A fine line between a resident and a non-resident

The recent case of Pillay v Commissioner of Taxation [2013] AATA 447 has shown that the ATO is currently targeting individuals who are working overseas yet still are classified as Australian residents for tax purposes.This can be the case even if the individual has been overseas for an extended period of time.

If you are an Australian resident generally you are taxed in Australia on your worldwide income from all sources (and liable for Medicare levy). However if you are a foreign resident generally you are taxed in Australia only on your Australian-sourced income (not liable for Medicare levy).

The ATO states that the primary test of tax residency is called the ‘resides test’. If you reside in Australia, you are considered an Australian resident for tax purposes.If you do not satisfy the resides test, you will still be considered an Australian resident if you satisfy one of three statutory tests:

The domicile test: You are an Australian resident if your domicile (broadly, your permanent home) is in Australia.
The 183 day test: If you are actually present in Australia for more than half the income year, whether continuously or with breaks, you may be said to have a constructive residence in Australia.
The superannuation test: Ensures that Commonwealth government employees working at Australian posts overseas are treated as Australian residents.

These tests are not always simple and clear-cut. In the Pillay v Commissioner of Taxation case the individual was found to reside in Australia on the basis of many factors including nationality, frequency, regularity, purpose and duration of visits to Australia, family and business ties with Australia and the maintenance of a place of dwelling in Australia. Given these facts the ATO did not need to consider the individuals domicile.

Generally, for countries with a tax treaty with Australia if you have paid foreign tax in another country you may be entitled to an Australian foreign income tax offset, which provides relief from double taxation. For individuals deemed Australian residents for tax purposes living and working in countries with similar tax rates to Australia the tax variance may not be significant. However, for those individuals living and working in countries with low effective tax rates the variance can be considerable.

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