Are You a Foreign Resident For Tax Purposes?

Are You a Foreign Resident For Tax Purposes?

Read the in-depth guide and see if you pass the four ATO residency tests.

Figuring out if you’re a foreign resident for tax purposes can be a minefield. The short answer is – it all depends. I’ve prepared this guide to help you make sense of your tax residency.

Have you got a permanent home base overseas? Do you have assets in Australia? How often do you visit your Australian friends and family? Are you a digital nomad that moves from place to place? Did you cancel your gym membership, private health insurance, and utilities? 

All of these questions can affect your tax residency.

Correctly understanding your tax residency is important if you’re an Australian expat or digital nomad because it can greatly reduce your tax burden (by up to 30-40% depending on where you live and how much you earn).

If you’re a non-tax resident of Australia, you’ll usually only pay tax in Australia on your Australian-sourced income. This includes Australian rental income, bank interest, and dividends. 

The good news? Foreign income is usually excluded and may end up being taxed at a much lower rate depending on where you live overseas.

The Four ATO Residency Tests

What is a tax resident of Australia? Someone who resides in Australia, has an Australian domicile or origin, and who spends more than 183 days in the country. It also includes holders of commonwealth superannuation – both CSS or PSS schemes.

What is a non-tax resident of Australia? Someone who doesn’t reside in Australia, who has a foreign domicile or origin, who spends less than 183 days per year in Australia, and who doesn’t have any commonwealth superannuation.

So what are the four ATO residency tests that determine whether someone is a tax resident of Australia? 

1. Resides Test
2. Domicile Test
3. 183-Day Test
4. The Commonwealth Superannuation Test

Let’s explore what each of these tests are and how they might apply to you.

1. Resides Test

The main test when determining if you’re a foreign resident for tax purposes is the Resides Test. It looks at your overall situation to see if Australia is still the place where you live (or have a significant presence). The Australian Taxation Office (ATO) looks at several factors to decide if you “reside” in Australia.

Key Factors:

• Physical Presence: Where are you physically located? And where do you spend most of your time?
• Intention and Purpose: Do you intend to move overseas permanently or will you return to Australia after one year abroad?
• Family: Are your spouse or children still located in Australia?
• Lifestyle: Do you have a social life overseas where you live? Have you signed a lease on your house or apartment? Do you own a car?
• Assets: If you own a house, apartment, or other assets in Australia, the ATO may see you as a tax resident, as you still have strong economic ties to Australia.
• Business connections: Do you have a business or employment in Australia? Or is your business located overseas?

If you’re not sure that you pass this test – don’t worry. Keep reading to see if you pass the remaining three residency tests. Tax residency is all about your intention. And your actions show the tax office what your intention is.

Example:

If you’re an Australian expat working overseas but still own a home in Australia, regularly visit friends and family, and have a business in the country, you may still be considered a resident. On the other hand, if you’ve rented out your property, sold your car, moved your business overseas, and live full-time in another country, you’ll likely qualify as a non-tax resident of Australia.

Considerations:

To pass the Resides Test and be classified as a non-resident, you need to clearly cut your residential ties with Australia. This could include:

• Selling or renting out your Australian home.
• Closing or reducing your Australian bank accounts.
• Cancelling your health insurance, gym membership, and other subscriptions.
• Removing yourself from the Australian Electoral Commission. 
• Moving your business or investments overseas.
• Demonstrating strong ties to the country where you now live, such as employment, friends, residency visas, or rental contracts.

By showing that your life is now based in another country, you can improve your chances of being classified as a non-resident for tax purposes.

B. Domicile Test

The Domicile Test looks at where your permanent home is to determine if you’re an Australian tax resident, or a foreign resident for tax purposes. Even if you live abroad, you could still be considered a resident if Australia remains your “domicile” (your permanent home).

Your domicile includes a place: 

• considered by law to be your permanent home
• More permanent than where you reside.

Your residence can be separate from your domicile. You could be a resident of multiple places but you can only have one domicile at a time.

Domicile is either by origin / birth, by choice, or by operation of law. Australian expats and digital nomads have an Australian domicile by birth, but they can change their domicile if they permanently relocate overseas, migrate to a new country, and set up a permanent place of abode.

Permanent Place of Abode

Permanent does not mean forever. However, it should be for a long time, usually two or more years.

Your place of abode is your residence. This is where you live, where your family lives, and where you sleep at night on a regular basis. 

