With the expansion of cross-border travel following the reopening of international borders, it's essential to accurately determine your tax residency status, as advised by the new Australian Taxation Office (ATO) ruling.

The ruling is particularly significant for individuals who are arriving in Australia (inbound individuals) or for Australian residents leaving for overseas (outbound individuals). The ruling has implications not just for withholding tax provisions, but also for capital gains tax, the Medicare levy, and even for Commonwealth Government employees who may be Australian posts overseas.

An individual's tax residency status is determined by the definition of a 'resident', which takes into account the specific facts and circumstances of each case and applies four alternative tests. If an individual meets any one or more of these residency tests, they will be considered an Australian resident. for tax purposes Conversely, if an individual does not meet any of the tests, they will be classified as a non-resident for Australian tax purposes.

Here is an overview of the four alternative residency tests:

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The ordinary concepts test

The main criterion used to determine individual tax residency for Australian tax purposes is the "usual and settled" test. This test examines whether an individual's presence in Australia is of a permanent and stable nature, as opposed to being temporary or casual. It takes into account the nature of the individual's presence in Australia and their level of connection to the country.

The "usual and settled" test is applicable when an individual is physically present in Australia and is used to ascertain the tax residency status of both inbound and outbound individuals.

The domicile test

According to this test, an individual will be considered an Australian tax resident if their domicile is in Australia, unless they have a permanent place of abode outside the country. The meanings of 'domicile' and 'permanent place of abode' will be elaborated upon later.

This test is particularly applicable to individuals who had been residing in Australia previously but are currently not present in the country or are only intermittently present during the relevant income year. In essence, it is mostly relevant to outbound individuals.

The 183-Day test

According to this test, an individual qualifies as an Australian resident for tax purposes if they have spent 183 days or more physically present in Australia during an income year (or 184 days or more in a leap year). However, there is an exception to this rule if the ATO is convinced that:

• the individual’s usual place of abode is overseas and;
• they do not intend to take up residency in Australia.

Whether an individual's stay in Australia is continuous or intermittent (meaning the total days in Australia during the income year are combined) is inconsequential. Additionally, even if an individual is present in Australia for only part of a day, it is counted as a whole day for the purposes of this test.

This test is typically applicable to inbound individuals who were not Australian residents previously and arrived in Australia during the income year. In other words, it helps determine the tax residency status of individuals coming into the country.

The Commonwealth super scheme test

In general, this test serves as a dominant criterion that may consider certain Australian Commonwealth Government employees, who are members of a prescribed government superannuation fund and are leaving Australia, as residents for Australian tax purposes.

This test is typically relevant for individuals who had been residing in Australia previously but are currently not present in the country or are only intermittently present during the relevant income year. In essence, it is mostly applicable to outbound individuals.

Determining the residency status of inbound individuals

When dealing with taxpayers coming into Australia (i.e., inbound individuals), the two key residency tests to consider are the ordinary concepts test and the 183-day test.

Applying the ordinary concepts test

To be an Australian resident for tax purposes under the ordinary concepts test, an individual must demonstrate that they ‘reside’ in Australia according to the ordinary meaning of that term. This requires that an individual’s circumstances would fit the following meaning of the term ‘reside’: “(to) dwell permanently or for a considerable time, to have one’s settled or usual abode, to live in or at a particular place”. In other words, to be an Australian resident for tax purposes, an individual would need to demonstrate a usual and settled presence in Australia, in contrast to a temporary or casual presence.

Applying the 183-day test

An individual is an Australian resident for tax purposes where they have been physically present in Australia for 183 days or more in an income year (or 184 days or more in a leap year) unless the Commissioner is satisfied that both:

• their usual place of abode is overseas and
• they do not intend to take up residency in Australia

The purpose of this residency test is to allow an individual a certain length of presence in Australia to be relied upon to establish residency unless the individual is properly regarded as a visitor to Australia (e.g., a person who is in Australia on an extended holiday).

Determining the residency status of outbound individuals

Applying the domicile test

Under the domicile test, an individual is an Australian resident for tax purposes if their domicile is in Australia unless their permanent place of abode is outside of Australia. This test is relevant for outbound individuals (e.g., Australian nationals moving overseas).

Its purpose is to exclude (from Australian tax) any foreign-sourced income of an individual who has retained their Australian identity but who has abandoned their tax residency in Australia as they have a permanent abode outside of Australia in that they have commenced living permanently (contrasted to temporarily or transitorily) overseas.

