An increasingly large number of Australians are making the transition to location independence. In this article, I explain how this transition works from a tax perspective and what should / should not be done. I also answer frequently asked questions and provide a few tips.
Australia is one of the world’s most livable countries. Its twenty-five million or so people enjoy access to a number and variety of opportunities rivalled only by a few. Unfortunately, the scope Australia’s taxation system is also rivalled only by a few and things are likely to get even worse as the ATO continues its war on tax evasion and money laundering.
While technically a residential taxation country, Australia relies heavily on domicile rules when it comes to residency issues. As a result, “leaving” can be fairly hard and that is especially true in the context of location independence.
For those who qualify as tax residents, federal rates are progressive and range from 0% on income up to ~ 18000 AUD to 45% on income above ~ 180000 AUD. There is no state or municipal income tax in Australia. There is also no capital gains tax per se, instead, gains are taxed as normal income (discounts are available). Deductions, tax credits and allowances are available provided that certain conditions are met. There are no wealth, inheritance or capital duty in Australia. There is a state-level stamp duty with rates up to 5.75%. An annual return must be filed by all taxpayers with taxable income and the deadline for payment is the 31th of October.
In the vast majority of residential taxation countries, a physical presence test is used to determine tax residency. If you pass the test, you are deemed to be a resident while if you do not, you are deemed to be a non-resident. In most cases, 183 days is the magical number.
In Australia, the domicile rules are what is used to determine tax residency. Under the domicile rules, you are deemed to be a tax resident of the country where you have the most ties. This includes physical assets (house, car, RV etc), financial assets (bank accounts, credit cards, pension etc), social connections (close family, memberships etc) and work connections (business, employment etc).
As a result, the only sure way of “leaving” Australia is to establish significant ties elsewhere. Otherwise, it is likely that even if you travel constantly, you will still be deemed a tax resident in Australia.
It is important to note that there have been a number of court cases involving Australians living abroad on temporary residence permits (one year in most cases) and that in the majority of those cases, the ATO has successfully argued that the defendants be deemed tax residents of Australia based on the limited duration of their residence permits and that back taxes should be paid if applicable on any income received since leaving Australia. It is thus crucially important that you secure a long term residence permit in your chosen country and that you document everything you do in relation to leaving Australia to avoid future issues. Click here to take the ATO’s residency test and here to read more about residency rules.
If you do qualify as a non-resident, you will only need to file a tax return in Australia if you have Australia-sourced income. To re-qualify as an Australian tax resident, you will simply need to move back to Australia and re-establish ties.
Question 1: Is spending 183+ days abroad enough to qualify as non-resident for tax purposes?
Answer 1: No, see the “Tax residency” section for more details.
Question 2: Do I need to close all my Australian bank accounts, credit cards etc in order to qualify as non-resident?
Answer 2: You can continue to use your Australian bank accounts, credit cards etc but be aware that doing so may create a tax liability in Australia (interests earned, capital gains etc).
Question 3: If I qualify as a tax resident of Australia, can I tax-optimize?
Answer 3: Absolutely. There are many rebates / credits available, tax transparent entities in countries like the UK, US and Canada may also be used.
Question 4: As a non-resident, will I still have access to universal health care and social services?
Answer 4: No. You will need to purchase health insurance and pay your own way.
Question 5: What will happen to my assets in Australia (real estate, Super etc) if I become a non-resident?
Answer 5: They will be deemed to have been sold / liquidated and any gains realized will be subject to taxation (similarly to if you died). See this page for more details.
Question 6: I have kids in Australia, can I become non-resident?
Answer 6: In practice, it will be nearly impossible to become a non-resident if you have kids living in Australia with an ex-partner (they will be deemed a very strong tie up until they become adults).