Australian Resident vs Non-Resident Tax

Moving overseas is an exciting opportunity to explore a different part of the world. However, sorting out your Australian tax residency is essential if you plan to live abroad.

Understanding tax residency is crucial, and our guide can help. We will explain everything you need to know about tax residency, including how it affects your taxes and how to prove you’re not a tax resident.

Let’s begin.

What Is an Australian Tax Resident?

The Australian Tax Office defines Australian residency status differently than the Department of Home Affairs. Living in Australia for a certain period does not determine your residency status for tax purposes. If you no longer reside in Australia or earn any Australian income, the Tax Office will not consider you an Australian resident.

You may be an Australian expat living overseas or a temporary resident working in Australia. Every situation is different when it comes to tax residency. If you’re unclear whether you’re a tax resident, you should speak to a tax advisor or contact ATO.

Generally speaking, the ATO has four residency tests to determine if you are an Australian tax resident. Answering ‘yes’ to any one of them makes you a tax resident.

Let’s explore each test.

Residency Tests by the ATO

The Resides Test

The Resides Test assesses if you spent six months or more in Australia and showed a degree of habit indicating you plan to reside permanently.

The ATO examines your purpose for staying in Australia, asset maintenance and location, family and business ties, and social and living arrangements.

The Domicile Test

The Domicile Test aims to establish your permanent place of residence. It examines the purposes and length of your overseas stay, property ownership in Australia and overseas, and your financial and family ties to Australia.

The 183-Day Test

The 183-Day Test considers you a tax resident if you spend more than half the tax year (183 days) in Australia. This is unless you can prove your domicile is elsewhere.

The focus of this test is on time spent in Australia.

The Commonwealth Superannuation Fund Test

The Commonwealth Superannuation Fund Test applies to Australian government employees. It focuses on belonging to the superannuation scheme and being an eligible employee for Superannuation Act 1976.

What Is a Non-Resident for Tax Purposes?

In Australia, non-resident tax applies to those who live and work abroad without intending to return to Australia. For tax purposes, non-residents only need to file tax returns for income earned in Australia.

Proving non-residency status, however, could be challenging. If you cut all financial ties with Australia and move abroad, it’s clear you’re not a tax resident. However, owning and renting a property while living overseas could complicate matters.

Each individual’s situation is different on a case-by-case basis. Generally, those who leave Australia with no intention of returning are non-residents from the date of departure. It’s recommended to seek professional advice for all tax affairs to avoid costly mistakes.

Differences Between Tax Residents and Non-Residents

The Australian Tax Office differentiates between tax residents and non-residents. Although non-residents pay higher tax rates, tax residents who live abroad may also have to pay higher rates. The residency tests are challenging to apply universally.

If a person intends to return to Australia, they may still be a tax resident even after years of living overseas. This can result in them paying taxes in two countries for the same foreign income, making them pay more overall despite the lower resident tax rates.

Aside from paying tax on worldwide income or not, other differences between Australian tax residents and non-residents can be seen in the table below.

Aspect	Australian Residents	Non-Residents
Tax rates	Lower tax rate on taxable income	Higher tax rate on taxable income; pay 32.5% on all Australian sourced income from $0 to $120,000
Medicare Levy	Required to pay Medicare Levy (2%) and Medicare Levy Surcharge	Not required to pay Medicare Levy or Medicare Levy Surcharge
Low and middle-income tax offsets	Eligible for low and middle-income tax offsets	Not eligible for low and middle-income tax offsets
Deductions	Able to deduct income-related expenses	Able to deduct income-related expenses
Principal residence capital gains tax exemption	Qualify for main residence exemption on capital gains tax	Must pay entire capital gains tax amount

Do I Pay More Tax as a Resident or Non-Resident?

Resident and non-resident taxpayers are subject to different tax rates in Australia. Residents enjoy tax-free thresholds that non-residents do not. For instance, in the financial year 2022-2023, Australian residents can earn up to $18,200 before they start paying taxes. They pay a reduced tax rate of 19% on income up to $45,000. Non-residents cannot benefit from these thresholds and tax rates.

Let’s compare Paul and Agatha with the same income of $80,000 p.a. Paul is a tax resident of Australia, and Agatha is a non-resident for tax purposes.

