Under the Australian Taxation system, a taxpayer’s tax liability varies significantly depending on their residency status.
Australian residents are taxed not only on their Australian sourced income but also their worldwide income, whereas non-residents are taxed only on their Australian sourced income.
This is why it is crucial to understand your tax situation and work out whether you are an Australian for tax purposes before lodging your tax returns.
There are four (4) tests used to determine if you are an Australian resident for tax purposes:
- Ordinary Concepts Test
Under the ordinary concepts test, you are a resident of Australia if you reside in Australia. ‘Reside’ means “to dwell permanently, or for considerable time, to have a settled or usual abode, and to live in a particular place”.
Factors which are considered when determining your residency status for tax purposes include physical presence, intention and purpose, family and business/employment ties, maintenance and location of assets and social and living arrangements.
Determining residency requires consideration of all of the above factors on a case by case basis. There is no one factor that will determine the issue without reference to the circumstances as a whole.
- Domicile Test
Under the domicile test, you are a resident of Australia if your domicile is in Australia, unless your permanent place of abode is outside Australia. ‘Domicile’ means a place that is considered to be your permanent home by law. It can be where you were born (domicile of origin) or where you have changed your home with the intent of making it permanent (domicile of choice).
- One-Half of the Income Year Test (183 Day Test)
Under the 183 day test, you will be a resident of Australia if you spend over half the year in Australia, unless it is established that:
- your usual place of abode is outside Australia; and
- you have no intention of taking up residence here.
If you have already taken up residence in Australia, this test will not generally apply regardless of the number of days you spend overseas. In practice, this test only applies to individuals arriving in Australia.
- Superannuation Scheme Test
The superannuation scheme test only applies to certain Australian Government employees who are eligible to contribute to the Public Sector Superannuation Scheme (PSS) or the Commonwealth Superannuation Scheme (CSS). If this is the case, you (and your spouse and children under 16) are considered to be a resident of Australia regardless of any other factors.
If you meet any one of these tests, you will be an Australian resident and you will be required to declare all of your worldwide income (even if you have already paid tax on it overseas).
What happens if you do not report your worldwide income?
Shortfall Interest Charge
If you do not report your foreign sourced income and your tax return is amended to increase your tax liability, there will be a tax shortfall. In these circumstances, the ATO will apply shortfall interest charges (SIC) to the shortfall amount for the period between when it would have been due and when the assessment is corrected.
SIC is a lower-rate of interest which is imposed to the shortfall amount, as opposed to general interest charges (GIC) as you would have been unaware of a shortfall amount until you received an amended assessment.
SIC is applied on a daily compounding basis to the shortfall amount and is due 21 days after the day the ATO issue the notice of amended assessment.
General Interest Charge
Once this date has passed, GIC will apply automatically to any unpaid tax and SIC. GIC is also calculated on a daily compounding basis on the amount outstanding and can result in a large tax bill for the taxpayer.
Penalties
In these circumstances, the ATO is also able to impose administrative penalties for conduct such as:
- making a false or misleading statement or taking a position that is not reasonably arguable
- failing to lodge a return or statement on time
- failing to withhold amounts as required under the PAYG withholding system
- failing to meet other tax obligations.
Remission of Interest and Penalties
The silver lining to SIC, GIC and administrative penalties is that taxpayers are able to ask for the SIC, GIC and administrative penalties to be remitted in full or part if there are extenuating circumstances, for instance:
- the delay in payment being not due to you (for example, natural disasters, industrial action, the unforeseen collapse of a major debtor or the sudden ill health of key personnel) and you took reasonable action to reduce the delay
- the delay in payment being due to you, but you took reasonable action to reduce the delay, and it is fair and reasonable to remit
- payment of the full amount of GIC would result in serious financial hardship for you.
How we can assist?
As a taxpayer’s tax liability varies significantly depending on their residency status, we implore our clients (whether they are Australian or foreign residents) to contact our office so that we can:
- consider the tests used to determine residency and provide certainty as to your residency status for Australian tax purposes;
- advise you on the consequences of being a foreign resident for tax purposes;
- assist in the structuring of your affairs so that you can achieve your desired residency status;
- determine whether any tax treaties (double taxation agreements) apply to your circumstances so as to prevent double taxation;
- represent you during a review or audit being conducted by the Australian Taxation Office;
- request a remission of interest and penalties for any tax debt raised by the Australian Taxation Office.
Author: Tim Arvanitis
Contact our Tax and Superannuation team today at enquiries@antunes.com.au or phone us today on 02 9964 0499 to arrange a video conference.
The articles on this website comprise legal general information and not legal advice. The general information presented here must not be relied upon without legal advice being sought. In the event that you wish to obtain legal advice on the contents of this general information you may do so by contacting our office or your existing solicitor.