I, like many other Australian expats still call Australia home, but should this mean that I have to pay tax there regardless of where I may live and work? If the proposed changes in Australia’s most recent Federal Budget are passed, then this may very well be the case.
While the 2021 Budget was always going to be a ‘cash splash’ as is typical of most pre-election Budgets, what many were not expecting was the proposed change to Australian tax residency, which could catch out the estimated 1 million Australians living and working across the globe on expatriate assignments. Most would agree that the tax residency rules were well in need of a refresh given the grey areas that have appeared in the 85 years since the 1936 Income Tax Assessment Act, however, the devil is in the detail of the proposed changes.
Last week’s Federal Budget set out to simplify the Australian tax residency test based on a primary check at first instance being the 183 Day Test. Simply put, if this test applies to you, then if you did not spend more than 183 days in Australia, you will not be deemed to be an Australian tax resident and would proceed to the second test.
The second test, where many Australian expats could be caught out, is called the 45 Day Test. If you spent between 45 and 182 days in Australia during the financial year, being 1 July to 30 June, then you could be deemed to be an Australian resident for tax purposes.
This could mean that many are deemed to be ‘accidental Australians’ even though they’ve spent less than 183 days in the country. If you have spent more than 45 days in Australia during the financial year, then you must proceed to the Factor Tests.
The Factor Tests are where most Australian expats would be caught out, and deemed to be an Australian resident for tax purposes. To be deemed a resident, you must simply meet two of the four tests, which are as follows:
- You have the right to permanently reside in Australia: Simply put, you are either a Citizen or Permanent Resident (PR) of Australia.
- You have Australian accommodation: You have an empty property for your use when you visit Australia or you have a permanent arrangement with an ‘Airbnb style’ property.
- You have family in Australia: This would include your spouse and/or children that are under the age of 18. This would not include siblings or parents for example.
- You have Australian economic interests: This could include an active interest in a business or trust in Australia, assets such as property or substantial cash balances or other investments in the country.
If you meet two of the above Factor Tests and are deemed to be an Australian resident for tax purposes, then tax would apply from the date that you first arrived in the country.
Joel Kerin of Australian expat financial advisory practice, Ally Wealth Management has warned“If the proposed changes are passed, we would expect many Australians to reconsider their offshore assignments, while many who are already living offshore, may simply decide to cut ties with Australia altogether”.
To put this in perspective, an Australian expat living and working in Singapore earning S$180,000 per year, would pay personal income tax of S$17,550, while if deemed to be an Australian tax resident earning A$180,000, a whopping A$55,267 would be paid in tax. This is a multiple of more than three times the annual tax bill.
Could this also mean that many Australian expats who own property in Australia start to offload their assets and invest elsewhere? Subject to the Double Tax Agreement of your country of residence, for Australian citizens or PRs, this may be the only viable option to avoid failing the Factor Tests.
For those Australians considering an international assignment, it may be time to think again. In this case, a number of tests must be met before they can be deemed to be a non-resident of Australia for tax purposes. This includes having resided in Australia for the previous three financial years, having an offshore employment contract of at least two years, having a long-term lease for your time abroad, and of course, spending less than 45 days in Australia each financial year.
Importantly, there is a Double Tax Agreement (DTA) between Australia and Singapore, which sets out a test to determine which of the two countries that you are deemed to be a tax resident. This is based on three key factors; a permanent home in one country such as a long-term lease or primary residence in Singapore that you own, that your natural place of abode is in Singapore and not Australia, and that your personal, financial and business interests are in Singapore and not Australia.
The DTA means that an individual who has their permanent home in Singapore and no permanent home in Australia, would likely be deemed to be a tax resident of Singapore only. One key design feature of DTAs is to avoid inconsistency with domestic rules. Importantly, for those Australian expats in countries that do not have a DTA in place, counting your days in Australia may become of critical importance, as these tie-breaker tests will not be available.
Thankfully, the proposed rules will only have effect if and when they receive Royal Assent, which means that they still need to be passed and we hope for a robust and constructive debate on the matter.
We remain hopeful that the new rules will promote, rather than crush, the entrepreneurial drive of those leaders in the region to strengthen ties with Australia, and that those who seek to invest back in the country they grew up in will not be punished. Given our country’s proximity to some of the largest, and fastest-growing nations on this planet, we have a unique opportunity to truly capitalise on the strengths and experience of some of Australia’s best and brightest working all over the globe.
Given the tax implications of the proposed changes, we recommend that you consult your tax agent and/or your tax (financial) adviser.
Ally Wealth Management is the trusted ally in finance for Australians at home and across the globe. As both Australian expats and residents, the founders of Ally have a unique understanding of the common personal financial challenges faced.
Book your complimentary appointment with our team at Ally Wealth Management to discuss how we can help you to achieve your financial goals.
Ally Wealth Management Pty Ltd is a Corporate Authorised Representative of Sentry Advice Pty Ltd ABN 77 103 642 888. Sentry Advice holds an Australian Financial Services Licence (AFSL) No. 227 748.
General Advice Warning: The information contained herein is of a general nature only and does not constitute personal advice. You should not act on any recommendation without considering your personal needs, circumstances and objectives. We recommend you obtain professional financial advice specific to your circumstances.