If a member of a family (in business) changes their tax residency they have a lot of short-term tax issues and strategic tax issues. The mere act of relocating to Perth or moving away from Perth is significant: however, the careful management of your tax profile can generate significant savings and opportunities for a family in business.
The concept of tax residency
It is important to note that tax residency is not the same as your citizenship or visa status. So a person can be say, an Indonesian citizen and be an Australian tax resident.
The test for residency
There is no “bright line” test for tax residents. Rather the tax tests rest on a combination of lifestyle factors that will build up a body of evidence proving your tax residence.
Sadly the tax definition of residency includes a person who “resides” in Australia. However, the definition then continues to include a person
Whose domicile is in Australia (unless they can prove that they have a permanent home outside of Australia).
Has been in Australia for more than 183 days (unless they have a permanent home outside of Australia and they do not intend to take up residency in Australia).
There are other tests regarding the residency of a Perth individual covering the superannuation entitlements of a person, however, we will focus on the above.
What does “reside” mean
The term “reside” is not defined in tax law. However, the following facts indicate where a person resides
The purpose of a person’s time in Australia.
Whether a person is accompanied by family.
The permanence of the living arrangements made in Australia.
The terms of an employment contract.
Social and living arrangements.
The time in Australia.
Given the overall “feel” to a person’s residence, it can be seen that there is an element of discretion in structuring your affairs – which will require significant lifestyle decisions to generate great tax outcome.
The 183-day test
If you live in Australia for more than 183 days and your usual place of abode is in Australia you will become an Australian tax resident.
The concept of a “usual place of abode” again takes its ordinary meaning. So if a person lived in Australia for say, 190 days, and stayed at hotels while travelling from town to town – it will likely be that they do not have a “usual place of abode” in Australia.
The outbound residency test
If you are leaving Perth (or Australia) if you cease to reside in Australia and your permanent place of abode is moved to outside of Australia.
The two-year test
Classically the Australian Tax Office has accepted that if an Australian resident leaves the country for more than two years they are likely to become a non-resident.
So why is this important?
The test of residency is currently factual. It depends on the mode and lifestyle of a person. So it is incredibly difficult for some people and also particularly easy for others.
However, the matter is critical.
Australian tax residents pay tax on their worldwide income.
Non-residents of Australia only pay tax on their Australian income.
The taxation of non-residents
If a non-resident generates employment income from work done in Australia they will pay tax in Australia. And the non-resident tax liability starts from the first dollar of income a person earns. This compares to Australian tax residents who enjoy a tax-free threshold.
Further, a non-resident selling Australian property might become liable to the foreign resident capital gains tax withholding regime. So the sale price of property sold might not be the monies actually received on settlement.
If you are a non-resident you can also potentially lose the main residence exemption on the sale of your home. There is an extension of time for assets acquired prior to 9 May 2017 and this area of law is significant.
However, it is important to note that non-residents lose all of the main residence exemption.
Non-resident persons will also become liable for the withholding tax regime on some types of dividends and interest paid from Australian sources. This might become an advantage.
Non-residents can also lose access to the 50% capital gains tax discount for properties (or have it grandfathered if acquired before 2012).
Australian tax residency does not mean that you get Australian healthcare. If you are a tax resident for Australia but you are not entitled to healthcare you can obtain a Medicare Entitlement Supplement from the Department of Human Services when lodging your income tax return.
Australian tax residents
If you are an Australian tax resident you will pay tax on your worldwide income. And if you are paying tax on your income in another country you will likely enjoy a tax credit for that overseas tax paid.
Tax status of assets
The tax status of your assets on becoming or ceasing your tax residency is complex. However:
If you become a tax resident you are deemed to have purchased all of your assets (for Australian tax purposes) for the market value of the assets at the time you become a resident.
If you cease your tax residency in Australia you are deemed to have sold your “non TAP CGT assets” at their market value. And to make it more complex a choice can be made to stop this event happening.
The matter is more complex when considering the tax residency of companies, trusts, superannuation funds or deceased estates.
What is critical is that a business family should plan and structure their relocation to and from Australia. Dealing with great Perth tax advisors from who have demonstrated experience that is respected by their peers, and who deeply understands the issues facing a family in business is critical to getting it right.