【Tax】Considerations when becoming an Australian tax resident

Usually, if an individual becomes a tax resident of Australia, their income tax position will change significantly. 

The ATO uses four tests, and satisfying any one makes you a tax resident:

- Resides test (main test, also called "the common law test")

- Domicile test

- 183‑day test

- Commonwealth superannuation test

1

    You are taxed on worldwide income

Once you become a tax resident, the ATO taxes you on all income from everywhere, including:

• Overseas salary

• Foreign bank interest

• Dividends from overseas shares

• Rental income from foreign property

• Capital gains on overseas assets

This is the biggest shift — non‑residents are taxed only on Australian‑sourced income.

 2

      Your residency start date matters

Your “residency start date” determines:

• When worldwide taxation begins

• Which income is taxed under resident vs non‑resident rules

• Whether foreign income before arrival is taxable

For most people, residency starts when they arrive in Australia with the intention to live here, but the ATO looks at the whole picture — family, home, job, ties, and intentions.

 3

     Key implication on the date you become an Australian tax resident

For individuals who are becoming Australian tax residents with CGT assets which

are not taxable Australian property (examples would include foreign real estate, shares, business interests, foreign currency deposits, and collectibles), the date of the tax residency change is important because of the cost base setting rule in s 855-45 of the Income Tax Assessment Act 1997 (Cth) (ITAA97). That section provides that an individual is taken to have acquired the relevant CGT asset on the day they became a resident of Australia, for the market value on that day.

When markets are moving quickly (in either direction), the deemed acquisition

rule in s 855-45 ITAA97 could work to a client’s advantage or disadvantage.

For a CGT asset purchased for a lower value than the market value on the day of residency, there is a benefit in that “pre-residency gains” are not brought into the Australian tax system.

However, for a client who owns an asset which was purchased for a higher value than its market value on the day they become a resident, the cost base setting rule will work against them. Essentially, they will be exposed to CGT even if all that happens is that the asset is sold at its original cost price. Paying CGT when there is no economic gain is an unhappy prospect.

 4

      Other implications arising from a change of tax residency

After you become an Australian tax resident, 

– employment income is assessable in Australia when received, even if it relates to work performed prior to becoming a resident;

– foreign companies owned by this individual may become a resident;

– certain equity interests held in foreign companies may attract the operation of Australia’s controlled foreign company rules;

– loans from private companies incorporated overseas can be deemed to be dividends either because of Div 7A ITAA3626 or s 47A ITAA36;27 and

– distributions from foreign trusts, including overseas savings plans which do not qualify as “foreign superannuation funds” (such as US 401K plans), may be taxable because of the operation of s 99B ITAA36.

Disclaimer: This article is intended to provide general information only and does not constitute professional advice for specific circumstances.  It should not be relied upon as a substitute for tailored advice.

Source: ATO, ITAA36, ITAA37, Taxation in Australia