Residency guidelines for temporary workers

The residency tests are equally applicable to temporary workers as they are to all other taxpayers. However, considering the ordinary concepts test and the 183-day rule test, it is uncommon for short-term temporary workers to be categorized as Australian tax residents. As a general rule, this implies that incoming workers who are in the country for a short period of time fall under the following category:

• seasonal worker program (‘SWP’) or
• seasonal (short-stay) Pacific Australia Labour Mobility (PALM) scheme, are not typically residents of Australia, due to the short-term nature of their stay in Australia and their inability to establish a sufficient connection with Australia that is consistent with residing here

Residency guidelines for working holiday makers

The residency tests are equally applicable to working holiday makers, just like any other taxpayer. Typically, working holiday makers have a temporary stay in Australia, which is linked to a break from their regular overseas life before returning to their home country. Moreover, their employment in Australia is usually of a casual nature, they have flexible accommodation arrangements, and their activities and behaviors align with those of a visitor.

Consequently, they typically do not meet the criteria for residency in Australia according to the ordinary concepts test. Despite possibly spending over 183 days in the country, their primary place of abode remains overseas, and their actions generally do not demonstrate an intention to establish residency in Australia.

Individuals with part-year tax residency

If an individual qualifies as a resident based on the ordinary concepts test, the domicile test, or the 183-day test, and they spend only a portion of the income year in Australia, it does not automatically imply that they are considered a resident for the entire income year. The determination of when residency starts and ends depends on the specific facts and circumstances of the individual.

When an individual starts or stops being an Australian resident for tax purposes during an income year, the tax-free threshold (currently $18,200) afforded to Australian tax residents will generally be pro-rated. This means the amount of the tax-free threshold will change, but the resident marginal tax rates that apply will stay the same.

An individual in these circumstances has traditionally been required to the complete Item A2: Part-year tax-free threshold on the individual tax return so that their tax-free threshold can be pro-rated accordingly. Item A2 requires the following information to be reported:

• The date the relevant individual stopped or started being an Australian tax resident
• The number of months during the income year the relevant individual was eligible for the threshold (counting the month they became or stopped being an Australian resident for tax purposes)

For the 2023 income year, a part-year resident’s tax-free threshold will be calculated using the formula: $13,464 + [$4,736 x Number of months taxpayer was a resident for the year ÷ 12].

For example, if an individual became a permanent Australian resident on 15 January 2023, they would be entitled to a (reduced) tax-free threshold of $15,832 for the six-month period from January 2023 to June 2023, calculated as: $13,464 + [$4,736 x 6 ÷ 12].

Double Tax Agreements and dual residents

In situations where an individual holds dual resident status—being considered an Australian resident for tax purposes as well as a resident of another foreign country—attention must be paid to Double Tax Agreements (DTAs) between Australia and that foreign country. DTAs are designed to mitigate the burden of double taxation, where the same income would otherwise be taxed in both countries.

DTAs often include 'tie-breaker rules' which serve to establish which country has the primary taxing rights over certain types of income generated by the dual resident. These rules provide objective criteria to determine an individual's residency for tax purposes, thereby specifying which country can levy taxes on specific income types like worldwide income or foreign source income. The tie-breaker rules typically consider factors such as an individual's permanent place of abode, the country where they have stronger personal and economic ties, or their usual place of residence.

For example, if an individual qualifies as an Australian tax resident under any of the Australian residency tests—like the ordinary concepts test, domicile test, or the 183-day test—and also qualifies as a tax resident in another country, the tie-breaker rules in the applicable DTA will determine where they should pay tax primarily. This ensures that an individual's taxing rights and obligations are clearly defined, potentially averting issues like capital gains tax or withholding tax provisions that might arise from ambiguity in dual residency scenarios.

If your residency status changes during the year

If your residency status has shifted from being a resident to a foreign resident within the income year, please respond affirmatively to the query 'Are you an Australian resident?' on your tax return. This step ensures that you are taxed at resident rates for the entire income year. Additionally, you are eligible for a pro-rata tax-free threshold based on the number of months you remained an Australian resident.

Foreign residents are exempt from paying the Medicare levy. When filing your tax return, you can declare the count of days during the income year when you were not considered an Australian resident as exempt days.

Starting from the day you no longer maintain Australian residency, there is no requirement to report your income from foreign sources in your tax return. Furthermore, any interest, dividends, or royalties earned from Australian sources after your Australian residency ceased will be subject to withholding tax provisions, effectively serving as a final tax. These earnings should not be included in your tax return.

Your tax residency status is important in defining the tax rates that will be levied on your income, according to residency tests such as the domicile test, the Commonwealth superannuation test, and other statutory tests that may apply.