The Tax Office web site provides details of how the Resides Test works here.
As a starting point, it makes sense to complete the Tax Office questionnaire so that you can understand the factors that are taken into account when determining residency. Before you complete the Tax Office questionnaire, you will need to know the following:
- How long will you be away from Australia?
- When will you return to Australia?
- What type of accommodation will you live in while you are away from Australia?
- Your reasons for leaving Australia and the activities you will be undertaking while away from Australia.
- Whether you will retain any connections with Australia.
The Tax Office needs to be able to distinguish between individuals who are undertaking a short term overseas assignment whereby they maintain their home base while overseas and those who are moving overseas for a longer period of time.
Given that personal tax rates are relatively high in Australia, an individual may gain a tax advantage by being taxed on their overseas income in the foreign jurisdiction where they are based and not paying any Australia tax on that income. The Tax Office therefore closely monitors the tax status of individuals who are working overseas.
However, as the Australian tax system is a ‘self-assessment’ system, the onus is on individual taxpayers to declare their residency status on their annual income tax return. The Tax Office generally accepts tax returns as lodged but then reserves the right to conduct a tax audit after the event if it thinks that an income tax return is incorrect or that income has not been disclosed.
The onus is therefore heavily on the taxpayer to make sure they are making a correct declaration as to their residency status and including the correct amount of taxable income in their Australian income tax return. If they deliberately or inadvertently make an incorrect declaration, they could be subject to a tax audit and may have to pay outstanding tax and penalties if it turns out that their income tax return was incorrect.
Based on our experience, the Tax Office typically conducts tax audits 1-3 years after a taxpayer has returned to Australia from an overseas assignment. This can magnify the amount a taxpayer has to pay if they have understated their taxable income.
It is therefore essential that a taxpayer understands how the tax rules apply to their particular situation and ensures the income tax returns they lodge are accurate.