If you are considering a move overseas, then there are numerous financial and tax implications you will need to consider. However most of these implications are linked to one question you need to answer : Are you a resident or non-resident for Australian tax purposes?
Many people incorrectly believe that just because they move overseas, that they are automatically non-residents for Australian tax purposes. The Australian Tax Office takes a different point of view, and requires you to satisfy a number of tests before it will consider you to be a non-resident for Australian tax purposes.
Before discussing how the Australian tax office will determine whether you are a resident or non-resident for Australian tax purposes, lets first understand the difference between being a resident and a non-resident.
The difference between being a resident and non-resident for Australian tax purposes
The major difference between being a resident and non-resident for Australian tax purposes is that if you are considered to be a resident for Australian tax purposes then all of your global income (from all sources) will be subject to tax in Australia. If you have paid tax on any of that income overseas, you may be entitled to a tax offset (credit) in Australia.
If you are considered to be a non-resident for Australian tax purposes then you will only pay tax in Australia on your Australian sourced income (primarily any employment and rental income you earn in Australia). There are a numerous other tax differences for non-residents including:
- increased capital gains tax rates on Australian property; and
- no tax free income threshold (ie. You will pay tax on your first dollar of Australian sourced income)
- different treatment of dividend and interest income in Australia.
How do you determine whether you are a resident or non-resident for Australian tax purposes?
The Australian Tax Office uses four tests to determine your tax residency. You will be considered to be an Australian resident for Australian tax purposes if :
- you reside (live) in Australia (The Resides Test);
- your permanent place of abode is in Australia (The Domicile Test);
- you are actually present in Australia for more than half the income year (whether continuously or with breaks). Under this test (The 183 Days Test) you may be said to have a constructive residence in Australia; or
- if you are a Commonwealth government employee (or spouse) working at an Australian post overseas (The Superannuation Test).
If you move overseas, the domicile test is often the most relevant, but the most difficult to interpret.
The domicile test requires you to have setup a permanent place of abode overseas, and permanent place of abode is used in the context of a much broader meaning than most of us would expect. There are no conclusive rules for determining whether your permanent place of abode is inside or outside Australia, but it is more than just whether you live in Australia or not.
In determining whether you have established a permanent place of abode outside of Australia, various tax rulings outline a number of factors that need to be considered. The weight given to each factor will vary based on your individual circumstances, and no single factor is considered conclusive. Some of the factors that you will need to consider include :
- How long you intend and are actually in the overseas country
- Whether you have established a “home” outside of Australia (in the sense that it has the feeling of a permanent home not just a place where you are temporarily living)
- Whether you have abandoned your home in Australia (eg. Sold it or rented it out)
- Your continuity in one particular location overseas
- How strong your links are to a particular place in Australia.
As we discussed at the start of this article, your tax residency can have significant financial and tax implications, so it is important when moving overseas to understand whether you are a resident or non-resident for Australian tax purposes.
There is complicated legislation related to tax residency in Australia. So, it is important to discuss your specific situation with an Australian tax advisor before moving overseas, and be able to correctly answer Am I a resident or non-resident for Australian tax purposes?.
This is a guest post by Craig Joslin. Craig is the founder of The Australian Expat Investor – dedicated to supporting Australian Expats with the knowledge and tools to continue building their wealth while living abroad. Check out his blog or get his free ebook at www.austexpatinvestor.com.
Disclaimer : This information is for educational purposes only and does not constitute financial or taxation advice. As this information is not advice and has been prepared without taking into account your objectives, financial situation or needs you should, before acting on this information, consider its appropriateness for your circumstances. Independent advice should be obtained from an Australian financial services licensee before making investment decisions, and a registered (tax) financial advisor/accountant in relation to taxation decisions.