Robert Goodman Accountants Blog

Tax Residency of Individuals

Global mobility continues to be an increasing trend. One impact is that individuals who relocate for work may inadvertently change their tax residency status. An individual's tax residency status is important as this affects whether that individual is taxed on their worldwide income from all sources or just on their Australian-sourced income.

An individual's tax liability depending on whether a person is considered to be an Australian tax resident or a foreign resident. Australian tax residents are assessed on income from worldwide sources, while foreign residents are only taxed on Australian-sourced income. Non-residents are subject to higher overall tax rates, without the benefit of Australia's lower marginal tax rate scales.

This article examines the residency test according to ordinary concepts and the three tests under s 6(1) of the ITAA 1936 (the statutory tests). These tests determine whether an individual is a resident of Australia for tax purposes. While this article discusses all residency tests briefly, it will focus on the "ordinarily resides" test as it is the primary test for determining an individual's residency status.

Residency – the basic rules

Generally, an individual will be considered to be an Australian tax resident if they satisfy one or more of these four tests:

  • the "ordinarily resides" test;
  • the domicile test;
  • the 183 day test; or
  • the Commonwealth superannuation fund test.

Note: A foreign resident is simply anyone who doesn't satisfy any of the above tests, ie someone who is not an Australian resident.

The "ordinarily resides" test

http://www.checkpointmarketing.net/img/Australia/Personal%20Tax/LORES_PERSONALTAX_RESIDENCY_CP.jpgAn individual will be an Australian resident for tax purposes if they ordinarily reside in Australia. As the term "reside" is not defined under Australian tax law, the ordinary meaning of "reside" applies. The Macquarie Dictionary defines "reside" as "to dwell permanently or for a considerable time; have one's abode for a time".

Therefore, in situations when an individual leaves Australia indefinitely or for an extended period, a broad range of factors concerning their absence is considered in determining their residency status. The Commissioner considered the following factors in Taxation Ruling IT 2650 in determining whether an individual ceases to be a resident of Australia.

Intention and purpose of presence

The individual's intention and purpose for leaving or coming to Australia helps determine whether an individual resides in Australia. For example, if an individual leaves Australia for an extended period and does not intend to return at some definite point in time, it is likely that they will be considered a non-resident of Australia. This might occur where an individual relocates to take on a permanent job in the new location for example.

The duration and continuity of the individual's presence overseas

Generally, the longer and more continuous the individual's presence overseas, the more likely it is that the individual will be a non-resident of Australia.

The intended and actual length of the individual's stay overseas

Where an individual leaves Australia for a substantial period of time and establishes a home in another country, that home will represent a permanent place of abode outside Australia. Generally, a period of two years or more would be regarded as a substantial period. However, the duration of the actual or intended stay out of Australia should be considered in light of other factors.

Social and living arrangements

The way individuals interact with their surroundings during their stay in Australia or overseas may indicate residency status. These arrangements may include joining sporting or community organisations, enrolling children in school, re-direction of mail or committing to a residential lease.

Other relevant factors

  • The establishment of a home outside Australia would amount to a permanent place of abode in an overseas country.
  • Whether the maintenance and location of significant assets (such as real estate and investments) is in Australia or overseas.
  • Whether major family and business/employment ties exist in Australia or overseas.

Note: Whether a person resides in Australia is a question of fact and degree. No single factor necessarily determines Australian residency, and many factors are interrelated. The weight to be given to each factor will therefore vary with individual circumstances.

Key cases: FCT v Applegate (1979) 9 ATR 899 and Re The Engineering Manager and FCT[2014] AATA 969 demonstrate that the intention of the person is particularly important in determining residency. 

The domicile test

Under this first statutory test, an individual is generally an Australian resident if they have a domicile in Australia, unless it can be established that they have a permanent place of abode outside of Australia.

Broadly, a person's domicile is the place considered by law to be their permanent home. Thecommon law rule is that an individual acquires at birth a domicile of origin and retains the domicile of origin until they acquire a domicile of choice in another country, or until they acquire another domicile by operation of law.

Note: Generally, the Commissioner's view is that a person who intends to be out of Australia for more than two years will be considered to have established a permanent place of abode overseas.

The 183 day test

Broadly, under this statutory test, an individual is an Australian resident if they are physically present in Australia for more than 183 days during an income year, unless it can be established that the individual's usual place of abode is outside of Australia and there is no intention of taking up residence in Australia.

The person's presence in Australia need not be continuous. All the days spent in Australia during an income year are counted for the purposes of the 183 day test.

Note: This test applies based on an income year, not a calendar year.

Commonwealth superannuation fund test

Under the third statutory test, an individual is deemed to be an Australian resident if they are members, (or are the spouse, or a child under 16, of a person who is a member) of specified superannuation funds for Commonwealth government employees.

Want to find out more?

