The recently announced Australian Federal Budget was always expected to be a ‘cash splash’ Budget with an election just around the corner, however, what many weren’t expecting was the change to the Australian tax residency rules. The motivation behind the change is to simplify the rules for Australians living abroad and reduce the compliance costs and any confusion from the current rules, to allow people to easily determine whether they will be treated as an Australian tax resident or not.
In simple terms, the proposed changes would result in there being one Primary Test, known as the 183 Day Test, followed by a second test and then factor tests. Simply put, if you did not spend more than 183 days in Australia, then you will not be deemed to be an Australian tax resident and would proceed to the second test.
The second test is the 45 Day Test, which means that if you spent between 45 and 182 days in Australia during the financial year, then you could be deemed to be an Australian resident for tax purposes. If you have spent more than 45 days in Australia during the financial year, then you must proceed to the Factor Tests.
The Factor Tests are used to explore your ties to the country. To be deemed a tax resident of Australia, you must simply pass two of the four tests, which are as follows:
- You have the right to permanently reside in Australia;
- You have permanent Australian accommodation;
- You have family in Australia such as spouse or dependant children;
- You have Australian economic interests.
It is important to note that these are just proposed changes at this stage, and we are yet to see the draft legislation to be considered. That said, it’s important to explore how these changes could impact Australian property investors.
The two key factors are Permanent Australian accommodation and Australian economic interests. An investment property in Australia would very likely be considered an economic interest in the country even if rented out. The permanent Australian accommodation would likely refer to a situation where you own a property in Australia that you stay in when you travel back and forth to the country. For those property owners in this category, it would be wise to seek professional tax (financial) advice here to explore your options, particularly as these proposed changes are discussed and debated.
It is also important to consider the Double Tax Agreement (DTA) between your country of residence and Australia, to determine if, or how, these tests may apply to you. Again, given the potential implications here, we would certainly suggest seeking professional advice to explore your options.
If you have any questions about how these changes could impact you, please reach out and let us know.
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