Individuals who are tax residents in Australia are subject to tax in Australia on their worldwide income and gains, subject to certain reliefs available to temporary VISA holders.
Once an individual ceases to be an Australian tax resident, they are only subject to tax in Australia on their Australian-sourced income.
For individuals arriving in Australia identifying when they first become a tax resident will ensure their taxes are filed correctly and more importantly that they are not doubling their tax liability by paying taxes both in Australia and in an overseas country.
Australian residents can take advantage of the following tax benefits:
- Tax-free threshold ($18,200 for 2023/24)
- 50% CGT Discount on assets held for more than 12 months (or from 12 months of establishing tax residency)
- Access to the main residence exemption for CGT purposes
- Lower tax rates on income than non-residents
- Rebasing to market value of non-taxable Australian property held before becoming Australian tax resident
Australia has a series of tests to determine when an individual is considered to become a tax resident, which must be followed in order. These can be briefly summarised as follows:
- Resides Test – The Resides Test focuses on where you live in Australia. If you reside in Australia, you are considered an Australian tax resident. Your primary home, family, and economic ties are typically factors that the Australian Taxation Office (ATO) considers.
- Domicile Test: The Domicile Test considers your permanent place of abode and whether Australia is your permanent home. If Australia is your permanent home, you are likely to be a tax resident, even if you spend considerable time overseas.
- 183-Day Test: The 183-Day Test examines the number of days you spend in Australia during the income year. If you spend more than 183 days in Australia in a financial year, you are considered a tax resident.
- Commonwealth Superannuation Test: For those receiving a Commonwealth superannuation pension, the receipt of this pension can be a strong indicator of your tax residency in Australia.
A consultation on modernising the individual tax residency rules has recently closed and future changes are likely. Under the proposals, 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. Of course, any residency will involve consideration of a foreign country and the Double Tax Agreement (if there is one in place).
Determining your tax residency status in Australia is a key step in managing your tax obligations. At Salann we are experienced in advising on residency issues for inbound and expats. Contact us on enquiries@salanntax.com.au
