Understanding Australian Tax Residency: The Four Tests Explained
Determining an individual’s tax residency is a critical first step in calculating taxable income in Australia. Residency for tax purposes differs from residency for immigration or citizenship and directly impacts how income is assessed. Australian tax residents are taxed on their worldwide income (per s. 6-5(2) of ITAA97), while non-residents are taxed only on Australian-sourced income (s. 6-5(3)).
To determine residency, the law applies four key tests: the Resides Test (common law) and three statutory tests—the Domicile Test, 183-Day Test, and Commonwealth Superannuation Test. A person is deemed an Australian resident for tax purposes if they satisfy any one of these tests.
Below, we’ll explore these tests in detail.
Test 1: Resides Test (Common Law)
The Resides Test, based on the ordinary meaning of the word “resides,” considers whether an individual lives in Australia as part of their routine, continuity, or habit. This test, outlined in Taxation Ruling TR 98/17, applies to various individuals, including migrants, workers, and visitors.
Key Factors Considered:
Intention or Purpose of Presence – Why the individual is in Australia (e.g., work, study, or family).
Family and Business/Employment Ties – Whether the individual has strong personal or professional connections to Australia.
Maintenance and Location of Assets – Ownership of property or other assets in Australia.
Social and Living Arrangements – The individual’s lifestyle and living circumstances in Australia.
If an individual demonstrates a level of routine or habit consistent with residing in Australia, they may be considered a resident, even if their stay is temporary.
The Three Statutory Tests
Test 2: Domicile Test
A person with an Australian domicile is deemed a resident unless they can demonstrate that they have a permanent place of abode outside Australia.
Key Considerations:
The Domicile Act 1982 defines domicile as the intention to make a home in a specific country indefinitely.
A permanent place of abode refers to a fixed, long-term residence outside Australia. It does not require permanence “forever” but must contrast with temporary or transient arrangements (FCT v Applegate, FCT v Jenkins).
Factors Assessed by the Commissioner (IT 2650):
Intended and actual length of stay overseas.
Whether a home has been established overseas.
Abandonment of any Australian residence.
Duration and continuity of overseas presence.
Any intention to return to Australia.
If a taxpayer leaves Australia for at least two years and establishes a home abroad, they are generally considered to have a permanent place of abode outside Australia.
Test 3: 183-Day Test
This test applies to individuals who are physically present in Australia for more than 183 days (or 184 in a leap year). However, it only applies if:
The individual does not have a usual place of abode outside Australia.
They intend to take up residence in Australia.
All days spent in Australia during the income year, whether continuous or intermittent, are counted (IT 2681). Note that this test is typically applied to individuals coming into Australia, rather than those leaving.
Test 4: Commonwealth Superannuation Test
This test specifically applies to Australian Commonwealth Government employees working overseas.
A person is deemed an Australian tax resident under this test if they are:
A contributing member of a Commonwealth Government superannuation scheme established under the Superannuation Act 1990 or Superannuation Act 1976, or
The spouse or child (under 16) of such an employee.
What’s Next? The Future of Residency Rules
In the 2021–22 Federal Budget, the Australian Government proposed modernizing the residency framework. Under the proposed primary test, individuals present in Australia for 183 days or more in an income year would automatically be considered residents. Secondary tests would apply to those who fail the primary test, assessing physical presence and other objective criteria.
Although these changes are not yet legislated, taxpayers should stay informed about developments as they may significantly simplify residency determinations.
Conclusion
Understanding Australian tax residency is essential for accurately calculating taxable income. By applying these four tests in order—Resides Test, Domicile Test, 183-Day Test, and Commonwealth Superannuation Test—individuals can determine their residency status for tax purposes.
If you’re unsure about your tax residency or need assistance navigating these rules, contact a tax professional for expert advice.