The Australian Treasurer‘s recent announcement of changes to existing exemptions on the taxation in Australia of income earned by Australians while overseas has caused widespread panic among the expat community.
While the changes, as part of the Federal Budget, are significant for those that are affected by them, those who are not residents of Australia for tax purposes will not be impacted by the changes at all.
This release provides an overview of the changes and the threshold for determining whether an expat continues to be an Australian tax resident.
Overview of changes
Under current law, foreign earnings derived by an Australian resident taxpayer through at least 91 days of continuous employment in a foreign country are generally exempt from Australian tax regardless of the rate of tax paid in the country in which they are employed.
From 1 July 2009 the exemption will only apply to income earned as an aid worker, a charitable worker, under certain types of government employment or on projects that are in the national interest.
For other workers, the system will be changed to a credit based system, such that, if the expat is still considered to be an Australian tax resident:
- any foreign employment income will form part of their Australian taxable income, and
- they will receive a credit for any foreign tax paid on that income.
The ultimate impact being that the rate of tax paid on these earning will now be equal to the Australian tax rates. This is clearly a significant change for those working in low tax jurisdictions, including in many Asian countries and the Gulf States.
These changes do not affect an expat who is no longer an Australian tax resident.
Threshold for an Australian tax resident
While the test for Australian tax residency is somewhat broad, there are essentially two components. A person will be an Australian tax resident if:
- they are domiciled in Australia, unless the Commissioner is satisfied that their permanent place of abode is outside Australia, or
- they have actually been in Australia, continuously or intermittently, during more than one-half of the year in which the income was earned, unless the Commissioner is satisfied that their usual place of abode is outside Australia and that they do not intend to take up residence in Australia.
These tests give rise to three key questions. Namely:
- Have you been in Australia from more than 183 days?
- Is your domicile in Australia?
- Is your usual or permanent place of abode outside of Australia.
The first test is fairly straightforward, the second and third have been subject to much legal analysis and judicial review.
Domicile
In relation to domicile (apart from domicile by operation of law) the essence is:
- residence in a particular place, and
- an intention to reside in that place either permanently or for an indefinite period.
Usual / permanent place of abode
There are a number of key factors the Commissioner of Taxation will consider in relation to whether a person’s usual/permanent place of abode is outside Australia, but no single factor will be decisive. These factors include:
- the intended, and the actual, length and continuity of the taxpayer's stay in the overseas country—as a broad rule of thumb, a period of about two years or more will be regarded by the Taxation Office as sufficient to establish residence outside Australia
- any intention the taxpayer may have to return to Australia at some definite point in time or to travel to another country—the fact that the taxpayer knows that he or she will return to Australia at a definite point in time does not, of itself, mean that he or she does not have a permanent place of abode outside Australia
- whether any residence or place of abode exists in Australia or has been abandoned because of the overseas absence
- whether the taxpayer has established a home—that is, a fixed residence—in the overseas country and is not simply ‘making do’ with temporary accommodation such as barracks, singles' quarters or aboard ships, and
- the durability of the taxpayer's association with a particular place in Australia taking into account, for example, such things as whether the taxpayer has maintained bank accounts in Australia and where any children are being educated.
More information
For information regarding possible implications for your business, contact