Have I become an Australian tax resident during COVID? Is it a problem for me that I have stayed in Australia longer than intended? When do I need to go back home? What if I am not comfortable going home once borders reopen? What are the tax consequences for me if I have become an Australian tax resident?
These are the questions that are being asked of us by individuals and their professional advisers. Australian tax residency has always been an important question, as it is one of the pillars of the Australian tax system. The rules, however, can be difficult to apply and are in the process of being redrafted.1 In the 2021 Federal Budget, the Federal Government acknowledged that the "Australia's current tax residency rules are difficult to apply in practice, creating uncertainty and resulting in high compliance costs for individuals and their employers".2
Yet, these same rules are being stretched and tested as COVID has resulted in many individuals being absent from their usual foreign residence for periods longer than expected. As we exit out of lockdown and look towards a reopening of the international borders, questions on one's tax residency are becoming common.
When do you become an Australian tax resident?
An individual becomes an Australian tax resident if any of the following applies:
- the individual ordinarily resides in Australia. This generally requires considering a range of factors, such as the individual's intention and purpose in Australia, family location, period of stay in Australia, business or employment ties, location of wealth and social and living arrangements;
- the individual has a domicile in Australia, unless the ATO is convinced that the permanent place of abode is outside of Australia;
- the individual has been in Australia - continuously or intermittently - for more than 183 days in the income year, unless the ATO is convinced that the usual place of abode is outside of Australia and the individual does not intend to take up residence in Australia; or
- the individual is a member of a Commonwealth or public sector superannuation scheme, or a spouse or child under 16 years of such a person.
If an individual has become an Australian tax resident but continues to be a foreign tax resident in their foreign country, the application of any double tax treaty should be considered as it may operate to deem the individual solely as a foreign tax resident.
What's changed since COVID?
Since COVID, many individuals have remained in Australia - either because of travel restrictions, lack of commercial flights or a fear of catching COVID should they return home. The ATO has warned taxpayers to monitor their tax residency status due to COVID.3 A review of the ATO private binding rulings register shows that the ATO is increasingly being asked to consider tax residency status having regard to COVID arrangements.4
In our experience, an individual has significant risk of being considered as an Australian tax resident if they continue to remain in Australia after they are legally allowed to leave (e.g. they can obtain an exemption) and commercial flights are available to facilitate the overseas journey. Reasons for staying in Australia, such as a fear of catching COVID, health risks and a fear of quarantine restrictions will not necessarily prevent the individual from becoming an Australian tax resident.
An individual also has a significant risk of being considered as an Australian tax resident if they have stayed in Australia for more than 183 days in the income year and have started to maintain a behaviour consistent with one usually living in Australia. This will be a common trend for many who have been in Australia for prolonged periods due to COVID. After all, when you have been in a country for more than half the year, it is natural to have established relationships and ties to the community.
Other relevant considerations include:
- Do you have family or friends in Australia?
- Do you have assets in Australia?
- Are you living in a home you own in Australia?
- Have you booked a return ticket home?
- Have you joined any social clubs or gyms in Australia?
- If you were previously an Australian tax resident, have you re-established your connections to Australia during COVID?
- What evidence is available to demonstrate that you are not an Australian tax resident?
What can you do?
The residency tests can be difficult to apply because they are based heavily on facts.
The tax implications of becoming an Australian tax resident can be costly. Whilst a foreign tax resident is generally taxed on Australian sourced income only, an Australian tax resident is taxed on worldwide income and capital gains regardless of source. Once you become an Australian tax resident, there can also be capital gains tax consequences when you cease your Australian tax residency status or dispose of capital gains tax assets whilst still living in Australia.
If you have been in Australia for a prolonged period due to COVID, or are uncertain about your tax residency status, you should seek professional advice. Reach out to us for a confidential discussion.
If you would like further information about the tax implications of becoming an Australian tax resident, have a read of our previous article "Resident v Non-Resident Tax Status - Why should I care?".
In the remainder of this article, we describe two real life examples extracted from the ATO's private binding rulings register where the ATO had formed a view that the taxpayer had become an Australian tax resident under Australia's domestic tax rules.
Case Study A5
Facts: The taxpayer left Australia years ago to live and work in Country A. There, he met and married his spouse and raised a family. He had a family home in Country A but would visit Australia for a few months to see close family, including his grandchildren.
Before COVID, he travelled to Australia with his spouse. Due to COVID travel restrictions, he has remained in Australia. He is in a high-risk category and decided to take a cautious approach until normal travel movements resumed. He stayed in Australia for 158 days in the income year.
During his time in Australia, he stayed in an apartment he owned. He also has an investment property and an Australian bank account.
Decision: The ATO considered that the individual had become an Australian tax resident. During the income year, he re-established a strong connection with Australia by: (i) re-occupying his Australian home; (ii) re-establishing his ties to Australia through family reunions and checking on his investments; (iii) he had travelled to Australia with his spouse; (iv) delaying his return to Country A; and (v) had been in Australia for a considerable period of time, even though this was because he was not comfortable going back home due to his health profile.
Case Study B6
Facts: The taxpayer was born in Country Z and held a dual citizenship in Australia and Country Z. He had a main residence in Country Z and had lived with his children and grandchildren in Country Z.
His spouse is an Australia tax resident and works and lives in Australia. She also owns a home in Australia in her personal name. Before COVID, the taxpayer would visit his spouse in Australia for 2 to 3 months in a year.
Due to COVID, the taxpayer was forced to extend his stay and had been in Australia for more than 183 days because: (i) the Australian government had prohibited Australian citizens from leaving Australia except in unusual circumstances, (ii) he was in a high-risk category; (iii) he was unable to find a suitable non-stop international flight out of Australia; and (iv) he needed to care for his spouse.
The taxpayer has bank account in Australia with his spouse. His friends, personal effects and driver's license are in Country Z. He receives an aged pension in Country Z.
Decision: The ATO considered that the individual had become an Australian tax resident under Australia's domestic tax residency rules. He had established significant ties to Australia during his stay by: (i) being in Australia for a considerable period of time; (ii) living in a house owned by his spouse; (iii) having a joint Australian bank account with his spouse; and (iv) he was an Australian citizen. He had also stayed in Australia for more than 183 days and the ATO was not convinced that his usual place of abode was outside of Australia and that he did not intend to take up residence in Australia. This ATO's view was not withstanding that: (i) the taxpayer was born in Country Z; (ii) he owned a main residence in Country Z; (iii) he had previously spent most of his time in Country Z; and (iv) his friends and other family are in Country Z.
1 In the 2021-22 Federal Budget, the Federal Government announced its intention of replacing the individual tax residency rules with a new, modernised framework.
2 Budget 2021-22, Budget Measures, Budget Paper No. 2 on page 21.
4 From our review of the ATO's private binding rulings register, there were 201 private ruling applications in 2021 concerning residency and 55 of these rulings concerned COVID. In contrast, in 2020, there were 255 private ruling applications concerning residency and only 11 of those rulings concerned COVID.
5 This was based on Private Ruling Authorisation Number 1051822531583 dated 30 March 2021.
6 This was based on Private Ruling Authorisation Number 1051788091668 dated 18 December 2020
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.