If you live overseas for a period, you may be a “foreign resident” for Australian tax purposes, even though you are an Australian citizen. Being a “foreign resident” is often advantageous from an Australian tax perspective because, generally speaking, a foreign resident is not required to pay Australian tax on their overseas income (whereas an “Australian resident” is).
Not surprisingly, then, disputes between taxpayers and the Australian Taxation Office (“ATO”) about whether the taxpayer was a foreign resident or an Australian resident during a particular income year (typically, a year when the taxpayer earned significant overseas income) are common.
You will be a foreign resident for an income year if, during the year:
- Requirement 1: you were in Australia for less than 183 days (or you had a “usual place of abode” overseas and did not intend to take up residence in Australia);
- Requirement 2: you did not “reside” in Australia; and
- Requirement 3: you had a “permanent place of abode outside Australia”.
(This is true for many taxpayers; but for some taxpayers, the requirements will be different.)
You need to satisfy all three requirements to be a foreign resident. Determining whether you satisfy Requirement 1 is usually straightforward if you were in Australia for less than 183 days; it is more complex if you were in the country for longer. Determining whether you satisfy Requirements 2 and 3 is often an involved process because there is no “bright line” test for these requirements, ie, the tests are “grey”. How to satisfy Requirement 2 remains controversial – is it enough to show that you were not physically in Australia; or do you also need to show that you severed your associations with Australia? And to satisfy Requirement 3, you need to show that you had a dwelling overseas that was your permanent home. Whether you satisfy Requirements 2 and 3 will likely depend on all your circumstances, including, eg, whether you spent time in Australia – and if so, for how long and for what reasons, the nature of your overseas residence (eg, was it merely a dormitory/barracks or was it something more “home”-like), whether your immediate family lived with you overseas, for how long you intended to live in the foreign country, for how long you actually lived in the foreign country, how strong your connection was with the foreign country, whether you maintained a home in Australia while overseas etc.
But even if you can’t satisfy the three requirements, your foreign income might still be (Australian) tax-free. If the income was earned in a foreign country with which Australia has a ‘tax treaty’ in place, it may be possible to show that, under the treaty, Australia does not have the right to tax you on the income (because only the other country is permitted to tax you).
If the ATO asserts that you’re required to pay tax on your foreign income, the onus is on you, the taxpayer, to show why the ATO is wrong. This means that it is up to you to provide the arguments and evidence to convince the ATO. In our experience, you should aim to provide a clear summary of your circumstances during the relevant income year with supporting evidence, and a considered explanation of how your circumstances compare with the those of taxpayers in relevant Court and Tribunal cases.