For an income of $80,000 per year, the tax difference in Australia between Paul and Agatha can be significant.

So, Paul’s tax liability would be:

$0 on income up to $18,200
$5,092 on income between $18,201 and $45,000 (i.e., 19% of $26,799)
$12,675 on income between $45,001 and $80,000 (i.e., 32.5% of $34,999)

Total tax liability of $17,767

Agatha’s tax liability would be:

$26,000 on income up to $80,000 (i.e., 32.5% of $80,000)

Total tax liability of $26,000

Therefore, the tax difference between a resident and a non-resident earning the same income of $80,000 per year can be $8,233. However, it’s important to note that this calculation doesn’t consider other factors that may affect a person’s tax liability, such as deductions or offsets.

Despite the higher non-resident tax rates, non-residents may not necessarily pay more tax than residents. For example, an Australian resident earns income in another country during the same financial year. In that case, they must declare it on their Australian tax return and pay accordingly.

Non-residents face some disadvantages when selling property in Australia. For instance, if a foreign resident sells property to an Australian resident, the purchaser must withhold 12.5% of the purchase price and remit it to the ATO to ensure that the foreign resident pays their capital gains tax.

Do I have to pay double tax if I earn income abroad?

You may have to pay income tax in both countries if you earn income abroad. However, Australia has double tax agreements with over 40 countries.

These treaties determine which country has the right to taxable income tax, so you don’t have to pay double tax. If you do end up paying double tax, you can claim a tax refund with Australia’s Foreign Income Tax Offset.

What About Working Holiday Makers?

Working holidaymakers have different tax rates compared to residents and non-residents. All Australian-sourced income is subject to these tax rates, regardless of residency status. The 417 or 462 visa holders must pay the following working holidaymaker tax rates:

Taxable Income Range	Tax Rate
$0 – $45,000	15%
$45,001 – $120,000	32.5%
$120,001 – $180,000	37%
Over $180,000	45%

How Do I Prove I'm Not a Tax Resident?

To prove that you’re not an Australian tax resident while living outside the country, you can take various steps, such as:

Submitting evidence of your commitment to living elsewhere, such as a long-term tenancy agreement or a mortgage.
Removing your details from the Australian electoral register to prove that you’re no longer an Australian permanent resident.
Taking ATO’s resident tests to prove that you don’t meet any of the criteria to be considered a tax resident.
Selling or renting out your Australian property to prove that you have no intention of returning.
Opening an overseas bank account and using foreign currency for all your expenses instead of Australian bank accounts.
Applying for a foreign driver’s license in your new country.
Purchasing overseas investment assets to cut financial ties with Australia.
Obtaining foreign health insurance and not making any Medicare claims.

Suppose you plan to return to Australia after living abroad. In that case, you’ll resume your tax residency and must understand your tax obligations to avoid any unwanted tax consequences.

If you plan to stay permanently in Australia upon your return, you will be a tax resident from the date you land. In addition, your global income will be liable to tax and capital gains tax. If you sell property abroad after returning to Australia, you must pay CGT on your foreign asset.

Seek professional advice if you have any queries about foreign taxation rules and how to avoid CGT.

How Do I Pay Tax in Australia from Overseas?

To pay tax from overseas:

Update your myGov account settings to allow tax return lodgment from abroad.
Declare your residency status and all Australian-sourced income (and worldwide income if you’re a resident) on your tax return.
Keep accurate records of your expenses to deduct from your taxable income tax and lower your tax liability.

ATO will assess your tax bracket and applicable offsets. Make sure you have an Australian bank account to receive any tax refunds.

In Conclusion,

Whether you are a resident or non-resident taxpayer, understanding your tax obligations in Australia is crucial to avoid any unwanted consequences. As a resident taxpayer, you must pay taxes on your worldwide income. On the other hand, non-residents are only taxed on their Australian-sourced income.

There are various tests to determine your residency status. Tax treaties with other countries and foreign income tax offsets may affect your tax situation. If you need help navigating the complexities of the Australian tax system, the Odin Tax Team is here to assist you. Contact us today for expert tax advice and assistance.