Domicile is meant to be permanent, so it doesn’t suit a digital nomad who changes countries every 1, 3, or 6 months. Ideally, you’ll put down roots, build a social community, sign a lease, and work towards your permanent residence in a foreign country.

To change your domicile, you need to create a new home base in a country overseas. Otherwise, you’ll retain your domicile in Australia, and be taxed on 100% of your income in Australia.

Key Factors:

• Permanent home location: The ATO checks where your true home is. If Australia is still considered your permanent home or domicile, you may be considered a resident for tax purposes.
• Intention to remain overseas: If you plan to live abroad long-term or permanently, this may mean you’re a foreign resident for tax purposes
• Plans to return to Australia: If you plan to return to Australia in the near future (6-12 months) or keep ties like owning property, bank accounts, health insurance, or family, you will possibly be seen as a tax resident.

Example:

If you’re an Australian expat working on a long-term contract overseas but still own property in Australia and have plans to return after your contract ends in 12 months, the ATO will likely consider you a tax resident. Especially if your spouse and children remain in Australia. Keeping strong connections to Australia affects your tax residency status, even if you’re living and working overseas.

Considerations:

Similar to the Resides Test”, to pass the Domicile Test and be classified as a foreign resident for tax purposes, it’s important to clearly show that your permanent home is overseas.

Here are some steps you can take:

• Sell or rent out your Australian property: Selling your home in Australia shows that your domicile is no longer in the country.
• Notify the ATO on your tax return: By notifying to ATO or AEC about your change of address, you show that you’re planning a permanent move overseas. Your CGT assets may fall under the deemed disposal rules, with exit taxes payable on your departure.
• Move your personal assets abroad: This may include setting up bank accounts, companies, investments, or renting a property abroad in the country where you live. Creating ties to the country you live in will help show your intention to live overseas long-term.
• Avoid plans to return: If you intend to live abroad permanently, avoid making future plans that involve moving back to Australia. Note: you can still make contributions to superannuation without triggering your tax residency.

By establishing your permanent home overseas and cutting ties to Australia, you can increase your chances of passing the Domicile Test and being considered a foreign resident for tax purposes.

C. 183-Day Test

The 183-Day Test is a simple way to check if you are a tax resident of Australia. If you spend 183 days or more in Australia during a tax year, either continuously or with breaks, you are automatically considered a resident for tax purposes. This means even if you live abroad, staying in Australia for this long in one year could trigger your tax residency.

Exceptions:

There is an important exception to the 183-day rule. If your “usual place of abode” is outside Australia, and you don’t intend to make Australia your permanent home, you might still be considered a non-resident, even if you stay for more than 183 days. The ATO will look at where you live most of the time and where your real ties are.

Example:

Imagine you’re an Australian digital nomad who spends 6 months in Australia and 6 months abroad each year. If your main home and work life are in another country, and you only return to Australia temporarily (like to care for a sick parent), you may avoid becoming a tax resident, despite staying over 183 days.

Considerations:

To avoid becoming a tax resident under the 183-Day Test, you need to manage your time in Australia carefully. 

• Limit your time in Australia: Keep your stays under 183 days per tax year (less is better).
• Maintain strong ties to another country: Show that your main home and lifestyle are permanently based in another country.
• Plan your visits: If you want to spend significant time in Australia, consider spreading your stays across different tax years.

To ensure your status as a foreign resident for tax purposes, be mindful of how long your visits to Australia are each tax year. Otherwise you run the risk of becoming a tax resident and paying tax on 100% of your income.

D. The Commonwealth Superannuation Test

The Commonwealth Superannuation Test only applies to current or past government employees. 

You will automatically be a tax resident of Australia if you or your spouse are a contributing member of a Commonwealth Government superannuation fund, including CSS or PSS schemes. It does not apply to members of the PSSAP scheme. This test applies even if you live and work overseas.

Who It Affects:

This test impacts Australian government employees working abroad. If you’re a public servant or have a spouse who contributes to a government super fund, you will be considered a tax resident of Australia, regardless of where you live.

Example:

If you’re an Australian diplomat or public servant on assignment overseas, you are still considered a tax resident under this test because of your commonwealth superannuation contributions.

