Yahoo Finance Major tax factor determining if you get 'raw deal' from ATO. 6 questions to ask
Non-residents get a raw deal when it comes to tax time.
Your tax residency plays a major role in determining how much tax you will pay the Australian Taxation Office (ATO) at tax time.
The ATO first looks at where you live, but there's more to it than meets the eye. Here's how to determine your tax residency status, and how much you can expect to pay.
How the ATO determines your tax residency
The ATO considers the following six factors when they are determining your place of residence:
1. How long you’ve physically been in Australia
This is an important factor when considering whether you reside here, but it is not determinative. Merely staying in Australia is normally insufficient. You must have some connection to Australia that characterises your presence as 'residing' in it.
2. Why you’re in Australia
A resident will usually have an intention to treat Australia, or a place within Australia, as a home at least for the time being, though not necessarily forever.
3. Your behaviour while in Australia
This includes the way you live as part of the regular order of your life. For example, if you enter Australia and take up long-term accommodation, employment, enrol children in school and take part in regular extracurricular activities, this would demonstrate behaviour consistent with residing here, particularly when coupled with other factors such as an intention to make your home here.
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4. Any family, business or employment ties to Australia
The presence (or absence) of your family in Australia is indicative of your connection to Australia. In addition, the term and type of employment or business association you may have will also be relevant. For example, entering Australia to take up an employment contract or to set up a business often results in behaviour that indicates you reside here.
5. Maintenance and location of your assets
Living in a property in Australia that you own or are purchasing suggests establishment of a home in Australia consistent with residing here. Keeping other assets in Australia, such as motor vehicles, superannuation investments and bank accounts, are also indicative of residence.
6. Your social and living arrangements
These are the ways you interact with your surroundings during your stay in Australia, including joining sporting or community organisations, enrolling children in school, redirecting mail to Australia or committing to a residential lease.
If the “resides” test is positive, you are resident in Australia and will be taxed as such. If it is negative, there are then three further tests applied.
1. The domicile test
You are resident if your domicile is Australia unless you convince the ATO that your permanent place of abode is overseas.
2. The 183-day test
You are resident if you are physically present in Australia for 183 days or more in a tax year unless you convince the ATO that your usual place of residence is overseas.
3. You're a member of a commonwealth or public sector superannuation scheme
If you’re a spouse or child under 16 years of a member of a commonwealth or public sector superannuation scheme this also applies.
If any one of these three additional tests is positive, you will be considered a resident. Once the question of residence is settled, this determines the way you are taxed.
Resident vs non-resident: How you’ll be taxed
The key difference is that Australian tax residents are taxed on all of their income and gains, wherever in the world it has its source, while non-residents are only taxed on their Australian-sourced income.
This means residents need to declare on their Australian tax return all dividends on foreign shares, bank interest from foreign bank accounts, foreign capital gains (for example, from the sale of foreign shares or a holiday home) and income from foreign business and employment.
As non-residents are only taxed on their Australian-sourced income and gains, all the above foreign-sourced income does not need to be recorded on an annual tax return and is, effectively, free of all Australian taxes.
When it comes to capital gains tax (CGT), non-residents are only taxed on gains they make on assets that are 'taxable Australian property'. This consists of Australian land interests (such as housing, farmland and mining interests) and a 10 per cent or more ownership interest in a company or unit trust that has Australian land interests that consist of more than 50 per cent of its assets by market value.
Resident vs non-resident: How much tax you pay
Tax residents pay tax at a lower rate than non-residents. The normal rates of tax apply if you are a full-tax resident.
Resident tax rates
Taxable Income | Tax Rate |
$0 - $18,200 | Nil |
$18,201 - $45,000 | 19 per cent |
$45,000 - $180,000 | 37 per cent |
$180,000 and over | 45 per cent |
Non-residents, however, pay tax at different rates. The major difference is that they aren’t entitled to the tax-free threshold and they are taxed at 32.5 per cent from the first dollar earned.
Non-resident tax rates
Taxable Income | Tax Rate |
$0 - $120,000 | 32.5 per cent |
$120,000 - $180,000 | 37 per cent |
$180,000 and over | 45 per cent |
CGT: Non-residents get a raw deal
Non-residents aren’t entitled to many of the CGT concessions and exemptions that apply to residents, which can make the disposal of Australian assets very expensive.
For example, non-residents aren’t entitled to the main residence exemption (MRE), which applies to exempt the sale of the family home from CGT. The only exception is where the individual has been a non-resident for less than six years and the ‘life events’ exemption applies. This exemption applies if there is a terminal illness, death or divorce.
Non-residents also aren’t entitled to the 50 per cent CGT general discount, which effectively halves the rate of CGT paid where the asset disposed of has been owned for at least a year.
Non-residents are also obliged to pay withholding tax to the ATO on property disposals, at a tax rate of 12.5 per cent on the gross proceeds. This applies to real property disposals where the contract price is $750,000 or more.
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