Australia taxes you differently depending on whether you are an Australian tax resident or a non-resident. These differences can make a significant impact on the after tax proceeds one receives. A reader who has always lived in Australia may brush past this article thinking it does not affect them. However, this is short-sighted. Many people may spend extended periods of time overseas during their lifetime. One's child may migrate overseas for job opportunities or love. There are tax planning opportunities and pitfalls when one changes one's tax residency.
Additionally, if you want to gift an asset to an Australian non-resident beneficiary under your will it is important to understand the tax consequences of such a gift. This includes not only tax on the initial gift but tax on Australian sourced income that may be derived by the non-resident later on (e.g. dividend on a gift of Australian shares).
How do I know if I am an Australian tax resident?
It is important to know whether you are an Australian tax resident or a non-resident. Nothing can be worse than leaving Australia and ceasing to pay Australian tax because you believe that you are a non-resident, and then the Australian Taxation Office (ATO) comes knocking.
Broadly, you will be an Australian tax resident if any of the following applies:
- you ordinarily reside in Australia;
- your domicile is Australia unless you convince the ATO that your permanent place of abode is overseas;
- you are physically present in Australia for 183 days or more in a tax year unless you convince the ATO that your usual place of residence is overseas; or
- you are a member of a Commonwealth or public sector superannuation scheme, or you are a spouse or child under 16 years of such a person.
The residency tests can be difficult to apply since they are based heavily on facts. For instance, the domicile test can possibly catch an Australian resident who leaves Australia for a period of time but ultimately intends to come back to Australia (such that they have not changed their Australian domicile). If such a person never plants social and economic roots outside Australia (e.g. lives in temporary accommodation and works in non-permanent jobs) there is a risk that they may still be an Australian tax resident even if they are outside Australia for years.
If you want to leave Australia and cease your Australian tax residency then there are steps you can take to strengthen the position that you have ceased Australian tax residency, and you should seek advice on this point prior to leaving Australia.
How does Australia tax residents and non-residents?
Generally, an Australian tax resident is taxed on their worldwide income and capital gains regardless of source, whilst a non-resident is normally only taxed on their Australian sourced income.
The marginal tax rates which apply to a resident and a non-resident are different. Significantly an Australian tax resident can access an $18,200 tax free threshold and a lower 19% marginal tax rate for income below $37,000, which is not available to non-residents.
Australian tax residents are liable to a 2% Medicare levy whilst non-residents who cannot access Australian Government health benefits do not have to pay this levy. Certain tax offsets are also only available to Australian tax residents (e.g. franking credit refunds).
Whilst an Australian tax resident is assessed on their worldwide income at their marginal tax rates, a non-resident may be subject to final withholding taxes on certain income. These withholding taxes are final in that a non-resident is not required to lodge an Australian tax return in relation to such income - the withholding in itself is enough. The rate of withholding may be reduced under a double tax agreement (DTA) which Australia has entered into with the country in which the non-resident is tax resident.
The following table outlines general withholding tax rates:
|Income Type||Withholding tax rate||Usual reduction under DTA|
Withholding tax only applies to unfranked dividends. No withholding tax applies where a non-resident receives a fully franked dividend. In that case the non-resident effectively bears the 30% company tax because they cannot claim the benefit of the franking credits attached to dividends. This contrasts with an Australian tax resident who can claim the benefit of franking credits.
Non-residents are only subject to Australian capital gains tax (CGT) on gains they make on assets that are 'taxable Australian property'. Broadly, 'taxable Australian property' consists of Australian land interests and a 10% or more ownership interest in a company or unit trust that is "land rich". Broadly, a company or trust is "land rich" if more than 50% of its assets by market value comprises Australian land interests.
From 8 May 2012, non-residents cannot claim the benefit of the 50% CGT discount. This is a significant disadvantage. To the extent that a non-resident owned a capital asset before 8 May 2012 then they may claim a pro-rata 50% CGT discount. Non-resident individuals are denied the ability to claim the main residence exemption on the sale of their Australian home if they enter into the contract of sale at or after 7.30 pm (AEST) on 9 May 2017. The fact that the non-resident is an Australian citizen or was an Australian tax resident during most of the time they owned the home is irrelevant. Being a non-resident at the time of signing the sales contract is enough to lose the exemption under the proposal.
There is a transitional rule which provides that if the non-resident bought their home before 9 May 2017 and sells it before 30 June 2020, then they can still claim the main residence exemption even if they are a non-resident at the time of sale.
After 30 June 2020 a non-resident can only access the main residence exemption if they fall within the 'life events' exception. That is, the non-resident must have been a non-resident for a continuous period of six years or less and during that time one of the following has occurred:
- terminal illness of the individual, their spouse or minor child; or,
- the death of an individual's spouse or minor child; or,
- divorce and the sale were part of a family law split.
The denial of the main residence exemption to non-residents means that Australian resident individuals who are contemplating moving overseas need to seriously consider selling their home before they migrate from Australia.
Estate planning issues and residency
A gift of an asset that is not taxable Australian property (e.g. shares in a non-land holding company) under a will to a non-resident beneficiary can trigger CGT. This CGT liability can be prevented by taking certain steps, for instance gifting the asset to an Australian tax resident testamentary trust which includes the non-resident as a beneficiary.
There is much more to the different taxation of Australian tax residents and non-residents. Ceasing one's Australian tax residence can lead to deemed disposals for Australian capital gains tax purposes. Additionally, there is a special class of persons who fall within the category of "temporary residents" who are eligible for Australian tax concessions. These issues have not been explored in this article.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.