAA 1936 apply to limited partnerships, which are treated for income tax purposes as a company.