Without boring you with definitions straight out of the Australian Core Tax Legislation, if you are an Australian resident, you will pay tax on your ordinary income whether it comes from an Australian source or a foreign source. If you are a non-resident, you only pay tax to the Australian government for income that you earned from sources within Australia (any income your earned in your own country will be taxed according to their tax laws).
There are exceptions to these broad guidelines, including double taxation treaties that Australia has negotiated with many countries to avoid people being taxed in both countries on the same income. You can also be classified as a resident for a portion of the year and a non-resident for a portion of the year. For example, if you move permanently to another country and have no intention of moving back, you would most likely be classified as a non-resident from the time you left. In ruling on residency status, the ATO will consider whether an individual:
- Resides in Australia
- Has a domicile in Australia (unless their permanent place of abode is outside of Australia)
- Has lived in Australia for more than 182 days (six months) of the year
- A member or eligible to be a member of the superannuation scheme (or their spouse or child)
As you can see, there is scope for confusion in these guidelines, and there have been many court cases to dispute residency status, that have further muddied the waters.
So why is residency important? Imagine you spent half the year in Australia and half the year in Canada and earned $100,000 in each country. If you were classified as an Australian resident for the full year, you would pay tax on $200,000 in Australia, which would result in a tax bill of $63,947 – not including the Medicare Levy. If you were considered a resident of each country for six months, you would be taxed on $100,000 income in accordance with each country’s tax brackets (for simplicity we will assume the dollar in each country was equivalent). In this case, you would pay $25,397 tax in Australia and $19,294.89 tax in Canada – a total tax bill of $44,691.89. So by being classified as a non-resident, you could save yourself over nineteen thousand dollars in tax!
Simply moving overseas doesn’t automatically make you a non-resident, nor does moving to Australia make you a resident. In order to ensure you get the best tax benefits for any move you plan to make, it is worth discussing your situation with your accountant and even seeking clarification from the ATO.
By Jennifer Lowe