Who is an Australian resident for tax purposes?
Working out whether or not you are a resident of Australia for tax purposes can be difficult. Many people believe it is just a matter of how much time you spend out of the country but this is not always the case.
It can be complex, and requires judgement beyond applying a single ‘black and white’ test, which is why we always recommend you discuss your
personal circumstances with a professional!
There are four tests that are used to work out your residency status:
- Resides test - The first test looks at whether you reside in Australia. For example, are you moving out of the country permanently and migrating, or just moving away for a while? The actions you take help determine this test. For example, do you appear to have cut your ties with Australia (sold your furniture as opposed to being in storage, closed memberships, etc.,)
- Domicile test - The second test looks at your where you are living and where you have your permanent home. Someone who was born or migrated to Australia will generally retain their Australian domicile unless they leave Australia permanently. Someone with an Australian domicile will be treated as a resident for tax purposes unless they can show that their permanent home is overseas. There are a range of factors to consider in order to determine whether someone’s permanent home is overseas. For example, is your home overseas permanent or temporary (like a hotel)?
- 183 day test - Assuming you are not already considered to be an Australian resident by the other tests, the 183 day test looks at how long you are physically present in Australia during a particular income year.
- Superannuation test - If you are a current member of certain superannuation funds covering Commonwealth Government employees then you will generally be considered a resident for tax purposes regardless of how long you intend to live overseas.
The residency tests can be confusing. If you are uncertain, you should seek advice to clarify your position.
"I have been living overseas for the last 5 years for work. I am a non-resident for tax purposes but my main residence is in Australia. My house, which I bought in 2005, is being rented out while I am overseas. Now what?"
If you own a property in Australia that used to be your main residence, you can use the absence rule to maintain the exempt status of your property just in case you decide to return to Australia. When you return permanently to Australia and decide to sell, you may be able to access the main residence exemption (or a partial exemption). If you rent out your property while you are away, the absence rule allows you to treat the property as your main residence for up to six years.
If you sell the property while you are a non-resident, you will no longer be entitled to the main residence exemption or a partial exemption unless you enter into a contract and sell the property prior to 30 June 2020. Similarly, if you die while overseas, and your home is sold within two years of the date of your death, it’s unlikely that your beneficiaries will be able to claim all or part of the main residence exemption.
If you intend to return to Australia and become a resident again at some point, there is no change to your position as a result of the new rules. If you remain overseas but enter into a contract to sell prior to 30 June 2020, your position is also unchanged under the transitional rules.
If you remain a foreign resident and sell the property after 30 June 2020, you will not be able to access the main residence exemption in
part or in full.
"My mother lives overseas after retiring four years ago and is a non-resident for tax purposes. The family home in Australia is her main residence. My sister is living in the home rent free. What happens if my mother dies? Can my mother gift the home to her children now and still access the main residence exemption?"
After 30 June 2020, if your mother is a foreign resident for six years or less at the time she passes away, the main residence exemption she accrued continues to be available to the trustee or beneficiaries of the deceased estate that inherit the property.
If the trustee or beneficiaries sell the property within two years of your mother’s death, then the main residence exemption accrued by the deceased applies. If the property is sold more than two years after the date of death then the position is more complex.
If your mother passes away and was a non-resident for tax purposes for more than six years, then the main residence exemption she accrued does not pass to the estate or beneficiaries. However, if your sister inherits all or part of the property and continues to be her main residence then a partial exemption may apply on future sale if she is a resident of Australia at the time of the CGT event.
If your mother gifts the property to her children prior to 30 June 2020 then it may be possible to apply a full exemption under the main residence rules depending on the situation. If the property is transferred to the children after 30 June 2020 then the exemption won’t be available at all.
Please make sure you get advice specific to your personal situation. Chat to one of our brilliant accountants if you're unsure of your tax position or residency status.