Tax Residency – Introduction

As mentioned above “foreign resident” is defined in section 995 of the Income Tax Assessment Act (1997), but it simply refers you back to ITAA (1936) to find out what criteria apply to determine residency.

The way I like to think about the concept of residency is a bit like a net – am I going to be inside the Australian tax net and pay tax on my worldwide income or will I be able to get out of that net and be taxed as a foreign resident, which means I will only be taxed on certain types of Australian source income.

The residency rules are written so as to capture as many people in the ‘tax net’ as possible. If you were drafting the residency rules for the first time, who would you want to include in that net? You would probably want to tax people who normally live in Australia – i.e. those who ‘reside’ in Australia. You would want to tax people who were born in Australia or moved to Australia, unless they were based overseas. You might also want to tax people who lived in Australia for a certain amount of time. You might also have special rules for certain types of taxpayers.

This is effectively what we have in Australia today – a set of rules that were written over 80 years ago that define tax residency in a legal sense. Where there are grey areas, we have to consider the relevant Income Tax Rulings issued by the Australian Tax Office and the 37 residency cases that have been decided over the last 40 years or so.

Countries such as the United Kingdom have Statutory Residence Test rules which are very prescriptive in terms of defining when a person is resident and when a person is not resident. Australia rules are much more general and therefore open to interpretation. That means that the onus is on YOU to figure out whether you are tax resident or not and take the necessary action to ensure that the income you disclose and the status you declare in your Australian Income Tax Return is correct.

Australia operates a ‘self assessment’ system, so it is up to you to ensure that you have applied the law correctly and the tax returns you lodge are accurate. If you are not sure, you should seek professional advice.