The rules around tax residency are largely different to the rules around social security, visa residency, as well as citizenship.
Australian Tax Resident
In Australia, for tax purposes, an individual is an Australian resident if they satisfy one of the residency tests.
However, those people from outside of Australia may not realise that establishing that you are an Australian tax resident is not the end of the story. An Australian tax resident may be a permanent resident or a temporary resident, with different tax implications.
Temporary Australian Tax Resident
A temporary Australian tax resident is an Australian resident who:
- Holds a temporary visa under the Migration Act 1958
- Is not an Australian resident according to the Social Security Act 1991
- Does not have a spouse who is an Australian resident within the meaning of the Social Security Act 1991
The Social Security Act 1991 defines an ‘Australian resident’ as a person who resides in Australia and is an Australian citizen, holder of a permanent visa or a protected special category visa holder.
As you can see this is different to the tax definition of Australian tax resident.
Temporary residents may be considered an Australian tax resident due to a “permanence” in their intention and action of residing in Australia, however, they may not be legally allowed to permanently reside in Australia based on their Visa, which means they will likely return to their home country.
(NZ citizens are a special case, where they can remain in Australia without applying for permanent residency, but are still considered Temporary Residents based on the “Special Category Visas” issued to them upon entry to Australia.)
The Difference Between a Temporary Resident and a Permanent Resident for Tax Purposes
All Australian residents are taxed on their Australian and worldwide income, including any capital gains on foreign property held.
Foreign residents are taxed only on their Australian sourced income.
Permanent Australian residents are treated the same as an Australian resident, and taxed on both Australian and worldwide income.
Temporary residents are taxed on their Australian-sourced income only. They are taxed at resident marginal tax rates, however, they do not pay tax in Australia on their foreign-sourced income.
Foreign residents and temporary residents are subject to capital gains tax (CGT) if a CGT event happens to a CGT asset that is taxable Australian property. They are not subject to CGT in Australia on their foreign owned taxable property for CGT purposes. This ensures, for example, that they can reside in Australia on a temporary basis without having to worry about the CGT consequences of a home they maintain back in the country in which they permanently live and are likely to eventually return to.
Taxable Australian Property
‘Taxable Australian property’ are capital assets that include real property situated in Australia, mining rights in Australia, assets of a business located in Australia, and indirect interest in Australian real property through an entity that you hold 10% or more controlling interest in (where such interest is primarily associated with ownership of the Australian real property).
This also includes options over any of the above.
Individuals are taxed on any taxable Australian property, regardless of their residency status.
Overview of Different Tax Treatment
|Taxed on overseas income
|Taxed on Australian sourced Income
|CGT on taxable Australian property
|CGT on foreign taxable property
|Entitled to claim CGT main residence exemption on Australian main residence
Note that a temporary resident’s visa status may change, and they may find that they become a permanent resident, or Australian resident. If a temporary resident becomes a permanent resident, then they are deemed to have acquired any assets (other than taxable Australian property) at their market value on the date that they ceased being a temporary resident and became a permanent resident. Once an individual has become a permanent resident, simply departing Australia, even for more than six months, may not be enough to change their status to a non-resident.