The global nature of the business world in modern times has resulted in more and more people travelling overseas for work. The first and foremost tax consideration for those earning assessable income while they are overseas is whether they should still be classified as an Australian resident for tax purposes. This is important because Australian residents are taxed on their worldwide income, while foreign residents are only taxed on their Australian sourced income.
Residency for tax purposes should not be confused with the concept of citizenship, which is attributed by birth or immigration. Whether a taxpayer is a resident for tax purposes will depend on the taxpayer’s pattern of behavior in the relevant financial year. The Australian Taxation Office (ATO) has provided 4 tests to assist taxpayers in their self-assessment, including the factors which will be considered.
Ordinary Concepts Test (Resides Test)
This is the primary test of residency so if the taxpayer satisfies this test, there is no need to apply the remaining 3 tests.
This test aims to assess the taxpayer’s overall ordinary behaviour whilst they are in Australia. This involves reviewing the taxpayer’s:
- intention or purposes for being in the country (eg: working holiday, short term contractor, relocating permanently for work)
- the extent of any personal and/or professional business ties in Australia;
- social & living arrangements (eg: the extent to which the taxpayer participates in community or local activities, where personal mail is directed, whether the taxpayer’s children are enrolled at a local school)
- financial affairs, such as the extent of assets maintained in Australia (eg: owning or renting a home, ownership of investment properties/car)
- length of time and physical presence in Australia
- history of travelling to Australia when not working overseas
If the taxpayer’s behavior is not consistent with someone who resides in Australia, the taxpayer will need to satisfy one of the remaining tests.
A taxpayer’s “domicile” is their permanent home in the eyes of the law. This “permanent place of abode” must be more than a temporary or transitory residence and needs to be something permanent. The meaning and definition of a domicile is established through case law as there are no clear tests or rules to determine. The domicile test becomes important in situations where a taxpayer goes to work overseas for an extended period of time (thereby failing the resides test).
183 Day test
This test looks to see whether the taxpayer is actually present in Australia for more than half of the income year. This test is satisfied unless the taxpayer’s “usual place of abode” is outside Australia. The usual place of abode is a residence which is current or habitual but does not have the same requirement for permanence.
The Commonwealth Superannuation Fund Test
This final test was implemented to make sure current Commonwealth government employees working at Australian posts overseas are treated as Australian residents so this test has limited application.
This test is satisfied if the employee either falls within the definition of an “eligible employee” for the purposes of the Superannuation Act 1976 or is a member of a superannuation scheme set up by the Superannuation Act 1990.
In summary, the question of individual residency is not always straight forward but the outcome will determine what income (if any) should be taxed in Australia, and whether another country also has taxing rights to any of the taxpayer’s income.
If the taxpayer is liable for foreign tax, (that is, they are required to pay tax in another country), a Double Taxation Agreement (DTA) may apply to provide foreign income tax offsets so the taxpayer is not taxed twice on the same income.
We at the Quinn Group can provide a free checklist to help you determine whether you are an Australian resident for tax purposes. For more information and advice contact us on 1300 QUINNS (784 667) or (02) 9223 9166 to arrange an appointment or submit an online enquiry.