The Australian Taxation Office (ATO) treats individual taxpayers differently based on their residency status. Both Australian residents and non-residents must report wage earnings for the income year to the ATO and pay the required taxes.
However, both residents and non-residents for tax purposes will be subjected to different sets of rules and regulations. In a nutshell, your residency status will have a bearing on the amount of taxes you will pay to the taxman as well as on what you will be allowed to claim as deductions.
The ATO residency is different from the government treatment of residency. For governing purposes, residency is often determined by immigration documents or immigration status. However, for tax purposes, residency is determined more by individual circumstances. If you are in Australia with a working holiday visa, you will be treated as a tax resident even though you are not Australian resident immigration-wise. On the contrary, a person that was born in Australia can be treated as a non-resident for tax purposes depending on their personal circumstances even though that person is considered an Australian citizen by the immigration authorities.
So what does residency and non-residency status really mean for tax purposes?
The Australian Taxation Office Tax Residency Tests
To be treated as a resident for tax purposes, you don’t necessarily have to be a citizen or a permanent resident in Australia. On the other hand, a person holding a long term visa who stays and works in Australia may still be treated as a non-resident for tax purposes under certain circumstances. The ATO applies tax residency on individuals based on the following tests:-
In the domicile test, the individual must have an abode in Australia and they must treat it as their permanent home. If your domicile is in Australia, you are an Australian resident unless you can prove to the ATO that you have a permanent place of abode elsewhere outside Australia.
If a person lives in Australia for a long period of time, they can be considered Australian residents for tax purposes. An Australian citizen living in Australia is automatically regarded as a resident for tax purposes. However, an Australian citizen may still be considered as a non-resident for tax purposes in case they have significant business dealings, livelihood or properties in countries outside Australia. If a person does not meet the domicile test, their residency will be determined by the subsequent tax residency tests.
If you are in Australia for more than half of the income year, you are considered as an Australian citizen for tax purposes. You don’t have to live in Australia continuously for at least 183 days for the 183-day test to apply. Even if you live in Australia with breaks on short bursts of time and these amount to 183 days, you will still be considered an Australian resident for tax purposes unless you can prove to the ATO that you don’t plan to take up residence in the country.
If you are an Australian government employee that is posted overseas and are a member of the PSS or CSS schemes, you will be considered as an Australian resident for tax purposes. The superannuation test does not apply to Australians working on overseas posts that are members of the PSSAP scheme. An Australian that works privately overseas and maintains their superannuation can also satisfy this test. The test assumes that if a person maintains their superannuation, then they regard Australia as their permanent residence and are therefore treated as Australian citizens for tax purposes.
Taxation Treatment of Residents and Non-Residents
The tax residency status of an individual has a bearing on many other obligations including the incomes to be taxed, tax benefits and the amounts to be charged.
What income is taxed?
As an Australian resident for tax purposes, you are required to pay taxes on all income earned irrespective of where the income is derived from. If you are working overseas and are an Australian tax resident, you are required to pay your taxes in Australia even if the income has already been taxed overseas. However, if you are a non-resident for tax purposes, you will only pay taxes on income that is derived in Australia.
How the income is taxed
The ATO has a tax-free threshold of $18,200 so if you are earning less than that, you will not pay any taxes. If you are earning over the tax-free threshold and under $37,000, you will pay taxes at the marginal rate of 19%.
If you are a non-resident, you are taxed at the marginal rate of 32.5% for incomes equal to or less than $87,000. In case your income surpasses this, you will fall under higher tax threshold and be subject to a higher tax rate. Unlike residents, non-residents do not pay the Medicare Levy. On the other hand, if the fail to apply for a Tax File Number, 45% of their income will be withheld by the ATO for tax purposes.
If you are a backpacker or a working holiday-maker, you will be taxed at a marginal rate of 15% up to an income of $37,000 in an income year no matter your residency status. You will pay this tax whether you are a resident or a non-resident for tax-purposes and there is no tax-free threshold for this tax status.
Only residents for tax purposes pay the 2% Medicare Levy. All Australian residents are legally allowed to benefit from Medicare services and incentives. If you are a non-resident, you have to pay for your medical cover out of pocket.
Income from Investments
If you are an Aussie resident for tax purposes and earn an income from your investments, you will be taxed at the marginal rate.
A non resident who earns from their Australian investments will pay a tax of 10% on their investment earnings. However, if you fail to provide an overseas address, your investment earnings will be taxed at 45%.
Residents for tax purposes have access to various tax offsets and fringe benefits that are allowed by the Tax Office. These tax breaks enable residents to lower the tax liabilities every income year. As a non-resident, you will not have access to these tax advantages.
ATO’s definition of residency factors many aspects of your relationship with Australia including community relationships, behaviour, as well as the taxpayer’s attitude during their stay in Australia. It is important to clear the air with regards to your residency status so as not to fall afoul of ATO residency requirements and be riddled with higher taxes and penalties.