A practical guide to leaving Australia and becoming non-resident or entering as an Australian resident for tax purposes and minimising your tax
The world has become “smaller” with affordable travel and rise of technology. There are 50.5 million expats worldwide. Your residency status for tax purposes really does affect you financially. The question of whether you are an Australian resident for tax purposes or a Non-resident has a significant impact on your tax liability and financial position.
You may have a dream to work internationally and travel so you are packing up and leaving Australia to give it your best shot. Or alternatively, you may be arriving in Australia with the idea or making Australia home. Each individual’s personal circumstances are unique. This is why tailored tax advice should be sought to determine your status for Australian tax purposes and to help you manage and optimise your tax affairs.
About this guide:
This practical guide to being considered an Australian resident for tax purposes discusses the following scenarios, and offers some tools to help:
We cover the key steps to help manage and optimise your tax affairs so you are not paying more Australian tax than you need to.
Australian residency status – why does it matter so much?
Australia has one of the highest effective personal income tax rates in the world. As a result, there are many overseas countries where personal income tax is much cheaper than in Australia. An international relocation can offer lifestyle benefits and also financial benefits if you manage your tax affairs
For departing Expats, the motivation is to either completely avoid or significantly limit Australian income tax by breaking their Australian resident status and becoming Non-resident for Australian tax purposes. The tax savings can be significant and can be calculated as simply the equivalent Australian income tax less the local income tax applied in the destination country.
1. LEAVING AUSTRALIA?
Non-residents for Australian tax purposes do not pay Australian income tax on employment income and other Australian income.
To highlight the point that an individual’s residency status can significantly affect their financial position, take the following example:
- Joe is a 25-year-old newly graduated civil engineer
- Joe has just accepted an employment opportunity in Dubai (UAE)
- Joe’s income will be the equivalent of AUD $90,000 (262,000 UAE Dirhams) and he starts working on 1 July 2017
- One key motivator for Joe in taking the role is that he heard from a university friend that Dubai does not charge income tax
- Joe plans to spend an indefinite time in Dubai to save to buy a home in Sydney
- Joe will ultimately return to Australia to live where he plans to find employment, to marry and start a family
- Non-resident for Australian tax purposes?
If Joe qualifies as a Non-resident for Australia tax purposes his employment income is tax-free in both Australia and the UAE. This means that Joe will not have to pay Australian tax of AUD $22,732 (excluding his compulsory HECS repayment of $6,300). This tax saving will significantly boost Joe’s cash position and help him buy his dream family home!
How can Joe overcome being considered as an Australian resident for tax purposes?
If Joe does not break his Australian tax residency status, then his income will be taxed at Australian resident tax rates to the tune of AUD $29,032 (including compulsory HECS repayment of AUD $6,300). That is Joe, will have to pay an additional income tax component of AUD $22,732.
How to become a Non-resident for Australian tax purposes? Here is the Non-residency Checklist
There are a number of actions you need to take to become a Non-resident for Australian tax purposes. Our tax advice provides a checklist of action steps you need to complete to become a Non-resident for Australian tax purposes. Our advice is based on the ATO Audit document (a document the ATO would send to you if you are chosen for a tax audit) and various case law precedents (tax law cases). Our Checklist provides a practical guide to obtaining Non-resident status. Contact us here to book an obligation free appointment to discuss how we can help you become Non-resident for Australian tax purposes.
Benefits of becoming a Non-resident for Australian tax purposes
Listed below are some key tax benefits in becoming a Non-resident for Australian tax purposes:
- Nil Australian tax on employment income
- Nil Medicare Levy and Nil Medicare Levy Surcharge
- Minimal Withholding Tax on: Interest income (10%), Unfranked Dividend income (normally 15%, sometimes 30%), Unfranked Distribution income (normally 15%, sometimes 30%)
- Reduced reporting requirements to the ATO
- Cheaper Tax Agent fees
- Nil Capital Gains Tax on Australian listed shares when purchased as a Non-resident
- Ability to exit appreciating Australian Assets from the Australian tax system to avoid high levels of tax in the future; without selling the underlying Asset
If you are considering leaving Australia, then it is critical to seek an expert tax advice. This is because the financial benefits to you of obtaining the correct tax advice can be significant. On the other hand, the financial consequences of receiving incorrect tax advice can also be significant and can reverse the financial benefits of leaving Australia.
