Asset disposals can pay off for clients planning to live overseas for a reasonably lengthy time.
Indeed, if an adviser has a client who is planning to live overseas for, say, more than two years, there may be a tax advantage to being classed as a non-resident for Australian income tax. It could help to establish this if they sold their residence before leaving and made it clear on any paperwork or correspondence that they did not intend to return to live in Australia.
In general, the tax residency of an individual can be important because if a person is classed as a non-resident, they pay Australian income tax only on income earned in Australia, while if they are classed as an Australian tax resident, they pay tax on their worldwide income. Also, for US citizens, being classed as an Australian tax resident results in them paying tax on their worldwide income in both Australia and the US but they receive credits in both jurisdictions for any income tax paid.
When looking at options, it’s important to keep in mind what factors the Australian Tax Office relies on to make a case for people overseas being classed as a resident for Australian income tax purposes. This includes them retaining a property/former home in Australia and direct family members still living in Australia.
It is my experience that the ATO will go to quite extraordinary lengths to prove that someone’s permanent place of abode is really Australia. I know of one case where the ATO relied on details entered on incoming passenger cards that someone who claimed to be a non-resident had completed. As a result of other facts, and because they classed themselves as a resident returning to Australia when visiting, the person was found to be liable for Australian tax on income earned overseas.
Further, someone who has been an Australian resident and is leaving to work overseas for an extended period could find that despite not being in Australia for a long time, they could still be classed by the ATO as a tax resident and liable to pay tax on their worldwide income.
Non-tax residents of Australia pay tax on their employment income without the benefit of the tax-free threshold and the lower 19 per cent marginal tax rate. Instead, they pay 32.5 per cent on all income up to $87,000 and then pay the usual marginal tax rates of 37 per cent and 45 per cent above this.
This tax sting is decreased by them not having to pay the 2 per cent Medicare levy, paying only 10 per cent withholding tax on interest they earn in Australia, and not paying any tax on fully franked dividends.
How the ATO determines residency
There is a general misconception amongst both the public and advisers that an individual’s residency for Australian income tax purposes is based on the number of days they spend in Australia in a year; in fact, there is another test that is applied that can overrule the days in Australia test.
In broad terms, the 183-day test states that if someone is present in Australia for more than half an income year, whether continuously or with breaks, they could be said to be a resident of Australia for income tax purposes; however, it is the domicile test that finally decides whether someone is an Australian resident for income tax purposes. Under this test, a person’s tax residency is decided by the location of their permanent place of abode.
This means someone who was living and working in Australia for 12 months, who retained a residence in another country and intended to return there to live, could make a case for not being an Australian resident. While an Australian who works overseas for two years but intends to return to live and retains their home, could be classed as a resident for tax purposes.
