If you are going overseas to work for an extended period of time, one of the key issues you need to consider is how much tax you will pay and to which revenue authority the tax will be paid. Taxation of individuals is typically determined based on the concept of ‘residence’ which often rests of the particular facts and circumstances of the individual.
Whether you are resident of Australia or resident of an overseas country depends on your personal circumstances. It is therefore essential that you understand how the Tax Law applies to your personal circumstances and seek professional tax advice if you are not sure.
The Australian Tax Office has a simple questionnaire on its web site which can assist you in determining whether you are resident for tax purposes or not. Click here to use it.
However, the outcome of that questionnaire will not be binding on the Tax Office – it is only meant as a guide.
If you want to be sure about how the Tax Office will view your tax residency status, you can request a Private Binding Ruling (PBR). However, given the technical nature of the Tax Law, you should consider engaging a tax professional to prepare the PBR request on your behalf.
The Income Tax Assessment Act (1936) provides a framework for determining tax residency and there are also Income Tax Rulings and case law which can assist individuals to determine whether they are tax resident or not.
The definition of “resident or resident of Australia” is defined within Section 6 of the Tax Act and can be viewed here.
There are four tests for residency contained in the definition. They are:
- The ‘resides test’
- The ‘domicile test’
- The 183 day rule; and
- The superannuation test.
If you satisfy any of the above tests, then you are resident of Australia for tax purposes. If you are going overseas, and do not wish to pay tax in Australia on your worldwide income, you would not want to satisfy any of the above tests.
The Tax Office web site provides details of how the Resides Test here.
As a starting point, it makes sense to complete the Tax Office questionnaire so that you can understand the factors that are taken into account when determining residency. Before you complete the Tax Office questionnaire, you will need to know the following:
- How long will you be away from Australia?
- When will you return to Australia?
- What type of accommodation will you live in while you are away from Australia?
- Your reasons for leaving Australia and the activities you will be undertaking while away from Australia.
- Whether you will retain any connections with Australia.
The Tax Office needs to be able to distinguish between individuals who are undertaking a short term overseas assignment whereby they maintain their home base while overseas and those who are moving overseas for a longer period of time.
Given that personal tax rates are relatively high in Australia, an individual may gain a tax advantage by being taxed on their overseas income in the foreign jurisdiction where they are based and not paying any Australia tax on that income. The Tax Office therefore closely monitors the tax status of individuals who are working overseas.
However, as the Australian tax system is a ‘self-assessment’ system, the onus is on individual taxpayers to declare their residency status on their annual income tax return. The Tax Office generally accepts tax returns as lodged but then reserves the right to conduct a tax audit after the event if it thinks that an income tax return is incorrect or that income has not been disclosed.
The onus is therefore heavily on the taxpayer to make sure they are making a correct declaration as to their residency status and including the correct amount of taxable income in their Australian income tax return. If they deliberately or inadvertently make an incorrect declaration, they could be subject to a tax audit and may have to pay outstanding tax and penalties if it turns out that their income tax return was incorrect.
Based on our experience, the Tax Office typically conducts tax audits 1-3 years after a taxpayer has returned to Australia from an overseas assignment. This can magnify the amount a taxpayer has to pay if they have understated their taxable income.
It is therefore essential that a taxpayer understands how the tax rules apply to their particular situation and ensures the income tax returns they lodge are accurate.