Please get in touch with us to discuss your individual circumstances. Call us at Robert Goodman Accountants on 07 3289 1700 or email us at reception@rgoodman.com.au

© Copyright 2017. All rights reserved. Source: Thomson Reuters.  Brought to you by Robert Goodman Accountants.

 

Measures commonly referred to as the "Netflix Tax" came into effect on 1 July 2017. These bring supplies of intangibles made by non-resident suppliers to Australian consumers within the net of Australia's goods and services tax (GST) system. While the measures originally focused on taxing the supply of digital download products to Australian consumers, they also capture the supply of anything (other than goods or real property) that is made by offshore businesses to Australian consumers, unless the supply is otherwise GST-free or input taxed.

 

The new rules require suppliers to take reasonable steps to ascertain whether the recipient is an Australian consumer. Such steps include making a decision based on the recipient's Australian Business Number (ABN), other identifying information or a declaration from the recipient that indicates the recipient is registered for Australian GST.

An "Australian consumer" is defined as an Australian tax resident who is not registered for GST purposes or, if registered, who does not acquire the intangible item for the purpose carrying on their enterprise.


Supplies that offshore businesses make to Australian businesses (business-to-business or "B2B" transactions) fall outside the scope of the new measures.


While the changes will apply to a wide range of services and other intangibles, it is expected that digital downloads will comprise the majority of transactions affected.

Digital downloads and electronic distribution platforms

The GST changes include provisions that will apply where digital products are supplied via an electronic distribution platform (EDP). In such cases, the EDP operator will be deemed to be the supplier and will be liable for the GST, rather than the actual supplier of the digital product. This means, taking the "Netflix tax" name as an example, that the Netflix business entity, as the operator of the Netflix EDP, will be considered the supplier of streamed content and be liable for the associated Australian GST – not the creators and entities who license their content for streaming on Netflix. There are special provisions for determining who the supplier is where a supply is made through multiple EDPs without an agreement between the parties.

GST registration threshold

The existing GST registration threshold of AUD$75,000 per annum will also apply to non-resident suppliers of intangibles. Therefore, non-resident suppliers will need to assess whether the annualised value of their supplies to Australian consumers is likely to exceed AUD$75,000. If a supplier's turnover for supplies to Australian consumers is below the GST registration threshold, they will not be required to register. If their turnover is above the threshold, they will be required to register for GST purposes and remit GST to the ATO on their sales to Australian consumers.

Limited GST registration rules

Non-resident suppliers who are caught by these new provisions may elect to be treated as "limited registration entities". Limited registration entities will be required to lodge their GST returns on a quarterly basis and will not be entitled to claim input tax credits in respect of any GST included in the costs they may incur in Australia.

In practice, on the basis that an overseas supplier will not have a presence in Australia, we expect minimal costs will be incurred that would otherwise give rise to an input tax credit entitlement.

The ATO has recently activated its online limited GST registration process. As the returns are to be lodged quarterly and the first return will not be due until October 2017, the ATO expects that non-residents will be able to backdate their registrations to 1 July 2017 and report their sales by the due date for the first return.

Some practical considerations for consumers and affected businesses

As noted, the changes have now commenced and non-resident businesses that make supplies to Australian consumers will need to take into account these changes to the GST law.

Australian consumers

Australian consumers are likely to see some increases in the amounts these suppliers charge; for example, Adobe's digital software subscription prices for individuals rose to include GST late in 2016, and Netflix announced plan pricing increases at the end of June 2017.

Australian businesses

If you purchase intangibles from offshore suppliers that are for the purposes of carrying on your business – that is, the transaction is a B2B supply – it will be important to make it easy for the supplier to see this. Use your business name and address, ABN and other clear business identifiers so that GST is not mistakenly added to the price.

Non-resident suppliers

Supplier businesses affected by the changes will need to consider the following:

  • the ability of their systems to implement changes to cater for the new GST rules – including sales systems' ability to obtain information to confirm whether each customer is an Australian consumer, the ability to identify the amount of GST payable on a supply and to make sure the amount is reported on the periodic GST return lodged with the ATO;
  • reviewing their existing terms and conditions of sale to ensure they can recover GST from their customers if needed;
  • reviewing websites through which their sales are made, to determine compliance with Australian consumer laws – these generally require that GST-inclusive prices are advertised to consumers; and
  • currency conversion issues, if their sales are made in a currency other than Australian dollars.

EDP operators will need to understand their role in the supply chain, assess whether they will have a liability to register for remit GST and agree with relevant parties where the GST will be imposed.

Need to know more?

Confused about how these GST changes may affect your personal or business purchases? Wondering how to make sure offshore suppliers will know you're buying something for your business rather than for yourself? Talk to us about your circumstances to find out how we can help. If you would like to know more, please don't hesitate to contact Robert Goodman Accountants on 07 3289 1700.

 © Copyright 2017. All rights reserved.

Brought to you by: Robert Goodman Accountants