Australian Expat Tax Residency Proposed Changes
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 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, however, the detail in the proposed changes may mean more than meets the eye.
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, then you will not be deemed to be an Australian tax resident and would proceed to the second test.
The second test is many Australian expats could be caught out on and it’s 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 pass 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 the tax would apply from the date that you first arrived in the country.
“If the proposed changes are passed through, 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”, said Joel Kerin of Australian expat financial advisory practice, Ally Wealth Management.
To put this in perspective, an Australian expat living and working in Singapore earning S$180,000 per year, would pay a 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.
To put this in perspective, below are just a handful of the countries that don’t have a DTA in place with Australia:
- Hong Kong
What happens next?
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 inhibit, 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.
Once the draft legislation is released, we will be providing further updates and actively providing feedback to the relevant Ministers and members of Parliament to ensure that the voices of Australian expats are heard throughout this debate.
To Your Financial Success!
Jarrad Brown is an Australian-trained and qualified Fee-Based Financial Planner with Australian Expatriate Group of Global Financial Consultants Pte Ltd providing specialist financial advice and portfolio management services to Australian professionals in Singapore. Jarrad Brown is an Authorised Representative of Global Financial Consultants Pte Ltd - No: 200305462G | MAS License No: FA100035-3
Australian Expatriate Group is a division of Global Financial Consultants in Singapore providing specialist advice to Australians living abroad.
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General Information Only: The information on this site is of a general nature only. It does not take into account your individual financial situation, objectives or needs. You should consider your own financial position and requirements before making a decision.
*Please note that Jarrad Brown is not a tax agent or accountant and none of the content outlined here should be taken as personal advice. You should consult your tax agent and financial adviser to review your current personal finances and financial goals to consider whether this strategy is appropriate for you.
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