Changing tax residency – Did you know the tax implications?
8 November, 2022 BY Bibek Nepal, CPA

Changing tax residency – Did you know the tax implications?

If you are Australian resident for tax purposes, , you will need to declare and pay tax on your worldwide income (i.e. income from all sources, whether in or out of Australia) in Australia. When you leave Australia, you will need to work out if you continue to remain Australian resident for tax purposes or become foreign resident permanently dropping your Australian tax residency.

What is tax residency?

You are considered to be an Australian resident for tax purposes if you:

  • have always lived in Australia or you have come to Australia and live here permanently.
  • have been in Australia continuously for six months or more, and for most of that time you worked in the one job and lived at the same place.
  • have been in Australia for more than six months of the year, unless your usual home is overseas and you do not intend to live in Australia.
  • go overseas temporarily and you do not set up a permanent home in another country.
  • are an overseas student who has come to Australia to study and are enrolled in a course that is more than six months long.

There are four statutory tests to determine your tax residency:

  • Resides test
  • Domicile test
  • 183-day test
  • The Commonwealth superannuation test

As per ATO, a person who fails to cut their connection with Australia will be treated as an Australian resident for tax purposes.

Consequences of changing tax residency:

Following are some of the tax implications if your status changes from resident to foreign resident during the income year:

  • You are entitled to claim a pro-rata tax-free threshold for the number of months you are an Australian resident.
  • You are entitled to claim Medicare levy exemption in your tax return for the number of days you are not an Australian tax resident
  • Your foreign-sourced income is not taxable in Australia from the date you stop being Australian tax resident
  • If you stop being an Australian resident, you are taken to have disposed of each of your assets that are not “Taxable Australian property” (TAP) for their market value at the time you stopped being a resident. This means you may be liable to pay CGT on those disposals.
  • If you sell your TAP asset when you are non-resident, you will no longer receive 50% CGT discount for a capital gain even if you own the asset for more than 12 months.
  • You will be subject to higher non-resident tax rate in Australia

When does the capital gains tax liability arise?

  • You may choose to pay the capital gains tax at the time you cease to be an Australian resident or,
  • You can defer tax liability until you sell the assets.

If you choose to defer your tax liability until you sell the assets, your non-TAP asset will be considered as a TAP assets which means, disposal of such assets while you are non-resident will be taxed in Australia even if you are no longer an Australian resident for tax purposes.

Get in touch with us today, If you have recently left Australia or planning to leave Australia and have questions on tax implications of changing your tax residency.

Disclaimer: This article is provided as general information only and does not consider your specific situation, objectives, or needs. It does not represent accounting or tax advice upon which any person may act. Implementation and suitability require a detailed analysis of your specific circumstances. Before taking any action, consider your own circumstances and seek professional advice.

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