Considerations:

• Check if this test applies to you: If you or your spouse are employed by the Australian government and contribute to a Commonwealth super fund, you will be an Australian resident for tax purposes.
• Understand your obligations: If this test applies, you will need to continue paying Australian tax on your worldwide income, even while living overseas.

Next are some key tax considerations to be aware of when living or relocating overseas.

Key Tax Considerations for Australians Living Overseas

If you’re permanently living or relocating overseas, it’s important to cut as many ties as possible with Australia. Otherwise, you could end up paying tax in both Australia and in your destination country (unless they have a tax treaty, more on that in a moment).

If you’re not planning to return to Australia for 2+ years, here are some things to consider when living overseas:

1. Ties to Australia

Maintaining strong ties to Australia, like spouse and children, real estate property, a car, or business interests, can complicate your tax residency status. The more ties you have to Australia, the harder it is to prove your non-tax residency. The less ties you have to Australia, the more likely you’ll be a foreign resident for tax purposes. Unfortunately, it’s not black and white.

So, if you’re permanently moving overseas (or if you already live overseas), it’s time to tie off all your loose ends:

• Sell or rent out your real estate property in Australia.
• Notify the ATO or AEC that you’re moving overseas (and don’t use Medicare or renew your drivers license when you go back for a visit).
• Update your bank account addresses to overseas, as they will need to withhold taxes on your behalf.
• Sell your car and cancel your subscriptions (gym, phone, internet, utilities and health insurance) and any other Australian-based expenses.
• Move your business overseas and set up a US LLC for receiving foreign payments.
• Consider applying the deemed disposal rules and paying exit taxes when you leave Australia. This means any future capital gain won’t be taxable unless you return to Australia.

Once you’ve relocated to your new location overseas, it’s important to set up a permanent place of abode:

• Sign a 6-12 month lease contract for your new house or apartment.
• Apply for a 12-month working visa or digital nomad visa.
• Join some social groups and meet new people.
• Buy furniture and bedding for your new house.
• Get a phone plan and connect utilities (electricity, gas, internet).
• Enrol your children in school (if needed).

2. Australian Tax Treaties

Australia has tax treaties with many countries. These agreements help prevent you from paying tax in both Australia and the country where you now live.

If you are a resident of another country that has a tax treaty with Australia, you likely won’t have to pay tax in both countries on the same income.

However, if you live in a country that doesn’t have a tax treaty in Australia, and if the ATO considers you to be an Australian tax resident, you could be up for double taxes.

3. Record Keeping

To prove that you’re a foreign resident for tax purposes, you need strong documentation to back it up. The ATO may ask for proof of your life overseas.

Documents to keep:

• Travel records (e.g. flight details).
• Foreign employment contracts or client records if you’re a freelancer.
• Overseas accommodation details, e.g. rental agreements or property titles.
• Health and travel insurance documents.
• Foreign company documentation and bank accounts.
• Visa approval letters.

You can also highlight your lack of spending in Australia through your Australian bank accounts (if you still have them).

4. Temporary vs. Permanent Moves

The length of time you plan to stay overseas greatly impacts your tax residency. Do you plan on going for 6-12 months? 3-5 years? Forever?

• Short-term assignments: You will likely still be considered a tax resident of Australia if you’re only overseas for a short amount of time (e.g. a 1-year secondment, or semester abroad). 
• Permanent relocations: Moving abroad permanently (2+ years) increases the likelihood that you’ll be considered a foreign resident for tax purposes.

If you move back to Australia in the future, you may become a tax resident again, so it’s important to be aware of the rules and tax consequences before you return to Australia. Doing so could save you thousands in unnecessary taxes.

5. Capital Gains Tax (CGT)

As a non-resident, you may need to pay Capital Gains Tax (CGT) on certain Australian assets. Usually, when you depart Australia permanently, it’s considered to be a “deemed disposal” on any assets that you own (except real estate property). 

Deemed disposal means you are considered to have sold your assets on the day you leave Australia (but you don’t have to actually sell them).

Then, you pay CGT to the ATO on the profit of your assets. This may be worth doing so that any future capital gain you make while living overseas is considered non-taxable in Australia (providing you’re a non-tax resident). 

If you live in a country that doesn’t tax capital gains you could effectively avoid paying CGT on your future asset growth. If you don’t do a deemed disposal on your assets, the ATO will charge you CGT when you sell your assets (even if you’re still living overseas). Note: deemed disposal doesn’t apply to real estate property.

