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Resident vs non-resident: This is why it matters for your taxes

Compilation image of crowd of people crossing the street and ATO logo
Tax time can look very different for a resident versus non-resident of Australia. (Source: Getty)

It sounds like such a simple question but determining whether you’re actually a resident of Australia for tax purposes can be frustratingly difficult, and depending on the answer, the way you are taxed can change dramatically.

Why does it matter?

The law treats residents and non-residents differently.

Australian residents are generally taxed on all of their worldwide income. Non-residents are taxed only on income sourced in Australia. The marginal tax rates are different for incomes below $45,000, and the effective tax rates are much higher for non-residents.

Read more from Mark Chapman:

If your residency status changes during the tax year from resident to non-resident, your changed status is taken into account by a pro-rata adjustment to your tax-free threshold.

Am I a tax resident?

At its simplest, the country where you are resident is the country where you normally live. Unfortunately, in expressing that concept in tax law terms, matters get more complicated.

The primary test applied by the Australian Taxation Office (ATO) is the ‘resides’ test. This simply applies the ordinary meaning of the word ‘resides’ to your situation and if you ‘reside’ in Australia, you are a tax resident here.

There is no further definition of the word ‘resides’ in tax law but the Shorter Oxford Dictionary defines reside as: “ dwell permanently, or for a considerable time, to have one's settled or usual abode, to live, in or at a particular place…”

In determining whether you reside here, the ATO will weigh up numerous factors including:

1. The intention or purpose of your stay

If you intend to stay in Australia, you may be regarded as non-resident if the actual duration of your stay is quite short (for example, you might come here with the intention of living here permanently, but a family emergency may force you to return for good to your country of origin after three months).

Similarly, you may come to Australia with no intention of staying but the duration of your stay, combined with the settled nature of your living arrangements, may mean that you are regarded as a tax resident.

The purpose of your stay will be important; somebody who comes here for permanent employment will be resident; someone who comes here for a short holiday will not.

2. Family and business/employment ties

The presence of family members and settled employment are important. If your family is here and your job is here, that’s a strong indicator of residency.

3. Maintenance and location of assets

If you have assets such as a house, bank account, car, etc, in Australia, these are all indicators of residency.

4. Social and living arrangements

The place where you carry out the ordinary course of your life will be an indicator of residency. So community and social links, friendships, and use of local services will all be taken into account.

5. Physical presence in Australia

It might seem obvious that to be resident in Australia you need to be physically present here but it isn't always cut and dried.

The ATO – as a rule of thumb – regards people who are here for more than six months as a resident but you can be resident before the six-month period is up if the other factors indicate that it is the case.

None of the above factors in themselves are determinative. In judging your residency, the ATO will look at all of the factors above and make a balanced judgment based on your particular facts and circumstances.

As a general rule, your actual nationality or citizenship is irrelevant in determining residency and so is the visa you come to Australia on.

Man holding his head in anguish
Tax time headache: It can be difficult to get your head around what applies to you and your income at tax time. (Source: Getty)

In addition to the ‘resides’ test, there are three other statutory tests which apply to working out if you are resident. If the resides test tells you that you are resident, you need look no further but if the resides test tells you that you are not resident, you should consider whether any of the additional three tests applies:

1. The domicile test

Domicile is a slippery concept imported from UK law. Your domicile is essentially the place that you call home, even if you don’t currently live there. This concept catches many Australians who live overseas – some for quite long periods – because they always intend to return to Australia at some point and hence they continue to be regarded as Australian domiciled, and therefore tax resident. If your permanent place of abode is outside Australia and you have a permanent place of abode abroad, you are not domiciled here.

2. The 183 day test

If you’re actually physically here for more than 183 days in a year – whether continuously or not – you’ll be regarded as an Australian resident unless you can prove your usual place of abode is outside Australia and you have no intention of taking up residence here.

3. The Superannuation test

You are deemed to be resident if you are an eligible employee for the purpose of the Superannuation Act 1976 or are the spouse or a child under 16 years of age of such a person.

In plain English, that test applies to Australian government employees who may be working long-term overseas, such as diplomatic staff, and ensures that they continue to be Australian tax resident even though their work with the government keeps them overseas for many years.

The ATO has applied the residency rules to a number of the common scenarios for incomers to Australia and their verdict is set out in the table below:

(Source: Supplied)
(Source: Supplied)

Note that tax-residency is normally quite distinct from immigration-status residency, except in relation to working holidaymakers where the rules are targeted specifically at visa categories 417 and 462.

Residency – the advantages and disadvantages

Non-residents do not pay the Medicare levy (and so cannot claim Medicare benefits), and will have 10 per cent of any interest earned from Australian bank accounts withheld for tax.

The interest is not included in assessable income, but you will need to provide an overseas address otherwise tax will be withheld at a much higher rate.

The key differences between the way residents and non-residents are taxes are set out here:

(Source: Supplied)
(Source: Supplied)

What about working holidaymakers?

These taxpayers are taxed at a rate of 15 per cent on all income from the first dollar up to $45,000. For income from $45,001 onwards, normal tax rates apply.

These rates apply regardless of whether you satisfy the normal tests for residency or non-residency outlined above. In other words, the new rules override the current residency rules.

What about temporary residents?

Each year, thousands of people come to Australia on temporary residence visas, often linked to their employment. So far as the ATO is concerned, these temporary residents are residents for tax purposes, giving them access to the more favourable tax rates for residents.

Crucially, however, special rules apply to any foreign income earned by temporary residents. Unlike other tax residents, temporary residents do not have to pay tax on their foreign income, with the exception of certain short term foreign employment income.

In addition, temporary residents do not have to pay capital gains tax if they dispose of an asset whilst in Australia, unless the asset is taxable Australian property (such as an Australian investment property).

You are a temporary resident if:

  • You are in Australia on a temporary visa.

  • You (or your spouse) are not an Australian resident within the meaning of the Social Security Act 1991. This means that whilst you (or your spouse) reside in Australia, you are not an Australian citizen or a permanent resident.

How to calculate your tax refund

Calculate the tax refund you could receive after tax deductions with H&R Block's easy-to-use, accurate tax refund calculator.

If you have any doubt at all about your status, we strongly advise you to consult one of our professional tax agents at H&R Block. Our expert advisers are here to help you, and we'll support you through the process every step of the way.

Mark Chapman is director of tax communications at H&R Block.

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