Whether or not you’re ‘Australian’ depends on a lot more than where you’re from or whether you feel like an Aussie.
The Australian government doesn’t care about any of that.
In fact, it has strict rules for who can and who cannot claim Australian residency. So make sure you have it straight before you file your taxes.
You want to remain in compliance to avoid any potential fines or penalties.
As far as the Australian government is concerned, you can file in one of three residency categories:
- Australian resident for tax purposes
- Foreign resident
- Temporary resident
In this post, I’m going to focus on what it means to be an Australian resident for tax purposes.
How to tell if you’re an Australian resident for tax purposes
It’s important to the Australian Tax Office (ATO) that you’re appropriately taxed based on where you reside. If you reside in Australia, you must pay Australian taxes.
Whether you were born in Australia or migrated here from another country, if you live here legally and meet the criteria set by the government, you are an Australian resident for tax purposes.
In most cases, if you’ve been in Australia for more than half the tax year, you’re a resident for tax purposes. The only exceptions are:
- If you own a home in another country and claim residency there (that is, you do not intend on living in Australia).
- You are an overseas student. In this case you can enrol in classes here in Australia for more than six months without claiming Australian residency, because you do not have an automatic right to keep living here once your studies end.
There are a number of tests you can take to determine your Australian residency.
The first is definitely the simplest. It’s called the resides test.Do you reside in Australia? If yes, then you’re considered an Australian resident for tax purposes. Your testing ends here.
If you haven’t satisfied the resides test, you may still be a resident.In this case, you may take the domicile test. This will determine whether your permanent home is in Australia or elsewhere. The 183-day test will determine whether you have been in Australia for half the income year. If yes, you’re a resident.
Superannuation TestMost people won’t need to worry about the superannuation test, but if you happen to be a Commonwealth government employee working at an Australian post overseas, you are also considered an Australian resident.
Why does Australian residency matter for tax purposes?
If you’re an Australian resident, you’re taxed on all income earned, regardless of where it comes from.
So if you’ve worked your entire life and receive a pension from overseas, you’re responsible for paying tax in Australia on that income as an Australian resident.
If you’re not considered an Australian resident for tax purposes, you’ll only be taxed on the income you earn in Australia.But there’s something else you should know...
If you earn income in Australia but are not a resident, you do not qualify for the tax-free threshold.
That’s a pretty big deal.
Use our tax calculator to calculate income tax payable as an Australian resident for tax purposes with the tax-free threshold, or as a foreign resident.
What about Australians working overseas?
If you’re an Australian working overseas, you’ll still have to pay taxes on that income to Australia.
In order to change your status, you’ll have to completely sever your relationship with Australia. That’s right. You will have to break up with your homeland – or you could end up paying double taxes on your income.
In order to prove you’re not an Australian resident for tax purposes, you must go through the residency tests. And those tests must determine that you’re no longer a resident.But don’t worry...
You can still spend time in the land you love. As long as it’s not for half the tax year or more. In this case, you won’t need to claim your foreign income on your Australian tax return.
As a foreign resident, you also won’t be responsible for the Medicare levy of two percent on your income. You will, however, have to pay taxes on Australian-earned income, including employment and rental income.
And you’ll be responsible for tax on Australian pensions and annuities and capital gains on any Australian-earned assets.
Rules for temporary residents
If you have a temporary Australian visa and you aren’t married to an Australian resident, you’re considered a temporary resident for tax purposes.
In this case, you will need to declare any income you earn from Australian sources – and income you earn anywhere else for the duration of your visa.
So again, if you have a pension from elsewhere, you’ll pay taxes on it in Australia during the time your visa is active.
There are benefits and drawbacks to being an Australian resident for tax purposes, depending on your situation.
Only Australians can take advantage of the tax-free threshold, which is a major benefit. But if you share your time on another continent and earn income there, Australian residency may not be as appealing, since you’ll have to pay tax on foreign income here too.
Cross border tax can get pretty complicated, so be sure to talk to your tax professional if you have any questions.