Residency for tax purpose – Part 1
Residence and source
As a general principle, an Australian resident is subject to tax in Australia on income from all (worldwide) sources, whereas a person who is not an Australian resident is only subject to tax in Australia on income from Australian sources.
The income tax law contains a comprehensive definition of ‘Australian resident’ in s955-1 ITAA 1997. It also contains some rules dealing with the source of income, but for the most part the source of an amount of income is simply a question of fact determined by applying principles laid down by the courts.
Resident vs non resident
In order to determine your tax rate, you must first determine your residency status as residents and non-residents are taxed differently. Australian residents are taxed on all sources of income at generally lower rates, have tax free threshold, have income tax offsets for example, low income tax offsets, and has to pay Medicare levy. Non-residents are taxed at a higher rate on Australia sourced income, do not have to pay Medicare levy, does not have an income tax threshold and does not have most of the income tax offsets that the residents have.
Generally, you are an Australian resident for tax purposes if you have:
- Always lived in Australia
- Moved to Australia and live here permanently
- Been in Australia continuously for six months or more and for most of the time you have been
- Worked the same job, and
- Lived in the same place
- Been in Australia for more than half of the financial year, unless
- Your usual home is overseas
- You do not intend to live in Australia
- You are an overseas student enrolled in a course at an Australian institution
However, not everyone stays in one country for the entire year, and the ATO acknowledges this matter. Hence, for people who travel from country to country during the year, their residency status is determined based on the purpose of the travel as well as the length of time spent overseas. Some of the most common examples are given below.
So in most cases you are treated as a resident for taxation purposes if you:
- Leave Australia temporarily
- Do not set up a permanent home in another country
- Migrate to Australia and intend to reside here permanently
However, you are treated as a non-resident for taxation purposes if you:
- Are visiting Australia and for most of that time you are travelling and working in various locations around Australia
- Are holidaying in Australia
- Are visiting for less than six months
- Leave Australia permanently
The general principle that a non-resident is assessable on Australian source income is modified extensively by excluding from assessment, and instead subjecting to withholding tax, outbound payments of dividends, interest and royalties.
The general principle that an Australian resident is assessable on income derived from all sources is modified extensively by rules that include, as statutory income, amounts ‘attributed’ from certain foreign companies and trusts, and rules that exempt certain foreign dividend income derived by companies. A credit is available for foreign tax paid on Australian resident’s assessable foreign source income.