The global world we live in today means many more of us have dual residency, live in another country for part of each year, have a spouse from abroad, or maybe even earn income from foreign work or investment. Because of this more and more Australian taxpayers are being faced with a complex maze of foreign tax requirements.
To find out whether foreign tax laws apply to you, you first need to determine whether you are an Australian or foreign resident for tax purposes. Tax residency is important because it is the basis for calculating your tax.
Australian tax residents are taxed on their world-wide income, whereas foreign residents are generally only taxed on Australian-sourced income. The tax rates are also different, so getting it wrong can result in a significant difference to your tax position.
Are you a tax resident or a foreign resident?
If you live (reside) in Australia, you are considered to be a tax resident. If you don't satisfy the Resides test, you can still be considered a tax resident if you satisfy one of three ‘statutory’ tests:
The Domicile test. If your permanent home (domicile) is in Australia, you will be considered a tax resident.
The 183-day test. If you are actually present (continuously or with breaks) in Australia for more than half the income year, you will be a tax resident, unless your usual place of abode is outside Australia, and you have no intention of taking up residence in Australia.
The Superannuation test. This is a special test to ensure that Australian government employees working at Australian posts overseas are treated as Australian residents.
The tests appear straightforward because they read fairly simply. In reality, there have been a significant number of disputes regarding the application of these tests and the definition of the terms used. As no two situations are identical, it can be difficult to determine residency in many cases. This may leave the door open for the Australian Taxation Office to take an undesirable view.
Is there a double tax agreement with the other country?
If the country you have the connection with has a double tax agreement (DTA) with Australia, the double tax agreement will override Australia’s domestic laws. This includes the determination of residency for anyone that passes residency tests in both countries under the relevant domestic laws.
A foot in each camp
Matthew and Alana have a home in both Mooloolaba and London. To avoid winter, they live for six months of the year in each home. Although Matthew and Alana are both Australian citizens, they are likely to be considered tax residents in both countries. To avoid paying tax in both countries on the same income, Matthew and Alana would need to apply the tests in the double tax agreement to determine which country ‘wins’ residency status.
If Australia ‘won’ and became the country of residence then they would have to pay tax in Australia on their worldwide income. Some income may still be taxed in the UK in accordance with the DTA such as rental income on properties in the UK. In most cases they also have to report the income in Australia, but to avoid double tax they would receive a credit in Australia for tax paid in the UK.
If the UK were to be the country of residence then the situation would be reversed. …
What if there is no double tax agreement (DTA) with the other country?
The difference in Matthew and Alana’s tax position is not likely to be significant regardless of the result of the DTA because the tax rates in Australia and the UK are similar.
However, if they were living in Mooloolaba and Abu Dhabi the difference in tax rates would lead to a significantly different result. This is the area the ATO likes to target because it can result in large unreported tax liabilities.
Are you a temporary resident of Australia?
If after all of this you are considered an Australian tax resident, the next step is to see if you meet the Temporary Residency test. This special class of tax resident was introduced in 2006 to reduce the compliance burden for individuals who come to Australia temporarily, but were considered to be tax residents for the time they were in Australia.
If you meet the conditions of this class of resident, you are taxed more like a foreign tax resident than an Australian resident, even though you are an Australian tax resident.
The overwhelming message is that foreign tax and is very complex as no two individuals’ situations are exactly the same. A small difference to your situation can make a big difference to the outcome. With Australian Taxation Office scrutiny in this area, it’s important to seek advice early, preferably before you move, invest or become involved in anything foreign. This could save you from inadvertently creating a poor tax outcome.
If you, or someone you know, needs advice regarding foreign tax, please contact our office.