Tax implications for Australian residents working overseas
Australian residents are generally taxed on their worldwide income from all sources. Additionally, Australian residents for tax purposes are entitled to the tax-free threshold and are required to pay the Medicare Levy.
The tests that the ATO use to work out a taxpayer’s residency status for tax purposes are not the same as those used by other Australian agencies for other purposes such as immigration. You may be an Australian resident for the purposes of income tax, whether or not you are an Australian citizen and whether or not you are a permanent resident for immigration purposes.
If you remain an Australian resident for tax purposes while working overseas, then you are required to include in your assessable income:
1. Foreign employment income (unless you are qualified for an exemption, eg. foreign aid workers)
2. Foreign independent personal service income (ie. a contract)
3. Interest, dividends and royalties (Australian and foreign sourced)
4. Net income or loss from discretionary and fixed trusts (Australian and foreign sourced)
5. Managed investments trusts (Australian and foreign sourced)
6. Rental income (Australian and foreign sourced)
7. Capital gains
To avoid double taxation you may be entitled to claim a tax offset for the foreign tax you have paid on employment income or capital gains that are included in your assessable income (subject to a Double Tax Agreement).
The primary test of tax residency is called the ‘resides test’. If you reside in Australia, you are considered an Australian resident for tax purposes and do not need to apply any of the other residency tests.
If you do not satisfy the resides test, you will still be considered an Australian resident if you satisfy one of three statutory tests:
The domicile test: You are an Australian resident if your domicile (broadly, the place that is your permanent home) is in Australia, unless we are satisfied that your permanent place of abode is outside Australia.
The 183 day test: If you are actually present in Australia for more than half the income year, whether continuously or with breaks, you may be said to have a constructive residence in Australia, unless it can be established that your usual place of abode is outside Australia and you have no intention of taking up residence here.
The superannuation test: This test is design to ensure that Commonwealth government employees working at Australian posts overseas are treated as Australian residents.
Many Australians who work overseas incorrectly rely on the 183 day test to determine whether they are Australian residents. However, the recent case law demonstrated that a taxpayer cannot use the 183 day test to support the argument that he is a non-resident while working overseas because he was outside Australia for at least 183 days. This test is available to determine whether a taxpayer is an Australian resident.
In summary, to determine Australian residency status the ATO examines the social, financial and personal connection of a taxpayer with Australia rather than simply a physical presence.
The Quinn Group offers expertise advice and services in this area. Should you require assistance, please call us on (02) 9223 9166, or make an online enquiry here.