Saying you’re a non-resident for tax purposes is as simple as ticking a box. But actually being a non-resident requires a little more thought.
Before we begin, a word of caution. Tax lawyers charge $600 an hour (incredible right! That’s $10 per minute). If the ATO decides that they want to challenge your tax residency in court it will be a very expensive exercise!
Why? Because it is up to you to prove you are what you say you are.
If you claim to be a non-resident, do your research and take decisive action to make it abundantly clear that you are a non-resident.
I do not condone becoming a non-resident to avoid tax. However, if you do move overseas, then becoming a non-resident can be a very rewarding benefit.
If you live overseas already, or are thinking about giving it a go, you might be wondering what to do about paying tax in Australia. You have two options really:
- Maintain ‘residency’ in Australia and pay tax as usual.
- Become a non-resident for tax purposes, and come under a different tax regime.
Depending on your situation, it can be quite advantageous to become a non-resident.
If you do want to become a non-resident for tax purposes, it is really quite simple. You just tick a box at the start of your tax return saying “I’m a non-resident this year”.
That said, actually ‘being’ a non-resident is a lot more complicated. To understand how to be a non-resident, it is worth exploring what is meant by ‘resident’ in the first place.
Tip: Residency has nothing to do with your citizenship or right to enter Australia. It is simply whether you pay tax as someone who does or does not ‘live’ in Australia.
Resident – seemingly simple but not always so
In a basic sense, residency is where someone lives.
I’m a resident of my house. Why? I come here every day, I sleep here, my family lives here, I keep my stuff here, all my mail is posted here. It is where I live.
In terms of a country of residence, the concept is applied in a similar way.
If you live in the same country every day of the year, your family is there, all the stuff you own is there, all your money is in that country, you vote regularly in elections, etc – it is obvious you live in that country. You are a resident.
But, it can get a bit murky.
What if you work in Darwin for two weeks and then fly to Bali for your two weeks off?
Are you a resident of Australia or Indonesia?
You arguably live in Indonesia, and only work in Australia. So perhaps you should be an Indonesian resident.
What if I said that you didn’t have any fixed address in Bali, but simply showed up at your favourite beachside bungalow each fortnight and got a room. Now it’s not as clear, is it?
Let’s get murkier.
Let’s also assume you don’t have a postal address or bank account, in either Australia or Indonesia. All your mail is sent to a PO Box in Singapore, where you also happen to store your possessions and manage your finances from.
So, you work in one country, do personal business in a second, and sometimes ‘stay’ in a third. In this instance, it’s tricky to say where you are a resident.
So tricky in fact, that the ATO themselves do not have a rule to use. Here is what Tax Ruling IT2650 says:
“It is not possible to provide conclusive rules for determining the residency status of individuals leaving Australia temporarily.”
It’s straight forward if you indefinitely live 100% in Australia or 100% somewhere else.
But otherwise, it’s tricky.
What makes you a non-resident?
Luckily, the IT2650 tax ruling tells us what the courts use to determine if someone is or isn’t a resident. Here’s the criteria:
- The intended and actual length of the individual’s stay in the overseas country;
- Any intention either to return to Australia at some definite point in time or to travel to another country;
- The establishment a home outside Australia;
- The abandonment of any residence or place of abode the individual may have had in Australia;
- The duration and continuity of the individual’s presence in the overseas country; and
- The durability of association that the individual has with a particular place in Australia.
No factor weighs more heavily than another, and each situation is assessed individually. To get a better understanding of how each of these could be interpreted you should check out the ruling. It also provides examples of actual cases.
As a summary, you broadly need to:
- cease all ‘living’ activities in Australia
- leave for a period of two years
- establish a permanent home in another country
- create a continuous life with habits and routines in that country.
But, again, it depends on the individual situation. You may not be able to satisfy all the conditions and still be considered a non-resident. As the ruling says, “it is not possible to provide conclusive rules”.
To me it is all about your intention. Do you intend to make a permanent ‘life’ outside of Australia, or just pass time for a while?
How to prove you are a non-resident
Here are some tips straight from the tax ruling to help you prove you are indeed living permanently outside of Australia:
- Establish residence in another country – rent/buy and move into a house.
- Spend at least two years out of Australia – you can visit but you must establish a residence in another country.
- Take your family with you.
- Rent or sell any real estate in Australia – just don’t leave it empty.
- Open bank accounts where you live – shut all but investment accounts in Australia.
- Get a permanent locally-recruited job – not a transfer from which you will return.
- Enrol your children in school and join the same kinds of community groups you were a part of in Australia – sports clubs, churches, networking lunches, etc.
- Use your overseas address for all correspondence.
Statutory tests – eek they sound hard!
Even if you are doing all the things mentioned above you may still be considered an Australian resident through one of the three ‘statutory’ tests. The statutory tests are:
1. The domicile test. This one is a bit vague. It is similar in nature to what the IT2650 ruling used to determine if you live in Australia or not.
2. 183 day test. If you spend more than 183 days (continuously or broken) in a tax year in Australia, you will be considered mostly a resident. That is, unless you prove your normal place of residence is outside Australia and you have no intention to establish a residence in Australia
3. Superannuation test. If you are an Australian Government employee receiving government superannuation you will be treated as an Australian resident.
Becoming a non-resident of Australia for tax purposes is simple if you truly, even if only temporarily, make a permanent home and life in another country. It all leads back to your intention.
If you genuinely call somewhere other than Australia ‘home’, then you are heading down the right rabbit hole to non-residency for tax purposes.