This determines how the Australian Taxation Office (ATO) handles your taxes. If you’ve always lived in Australia or moved here intending to settle, you’re likely considered a resident. Spending more than half your income year here also counts unless your permanent home is abroad and you have no intention of staying. Overseas students in lengthy courses are treated as residents, too. If you’ve relocated to Australia for the long haul and have established ties, you’re seen as a resident.
Determining Tax Residency
Understanding your tax residency status in Australia involves several tests.
Resides Test
The simplest way to establish tax residency is by residing in Australia. Living in Australia means you’re considered a tax resident, and no further tests are necessary.
Statutory Tests
Three other statutory tests can determine your tax residency status if you don’t meet the residency test.
Domicile Test
This test examines whether your permanent home or domicile is in Australia. You are considered an Australian tax resident if Australia is your permanent home.
The 183-Day Test
This test defines your tax residency status in Australia by examining your physical presence within the country during the income year. If you’ve been in Australia for more than half of the income year, continuously or intermittently, you’re classified as an Australian resident for tax purposes.
Superannuation Test
This test, designed explicitly for Commonwealth government employees working at Australian posts overseas, ensures they are treated as Australian residents for tax purposes.
Why Residency Matters
Recognizing your tax residency status is vital because it substantially affects your tax responsibilities.
Australian Residents
Australian residents are typically taxed on their income from all sources worldwide, including earnings within Australia and internationally. They can utilize the tax-free threshold, permitting a portion of their income to be exempt from taxation. Moreover, they must contribute to the Medicare levy, which finances Australia’s public healthcare system.
Medicare Levy & Medicare Levy Surcharge
The Medicare levy acts like a tax to support Australia’s universal healthcare system. If you’re eligible for free healthcare in Australia (excluding temporary visa holders), you may need to pay the levy once your income exceeds certain thresholds. These thresholds can vary based on your family income and number of children.
Main Residence Exemption
Australian tax residents can sell their primary residence (like a house or apartment) without paying capital gains tax. There’s no limit on the sale amount or time of ownership. Even if you buy a property for a low price and sell it for a substantial profit years later, you won’t be taxed on the gain if you meet the exemption criteria. This exemption has been a topic of discussion as property prices have risen.
Capital Gain Tax Discount
When you sell an asset and make a profit, it’s typically subject to capital gains tax. To encourage long-term investment, assets held for over a year are eligible for a 50% discount on the taxable gain (except for companies). This discount reduces the taxable gain by half before applying marginal tax rates.
Cost Base Adjustments
When you become an Australian tax resident, any assets you own (except your primary residence) may be subject to tax when sold. However, you’re not taxed on the increase in value before you become a resident. Instead, the asset’s cost for tax purposes is adjusted to its market value when you become a resident. This ensures you only pay tax on the increase in value during your residency.
Non-Residents
Non-residents, on the other hand, are typically only taxed on income earned within Australia. They are not entitled to claim the tax-free threshold and are exempt from paying the Medicare levy.
Working Overseas and Tax Residency
Australian residents working overseas’ tax residency status usually remains unchanged unless they sever their ties with Australia. The residence test primarily determines their residency status, with the domicile test as a supplementary consideration.
Changing Residency Status
If your residency status changes during the income year, accurately reflecting this on your tax return is essential. Even if you’ve spent part of the year as a non-resident, you still need to indicate Australian residency on your tax return, which ensures you’re taxed at resident rates with adjustments made for the period of foreign residency.
Tax Considerations for Foreign Residents
Foreign residents do not have the same tax obligations as Australian residents. They are exempt from the Medicare levy and can claim the number of days in the income year that they are not an Australian resident as exempt days on their tax return. After ceasing to be an Australian resident, they do not need to disclose their foreign-source income, and some Australian-sourced income may be subject to different tax treatment.
FAQs
What does being an Australian resident mean for tax purposes?
Being an Australian resident for tax purposes entails being subject to Australian taxation laws on your worldwide income, regardless of its source.
How does one determine their tax residency status in Australia?
Tax residency status in Australia is determined through various tests, including the residency test, domicile test, 183-day test, and superannuation test.
What are the implications of being an Australian tax resident?
Australian tax residents are generally taxed on their global income, are entitled to claim the tax-free threshold, and must pay the Medicare levy, contributing to the public healthcare system.
Can working overseas affect tax residency status in Australia?
Working overseas does not generally change one’s tax residency status in Australia. However, to change one’s residency status, individuals must demonstrate that they have severed their ties with Australia.
How does tax residency status impact tax obligations?
Tax residency status affects the extent of one’s tax liabilities in Australia.
Is an international student in Australia a resident for tax purposes?
An international student who works in Australia are considered resident for tax purposes.
Disclaimer: The above information is not tailored to personal circumstances.
For information relevant to personal circumstances, please book an
appointment with Oracle Immigration Consultant’s expert migration agents in
Australia.
For any inquiries, please contact us at +61 430812158. We are premier Immigration agency and consultancy in Melbourne (Bundoora and Geelong).