To apply for deemed disposal, just record the capital gain in your tax return using the current market values.

Impact:

• Non-tax residents are subject to CGT when selling property, shares, or other assets in Australia.
• Exemptions may apply if you purchased the assets after you became a non-tax resident, so it’s important to review your assets before / after you leave Australia.

Common Mistakes to Avoid

Here are some common mistakes that Australian expats make while living overseas, resulting in excess taxes, penalties, and ATO interest.

1. Misunderstanding the Criteria of the Four Tests

It’s easy to misinterpret the four tests (Resides Test, 183-Day Test, Domicile Test, and Commonwealth Superannuation Test). Some Australian expats believe they’re a foreign resident for tax purposes without understanding the rules. It’s important to get this right otherwise you could be liable for ongoing Australian taxes. 

Be sure to review the tests and make sure you know which test applies to you and how to meet its criteria. Keep documentation and stay up to date with changing ATO guidelines. If in doubt, seek professional advice or reach out to Adventure Tax for assistance.

2. Overlooking Australian Income Sources

Some Australian expats don’t realise that all Australian income needs to be reported to the ATO and is taxable in Australia. This includes any bank interest, dividends, rental or investment income you earn while living overseas. You’ll need to report this income on your annual tax return every year while living overseas (even if it’s only a few dollars). 

If you have a HELP or HECS debt, you’ll need to report your total foreign income and make repayments to the ATO every year. 

3. Failing to Meet Australian Tax Reporting Obligations

Even if you qualify as a foreign resident for tax purposes, failing to properly report your Australian-sourced income can lead to penalties. You’ll need to keep up with your tax reporting to avoid fines and legal issues while living overseas.

This is especially important if you plan to make superannuation contributions while living overseas, as these will need to be reported on a NOI super form and also to the ATO each year. There are limits on how much to contribute to super, and from 1 July 2024 the non-concessional limit is $120,000. As a non-tax resident you’ll only be eligible for non-concessional contributions (unless you have substantial Australian income to claim a tax deduction against).

4. Not Notifying Financial Institutions

When you move overseas permanently, it’s important to notify your bank and other financial institutions as soon as possible. There are legal and compliance requirements for foreign tax residents, like withholding taxes on investment income.

Not informing your bank, financial planners, superannuation funds, or the AEC of your non-resident status could lead to incorrect tax treatment and tax residency issues.

5. Assuming All Income Is Tax-Free

Unfortunately, just because you’re a non-tax resident doesn’t mean all of your Australian income is tax-free. Certain income, like rental income or dividends from Australian companies, are still taxed in Australia. Foreign resident tax rates start at 32.5% and unfortunately there’s no tax-free threshold for foreigners.

You will also have to pay tax in the country where you live on your foreign-sourced income (unless you’re on a digital nomad tax-free visa, or living in a tax haven). Many Australian expats and digital nomads either pay zero tax or excess tax, both of which can cause issues down the track.

Make sure you review both your Australian-sourced and foreign-sourced income, and the tax regime in the foreign country where you live. Creating a legally compliant tax setup will serve you for years to come, while giving you some much needed peace of mind!

6. Returning to Australia Frequently

Many expats love to return home to see friends and family. It’s great! However, regular visits to Australia can undermine your claim to non-tax residency. If you spend too much time in Australia (especially on a regular basis), it can suggest that your residency status is still tied to Australia.

7. Incorrect Filing or Late Returns

As mentioned previously, non-tax residents are still required to file returns on Australian-sourced income. Failing to file your tax return or filing late can lead to penalties, interest, or complications with the ATO. Make sure you stay up to date with your lodgements and get professional help with preparing your Australian tax return if needed.

8. Not Understanding Superannuation Rules

As a foreign resident for tax purposes, your superannuation is still taxable in Australia, and it may also be taxable while living overseas. It depends on your location and if you’re withdrawing tax-free payments as a retiree. It’s important to seek professional advice when withdrawing superannuation payments or retiring overseas to avoid unexpected tax bills.

I hope this guide helped to clarify your tax-residency situation. Remember – having a permanent home base overseas will help avoid double taxation situations.

Enjoy your overseas adventure!

Want To Know More?

Here at Adventure Tax, we specialise in providing international tax solutions to Australian expats and digital nomads. Navigating tax-residency and overseas taxes can be complicated and stressful. We’re here to make it easier. To find out more, send us an email or book a call with our team.

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