The Australian tax residency test: are you an expat or a resident?

Written by Andrew Henderson
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This article is part of our series on Tax Residency for Australian citizens. It was written by an independent contributor and does not necessarily represent the opinions of Nomad Capitalist. It should not be construed as legal or tax advice, for which you should consult a professional.

Dateline: Kuala Lumpur, Malaysia

Daryl Thompson, an Aussie from Brisbane, was shocked and outraged when he opened the letter.

After six years working in Peru as a consultant to a Peruvian Mining company, Daryl returned to his home in Australia. Before taking on the offshore contract, Daryl had consulted with his accountant on what he needed to do to make sure he qualified for a Non-Resident status to shelter his offshore income from paying Australian income tax.

His accountant pulled out a short checklist of items that Daryl needed to do to qualify. There were only four requirements and it all seemed pretty straightforward.

But six months after returning to Australia, he received the shocking letter from the Australian Tax Office (ATO) stating that he owed back taxes and penalties on his six years of offshore income and asking him to please come in and discuss the matter.

At first, Daryl felt secure that he had fulfilled all the non-resident qualifications, but after calling the accountant he had consulted with years ago, he became nervous when the accountant suggested that it would be best if he contacted a Tax Attorney familiar with immigration issues.

Over one million Australian citizens live and work outside of Australia. Over two thirds of that number has relocated to accept jobs offshore. With the rapid growth of the Asian Pacific region, the offshore opportunities are very attractive.

If handled correctly, Australians working offshore can take advantage of the unique ability to be exempt from paying Australian income tax on offshore income.

Many “expat” workers have gotten burned by not fully understanding the requirements to become an Australian non-resident for tax purposes. It should be noted that this site does not provide tax advice, nor I am a tax professional.

However, to at least help clear up the basics, consider the following basic requirements as set out by the Australian Taxation Office to determine if you qualify for Australian tax residency:

1. Do not keep an Australian residence

If you own a home or apartment, you either need to sell it, rent it out or not have your name on the title before you leave Australia. Indeed, you cannot reside in Australia with the exception of visitations as explained under #3 below.

2. You cannot be domiciled in Australia

Basically, that means you cannot be based out of Australia and work offshore. In other words, not only do you need a full time offshore residence, but you must also demonstrate that your daily life takes place offshore and is not connected to Australia.

You must receive your mail at the offshore residence. Any regular payments such as credit cards, utility bills, club memberships, etc. should not be to Australian vendors. You must be able to demonstrate that your “real life” takes place offshore.

3. You cannot be in Australia for 183 days in a year

However, it is advisable to not get close to the maximum days as well as not spend all of your vacation visits to Australia.

This provision does not apply to one class of Australians: government workers. You are not exempt if you are a government employee or member of the Australian Military

But, as Daryl found out, this simple listing is not the whole story. Indeed, the devil was in the details. Unfortunately for Daryl, he had used his Australian Address when he filed his annual Australian income tax forms — a violation of requirement of #2.

Moreover, Daryl owned a home left empty while he and his family were living in Peru — a violation of requirement #1. These two mistakes eventually cost Daryl and his family over 60% of all the income he had earned while working offshore!

To get the ATO off their backs, the family had to sell their home and set up a repayment plan with the government.

While the short checklist of requirements appears straightforward, the reality is that the Taxing authority has a mandate to seek out revenue for the government. Any slight violation of tax law can leave the door open for an unfavorable decision.

Joe Sloan worked on a cruise line that continually ran between Antarctica and Sydney. Normally, his trips lasted twelve days with two days off before heading out again. He also had two 30 day vacation periods annually.

Joe understood that he couldn’t stay in Australia for more than 183 days per year and he stayed at his brothers home when he was in Australia. Joe liked his job but after five years he got married and found a job working as a customer service agent for a rental car agency.

While Joe was working for the cruise line, he did not file his Australian income tax as he had none. Joe then got his own letter from the ATO requesting that he come in and discuss what had happened to his last six years of income tax filings. Feeling confident, he took all his pay stubs, contracts and passport down to the ATO office.

As it turns out, living on a cruise ship does not qualify as an offshore residence. Moreover, Joe had continued to use all his local credit cards, receive his mail in Australia, kept his auto registered in his name and kept his health club membership.

To the ATO agents, this violated the second requirement of not having his domicile (regular home life) take place offshore.

As it was explained to him, offshore should be thought of as migrating to another country and severing all regular Australian commerce and daily activities. He also found out that by not filing his Australian income tax forms each year, he was liable for all the back years’ taxes, which included substantial penalties and interest.

Given the amount of income a properly qualified non-resident status can shelter from Australian taxation, it is strongly suggested to visit an Australian Tax Attorney who is familiar with the non-resident tax code as well as staying current on recent ATO non-resident decisions.

Andrew Henderson
Last updated: Dec 27, 2019 at 11:03PM

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