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 currently take advantage of the ability to be exempt from paying Australian income tax on offshore income. However, changes to Australian tax law are going to make things a lot harder for those working abroad.
Let us take a closer look at the current Australian tax residency requirements, what significant changes are coming down the line that will impact all citizens, whether resident or not, and how you can prepare now to protect your assets.
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Australian Tax Residency Requirements
Many “ex-pat” 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 is not tax advice.
Take, for example, Daryl, an Aussie from Brisbane, who was shocked and outraged when, after working for six years in Peru as a consultant to a Peruvian Mining company, he returned to his home in Australia, to find a letter claiming that he owned six years in taxes.
Before taking on the offshore contract, Daryl consulted with his accountant on what he needed to do to ensure 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 qualify. There were only four requirements, and it all seemed pretty straightforward.
But six months after returning to Australia, he received a 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.
Consider the following basic requirements as set out by the Australian Taxation Office to determine if you qualify for Australian tax residency:
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.
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.
You cannot be in Australia for 183 days in a year
However, it is also advisable not to get close to the maximum number of days as well as not to spend all of your vacation visits in 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.
Moreover, Daryl owned an empty home while he and his family were living in Peru — a violation of the first requirement. 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 any slight violation of tax law can leave the door open for an unfavorable decision.
Another example is Joe, who 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 brother’s 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 continued to use all his local credit cards, receive his mail in Australia, keep his auto registered in his name, and keep 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 explained to him, offshore should be considered to be 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.
Changes to Australian Tax Residency
In the past year, there have been significant developments that could mean that no matter where you live, Australia is going to tax you.
The only country that does this on a universal level is currently the United States, but we believe that more countries will follow in the steps of the US, even if in a less direct fashion, and it looks like Australia is taking its first steps in this direction.
The Australian Taxation Office (ATO) released its Taxation Ruling TR 2023/1 on 7 June 2023. This ruling addresses the criteria used to determine the tax residency status of individuals.
The ruling has incorporated recent decisions made by the Federal Court regarding how residency rules should be applied. For instance, “Harding v Commissioner of Taxation  FCAFC 29 – where an Australian national, for the purpose of the ordinary concepts and domicile tests, ceased Australian residency even though he worked and lived in temporary accommodation in Bahrain, whilst regularly returning to Australia to visit his family. The decision confirmed in relation to the “permanent place of abode” test that it is not necessary to be living overseas in a particular dwelling in a certain way in order for a place of abode to be considered permanent. This is provided that the nature of the presence in a town or country is consistent with abandoning residency in Australia and living in that town or country in a permanent way. As an extension to this, the ATO’s view is that a pattern of frequently moving around within a country can indicate that a person is traveling or has otherwise not commenced living permanently in that country.”
Clearly, Australia is tightening the screws further, making it harder to do business and live offshore. These changes will particularly impact the likes of Australian digital nomads and wealthy individuals who do business abroad. Start planning now before any changes are made to residency rules.
This is not tax advice. However, we work with tax lawyers and experts around the world who have helped our clients protect their assets in the face of such taxation changes, using a holistic approach to examine every detail and deal with all the complexities.
If you want to follow our trifecta method, where you have three different homes around the world enjoying different lifestyles and the opportunities that it gives you, that is going to be a problem for Australians.