Global mobility continues to be an increasing trend. One impact is that individuals who relocate for work may inadvertently change their tax residency status. An individual's tax residency status is important as this affects whether that individual is taxed on their worldwide income from all sources or just on their Australian-sourced income.
An individual's tax liability depending on whether a person is considered to be an Australian tax resident or a foreign resident. Australian tax residents are assessed on income from worldwide sources, while foreign residents are only taxed on Australian-sourced income. Non-residents are subject to higher overall tax rates, without the benefit of Australia's lower marginal tax rate scales.
This article examines the residency test according to ordinary concepts and the three tests under s 6(1) of the ITAA 1936 (the statutory tests). These tests determine whether an individual is a resident of Australia for tax purposes. While this article discusses all residency tests briefly, it will focus on the "ordinarily resides" test as it is the primary test for determining an individual's residency status.
Residency – the basic rules
Generally, an individual will be considered to be an Australian tax resident if they satisfy one or more of these four tests:
- the "ordinarily resides" test;
- the domicile test;
- the 183 day test; or
- the Commonwealth superannuation fund test.
Note: A foreign resident is simply anyone who doesn't satisfy any of the above tests, ie someone who is not an Australian resident.
The "ordinarily resides" test
An individual will be an Australian resident for tax purposes if they ordinarily reside in Australia. As the term "reside" is not defined under Australian tax law, the ordinary meaning of "reside" applies. The Macquarie Dictionary defines "reside" as "to dwell permanently or for a considerable time; have one's abode for a time".
Therefore, in situations when an individual leaves Australia indefinitely or for an extended period, a broad range of factors concerning their absence is considered in determining their residency status. The Commissioner considered the following factors in Taxation Ruling IT 2650 in determining whether an individual ceases to be a resident of Australia.
Intention and purpose of presence
The individual's intention and purpose for leaving or coming to Australia helps determine whether an individual resides in Australia. For example, if an individual leaves Australia for an extended period and does not intend to return at some definite point in time, it is likely that they will be considered a non-resident of Australia. This might occur where an individual relocates to take on a permanent job in the new location for example.
The duration and continuity of the individual's presence overseas
Generally, the longer and more continuous the individual's presence overseas, the more likely it is that the individual will be a non-resident of Australia.
Where an individual leaves Australia for a substantial period of time and establishes a home in another country, that home will represent a permanent place of abode outside Australia. Generally, a period of two years or more would be regarded as a substantial period. However, the duration of the actual or intended stay out of Australia should be considered in light of other factors.
Social and living arrangements
The way individuals interact with their surroundings during their stay in Australia or overseas may indicate residency status. These arrangements may include joining sporting or community organisations, enrolling children in school, re-direction of mail or committing to a residential lease.
Other relevant factors
- The establishment of a home outside Australia would amount to a permanent place of abode in an overseas country.
- Whether the maintenance and location of significant assets (such as real estate and investments) is in Australia or overseas.
- Whether major family and business/employment ties exist in Australia or overseas.
Note: Whether a person resides in Australia is a question of fact and degree. No single factor necessarily determines Australian residency, and many factors are interrelated. The weight to be given to each factor will therefore vary with individual circumstances.
Key cases: FCT v Applegate (1979) 9 ATR 899 and Re The Engineering Manager and FCT [2014] AATA 969 demonstrate that the intention of the person is particularly important in determining residency.
The domicile test
Under this first statutory test, an individual is generally an Australian resident if they have a domicile in Australia, unless it can be established that they have a permanent place of abode outside of Australia.
Broadly, a person's domicile is the place considered by law to be their permanent home. Thecommon law rule is that an individual acquires at birth a domicile of origin and retains the domicile of origin until they acquire a domicile of choice in another country, or until they acquire another domicile by operation of law.
Note: Generally, the Commissioner's view is that a person who intends to be out of Australia for more than two years will be considered to have established a permanent place of abode overseas.
The 183 day test
Broadly, under this statutory test, an individual is an Australian resident if they are physically present in Australia for more than 183 days during an income year, unless it can be established that the individual's usual place of abode is outside of Australia and there is no intention of taking up residence in Australia.
The person's presence in Australia need not be continuous. All the days spent in Australia during an income year are counted for the purposes of the 183 day test.
Note: This test applies based on an income year, not a calendar year.
Commonwealth superannuation fund test
Under the third statutory test, an individual is deemed to be an Australian resident if they are members, (or are the spouse, or a child under 16, of a person who is a member) of specified superannuation funds for Commonwealth government employees.
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© Copyright 2017. All rights reserved. Source: Thomson Reuters. Brought to you by Robert Goodman Accountants.
