Are you an Australian Tax Resident? An examination for Australian Senior Executives living in Asia

Written by Dale Hoy February 2018

This article is an extract from: 7 Critical Financial Strategies for Australian Senior Executives living in Asia (Feb 2018 edition) by Dale Hoy.

Did you know?

It is possible that you may be a tax resident of two countries simultaneously. This is particularly a problem if you live in Hong Kong due to the absence of any Double Tax Agreement (“DTA”) between the Australian Government and the Government of the Hong Kong Special Administrative Region. 

If you are a dual resident of a country with a DTA with Australia (such as Singapore, China, Indonesia, Japan, Korea, Malaysia, Philippines, Taipei, Thailand and Vietnam), the employment income articles of the DTA may exempt your foreign employment income from Australian tax. 

It is possible you can be an Australian resident for tax purposes without being an Australian citizen or permanent resident. 

It is possible for a husband and wife to leave and return to Australia at the same time and have different Australian tax residence status. 

It is also possible that a short term transfer to another location after being a non-resident previously can automatically trigger Australian residency. 

There is a significant risk of a “residency audit” for Hong Kong compared to all Western World countries. Foreign nationals working in Australia are automatically exposed to full residence taxation in the event of a relationship with an Australian citizen or Permanent Resident. 

What are the basic rules? 

The question of your Australian tax resident status is probably the most important question you need to ask yourself when you are planning to move overseas and returning to Australia. 

As an Australian resident, you are taxed on your worldwide income/capital gains. If you cease to be an Australian resident you are taxed on your Australian sourced income and Capital Gains Tax is limited to Australian property. In your offshore location, you may find you are taxed only on your employment income and often at much lower tax rates. Meaning you are free to structure your investments offshore AND in Australia in a way that legally avoids/reduces tax liability.

Tips for what you must do now 

There are a number of tests the Australian Tax Office will use to determine whether or not you are an Australian resident for tax purposes. You are an Australian tax resident if you satisfy any of the following tests: 

  1. The Reside Test
    You are an Australian tax resident if you reside (live) in Australia.
  2. The Domicile Test
    If you do not reside in Australia you may still be treated as a tax resident if your Domicile is Australia unless the Commissioner is satisfied you have established a permanent place of abode outside of Australia.
  3. The 183 Day Test
    If you are actually present in Australia for more than half the income year, whether continuously or with breaks, you may be said to have a “constructive residence” in Australia, unless it can be established that your usual place of abode is outside Australia and you have no intention of taking up residence here.
  4. The Superannuation Test
    This test is designed to ensure those Commonwealth Government employees (and their spouse) working at Australian overseas posts are treated as Australian residents. 

As an Australian expatriate, your tax residency status very much depends on your personal facts and circumstances and there are no conclusive rules for determining your tax residency. However, as an Australian expatriate, the domicile test will generally be the most relevant test. To avoid being considered an Australian tax resident you need to satisfy the Commissioner that your permanent place of abode is outside Australia. 

In determining whether you have established a permanent place of abode outside of Australia, the Commissioner sets out in his Income Tax Ruling IT 2650, a number of factors that need to be considered.

The weight given to each factor will vary with the individual circumstances and no single factor is considered conclusive. The factors you need to consider are:

  • The intended and actual length of stay in the overseas country.
  • Any intention to return to Australia at some definite time or travel to another country.
  • The establishment of a home outside Australia.
  • The abandonment of any residence in Australia.
  • The duration and continuity of the persons presence in the overseas country and
  • The durability of association the person has with a particular place in Australia.

Case Study 

The Australian Tax Office web site provides an example of Bronwyn who has been determined to be a non-resident of Australia. 

Facts 

Bronwyn, an Australian resident has received a job offer to work overseas for three years, with the option to extend for another three years. 

Bronwyn, her husband and three children decide to make the move. They retain their property in Australia, as they intend to return one day. The house will be rented out during their absence. 

Bronwyn is uncertain whether she will extend the option to stay after three years and will decide later, depending on how the family like the life there. 

While overseas, they will rent a house with an accommodation allowance provided under her contract. 

Outcome 

Bronwyn is considered a NON-RESIDENT for Australian tax purposes. It was concluded that the above four residency tests were not satisfied, in particular: 

  1. The Resides Test
    The length of Bronwyn’s physical absence from Australia and the surrounding circumstances (such as establishing a home overseas with her family and renting out her family home in Australia) are not consistent with residing in Australia, even though she retained the family home in Australia.
     
  2. The Domicile Test 
    1) Her permanent home is outside Australia due to the length of time she has committed to spending overseas establishment of a home overseas and her family accompanying her.

    2) The fact that she will not be selling the home in Australia, although relevant is not persuasive enough to overcome the finding on the basis of other factors.

    3) It is arguable that she has abandoned her home in Australia for the duration of her stay by renting it out.
  3. The 183 Day Test
    Not applicable.
  4. The Superannuation Test 
    Not applicable.

Critical Questions 

Residency (Australian and host country). 

The High Court of Australia ruled long ago it is a question of fact of where you live and therefore reside for tax purposes. The High Court also ruled an individual can reside in more than one place, so you need to be mindful if you reside in say Hong Kong and you maintain your family in your Australian home you may be a dual resident. 

So what’s the practical approach if you are “domiciled” in Australia? 

You really need to depart Australia with your family and dispose of that Australian home (either sell or let to long term tenants). 

But the tax laws have tentacles and you must also satisfy the Commissioner you have established a “permanent place of abode outside Australia”

The Federal Court long ago ruled this means you must have a place of abode offshore and it will be permanent in the sense of a substantial period of time (as opposed to permanent in the sense of forever) being for a period of at least 2 years. 

And yes, you can visit Australia while residing offshore, but you cannot live here. 

Try this simple straight line test

Your position (at one end) is you reside offshore and you visit Australia on business trips or annual holidays etc. If that’s so you should retain your non-resident status. 

But consider what the Commissioner may think, particularly if you have family and/or a home in Australia. He may consider you reside in Australia and you commute to work offshore (at the other end of the straight line test). It’s a question of fact and maybe you are in the middle of this straight line. That’s why you need good advice before departing and while you are offshore.

[This article is an extract from: 7 Critical Financial Strategies for Australian Senior Executives living in Asia (Feb 2018 edition) by Dale Hoy.

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