Proposed New Tax Residency Rules for Expats

As Australia re-opens its international borders in a return to ‘normal’ life following forced closures throughout the COVID-19 pandemic, many expatriates may be considering this as an ideal time to return home to family and friends – resettling life back Down Under.

This, alongside businesses’ greater demand for ‘talent’ and the continuing view to supporting Australia’s economic recovery, the Federal Government has previously announced potential new changes to tax residency rules.

As highlighted in last year’s 2021-22 Federal Budget, the new changes are intended to be introduced to create a more ‘modernised’ tax residency compliance framework, in-line with today’s globally connected workforce & economy.

With these changes to be introduced from 1 July after the legislation receives Royal Assent, we highlight what returning individuals need to know in resuming tax residency in Australia.

Resuming Residency in Australia

In returning home to Australia with the intention of staying permanently, whilst individual to the person’s situation, expats will generally be treated as a resident for tax purposes from the date of return.

This means that the individual will become subject to tax on their worldwide income and liable to Capital Gains Tax considerations (such as those associated with the sale of assets) immediately after their return.

It is also important to note that there may be ‘double tax’ implications, depending on the preceding country of work/stay. Fortunately, Australia has formed tax treaties with over 50 countries, whereby forms of income are exempt from tax, avoid double taxation by two jurisdictions or qualify for reduced rates.

Such countries agreed include China, Canada, France, India, Ireland, Italy, Japan, Korea, New Zealand, Singapore, South Africa, United Kingdom, and United States (full list).

Additionally, it is intended that Australia will enter into 10 new or updated double tax treaties by the end of 2023.

Proposed Changes to Tax Residency Rules

Under current tax residency rules, a person is to be a resident of Australia for Income Tax purposes if one satisfies at least one of the following residency tests:

• Residence accordingly to ordinary concepts (i.e. someone who resides in Australia)
• The domicile and ‘permanent place of abode’ test
• The 183-day test, or
• The Commonwealth Superannuation Fund test

As highlighted earlier, it is considered that current rules hold challenges in determining residency status with certainty – given the heightened individual nature of a person’s circumstances.

As a result, the Federal Government’s proposed change to the rules aim to ‘modernise’ their application and avoid faults in determining an individual’s tax rates, assessable classes of income, available tax concessions and offsets, etc.

The change outlines a two-pronged testing method: a new Primary (bright-line) test and a Secondary test - both determining one’s tax residency.

The primary test (‘bright line’ test) keeps hold of the existing ‘183-day rule’, where if a person who is physically present in Australia for a period of 183 days or more in any income year, this person will be considered a resident for Australian tax purposes.

Under the proposed secondary method, a ‘factor test’ criteria is applicable. This applies to individuals who spend more than 45 days but less than 183 days in Australia in an Income Year, and focuses on four factors which must be satisfied by the person to be deemed a resident for tax purposes.

The factors include:

• The right to reside permanently in Australia (e.g. citizenship or permanent residency);
• The ability to access accommodation in Australia (e.g. rights of ownership, leasehold interests, licences)
• Whether the individual’s family (spouse or any of their children under 18) are generally located in Australia
• The individual’s Australian economic connections (employment, carry-on business, interests in Australia)

It is important to consider, if your intention is not to become an Australian resident, you may unintentionally become one based on the length of your visit to Australia, and whether you pass two or more of the secondary factors.

Upon returning to Australia, expats will need to account for any investments, cash in offshore bank accounts, pension funds, and property. Some countries may charge non-residents a higher rate of tax, (such as Australia), therefore, if you've retained Australian property while abroad, you may be better to move back first before selling. The rules around Capital Gains Tax can be quite complex and it's important to get the timing right, between your intention to sell and move back.

People who have been working abroad need to also pay close attention to their pension savings and how to transfer the funds back into the Australian Superannuation system. It may be better to withdraw funds in the country you reside as the rate of tax may be lower. If you were to move back to Australia and then withdrawal, you may be liable for top-up tax.

Departing Australia and Ceasing Residency in Australia

Similarly, the opening of the border presents individuals the opportunity to consider overseas opportunities – whether for family reasons or to experience a new culture (especially London where Australians always seem to end up!).

Under legislation, whilst again individual to a person’s circumstances, most taxpayers who leave the country with their immediate family with the intention of residing outside the country for two or more years and establishing a home-base overseas are likely to be treated as a non-tax resident from date of departure.

Those departing Australia in-line with this will not be liable for Australian tax on their offshore income, but will remain liable for Australian tax on their Taxable Australian Property (TAP), which includes:

• Australian real property, such as a house, apartment, commercial building or land
• An indirect interest in Australian real property
• A mining, quarrying or prospecting right in Australia
• A CGT asset that you have used to carry on a business through a permanent establishment in Australia
• An option or right over one of the above - for example, a contract to purchase property off-the-plan

Ahead of departure, it is important to determine if you will be a tax resident of both Australia and the country that you will reside in. In determining this, a tie-breaker test will be conducted based on three key factors:

• Having a permanent home in one country and not the other, or
• Having a habitual abode in one country and not the other, or
• Having personal and economic relations strongest in one country and not the other.

It's important to consider which investments you own may trigger Capital Gains Tax upon departure and those that may continue to be taxed in Australia. 

Consideration around Shares and Managed Funds will be required, particularly if you become a non-resident, as these types of investments are generally treated under the CGT rules as having been sold at their market value at the time the tax residency changed, triggering 'deemed capital gains or losses'. If you disregard the 'deemed capital gains and losses' at the time you become a non-resident, your assets will become TAP, meaning you will be taxable on any gain if you dispose of those investments (or part) while a non-resident.

As you can see, there is a lot that needs to be factored into a possible return home or departure from Australia, but most importantly, a strategy needs to be in place before it is too late. It is important to seek advice before leaving or returning to Australia as it could result in additional tax implications.

For More Information

For more information on the proposed tax residency changes or for assistance in determining your status, please contact Aisha Thomas on (07) 3002 2699 | info@agredshaw.com.au.