4 Key Tests in Our Tax Law – a practical summary
There are 4 key Tests that determine whether an individual is a resident or non-resident for Australian tax purposes.
If an individual is considered an Australian resident under any of these Tests, then overall the individual is deemed to be a resident for Australian tax purposes – even if a non-resident under all three other Tests.
The 4 Tests or residency originate from the first of our two Tax Acts (Income Tax Assessment Act 1936). Below is a practical guide covering how these Test apply:
Test | Explanation of Test | Practical Guide |
|---|---|---|
Resides Test | If you reside in Australia, you will be considered an Australian resident for tax purposes. The word “reside” is defined as follows: “..to dwell permanently, or for a considerable time, to have one’s settled or usual abode, to live, in or at a particular place…” | This Test looks at the following factors:
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Domicile Test | You will be considered an Australian resident for tax purposes if your domicile (broadly, the place that is your permanent home) is in Australia, unless your permanent place of abode is outside Australia | For Departing Expats, we must look at whether you will establish/have established a permanent place of abode outside Australia. If you have not established a permanent home outside Australia, then you will be considered a Australian resident for tax purposes. In determining whether an individual has a permanent place of abode outside Australia will inevitably be dependent on the individual’s personal circumstances and tax planning advice they receive. Tax ruling IT 2650 provides that the following are the relevant factors:
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183 Days Test | If you are physically 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 in Australia. Your presence in Australia need not be continuous for the purposes of the 183 day Test. All the days you are physically present in Australia during the income year will be counted. It is important to note that the 183 day Test applies in relation to the year of income, not the calendar year | Refer to factors in tax ruling IT 2650 in determining whether a permanent place of abode (or home) has been established outside Australia
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Superannuation Test | This Test is designed to ensure that Commonwealth government employees working at Australian posts overseas are treated as Australian residents | If you are posted overseas to an Australian diplomatic embassy or similar then you will be taxed in the same way you would have been if you had remained in Australia – taxed as if you never left!
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2. ENTERING AUSTRALIA?
Australia is a highly desirable country in which to live and work so it is a popular destination for many inbound Expats.
An individual’s status for Australian Immigration purposes plays a significant part in determining the Australian tax treatment of their worldwide Assets and income. Below is a practical guide to the Australian tax treatment under varying classes of visa and immigration status:
VISA CLASS | Tax Treatment | Explanation of Australian Tax Treatment |
|---|---|---|
Temporary Visa (457 etc.) | Temporary visa holders are treated as temporary residents for Australian tax purposes | Tax compliance:
Foreign Assets and Income:
Employment income:
Medicare Levy and Medicare Levy Surcharge:
|
Permanent Visa | Permanent visa holders are treated as resident for Australian tax purposes | Tax compliance:
Foreign Assets and Income:
Employment Income
Medicare Levy and Medicare Levy Surcharge:
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Australian Citizen Returning | If you are physically 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 in Australia. Your presence in Australia need not be continuous for the purposes of the 183 day Test. All the days you are physically present in Australia during the income year will be counted. It is important to note that the 183 day Test applies in relation to the year of income, not the calendar year | Tax compliance:
Foreign Assets and Income:
Employment Income
Medicare Levy and Medicare Levy Surcharge:
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3. Calculate your residency status (guide only)
Use our free tax residency calculator here. Our residency calculator will give you a general guide (Not specific tax advice you can rely on) to determine your residency status as either an Australian resident for tax purpose, or a Non-resident for Australian tax purposes. TXM can confirm your residency status and provide specific tax advice to you which you can rely on.
Book Your Free Consultation
There are a number of other tax minimisation opportunities that can be accessed depending on your personal circumstances. We encourage you to make contact with us to discuss your tax position and tax needs. We offer a free initial consultation over the phone to discuss how we could assist you and will provide a fixed fee quote for our services prior to starting work.
Or reach out to us for an obligation free telephone discussion.
ph: +61 8 9467 4939
skype: +61 8 6102 0180
www.txmchartered.com/contact
info@txmchartered.com
Important: The above commentary is for information purposes only and does not constitute tax advice upon which you can rely. If you are seeking formal tax advice, please make contact with us. TXM Chartered Accountants provides nil warranty for any loss or damage caused as a result of relying on the above information.
