What Happens If You’re Not an Australian Resident for Tax Purposes?
Understanding your status as an Australian resident for tax purposes is more important than many people realise. If you’re not considered an Australian resident for tax, the way you pay tax, the income you declare, and your access to benefits like the Medicare levy all change. This can affect your finances in ways that catch many people by surprise. In this article, we’ll break down what it means to be a non-resident for tax purposes and how this impacts your Australian tax obligations.
How Does Australia Decide If You’re a Resident for Tax Purposes?
The ATO uses a set of residency tests to determine if you’re an Australian resident for tax purposes. This isn’t about your citizenship or visa status-it’s about your overall connection to Australia during the income year.
The primary test is called the resides test. It looks at your physical presence in Australia, your intention to stay, your family and social connections, your employment ties, and whether you have a permanent home here. If you don’t meet the primary test, there are other residency tests, known as statutory tests, such as the domicile test, the 183-day test, and the Commonwealth superannuation test. These consider factors like your usual place of abode, your permanent place of residence, and whether you’re a member of a superannuation scheme established by the Australian government.
If you’re a government employee working at Australian posts overseas, or if you’re a member of certain superannuation schemes (like CSS or PSS schemes), special rules may apply. The ATO also looks at whether you’re physically present in Australia for more than half the income year, your social and living arrangements, and other factors such as your financial ties and the maintenance of Australian bank accounts.
Your residency status can change if you leave Australia temporarily or for an extended period. Even if you’re an Australian citizen or permanent resident, you might become a non-resident for tax purposes if your permanent home is overseas and you don’t maintain significant ties to Australia.
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What Does It Mean to Be a Non-Resident for Tax Purposes?
If you’re not an Australian resident for tax purposes-sometimes called a foreign resident or non-resident-your tax situation changes in several important ways. You only need to declare your Australian income, not your worldwide income. This includes employment income earned in Australia, rental income from Australian properties, and capital gains from selling taxable Australian property.
You do not get the benefit of the tax-free threshold, so you pay tax on every dollar of assessable income you earn in Australia. The tax rates for non-residents are higher, and the middle-income tax offset does not apply. You also don’t pay the Medicare levy, as you’re generally not entitled to claim Medicare benefits or access universal health care in Australia.
If you earn income from overseas while you’re a non-resident for Australian tax purposes, you don’t need to include that foreign income in your Australian tax return. If your situation changes and you become an Australian resident for tax purposes again, you’ll need to report your worldwide income, including any earnings from overseas.
How Are Non-Residents Taxed in Australia?
The way you pay tax as a non-resident is different from how Australian tax residents are taxed. For the 2024-25 financial year, non-residents are taxed at a flat rate of 30% up to $135,000, with higher rates applying above this threshold. There is no tax free threshold, and you don’t benefit from the middle income tax offset.
Australian residents, on the other hand, enjoy a tax free threshold of $18,200 and pay lower rates on income up to $45,000. The absence of this tax free amount means non-residents can pay significantly more income tax on the same amount of assessable income.
For example, if you earn $50,000 of Australian income as a non-resident, you pay tax on the full amount at the non-resident rates. An Australian resident for tax purposes would pay much less, as the first $18,200 is tax free and the rates are lower for middle incomes.
What About Property, Investments, and Capital Gains Tax?
Non-residents who own property or investments in Australia need to be aware of specific rules. If you sell taxable Australian property, such as real estate, you may be subject to capital gains tax. Since January 2025, all property sales by foreign residents require 15% of the sale price to be withheld and paid to the ATO, regardless of the property’s value. This ensures that capital gains tax is collected even if you’re not physically present in Australia.
If you’re an Australian resident for tax purposes selling property, you can apply for a clearance certificate to avoid this withholding. The rules also apply to leases and other transactions involving Australian property.
Interest earned from Australian bank accounts, dividends, and royalties paid to non-residents may have withholding tax applied. This means the tax is deducted before you receive the income, and you generally don’t need to include this in your Australian tax return.
What If You’re a Temporary Resident or Working Holiday Maker?
Temporary residents and working holiday makers have their own set of rules. If you’re on a temporary visa and your usual place of abode is overseas, you may be considered a non-resident for tax purposes. However, if you establish a permanent home in Australia and meet the primary test, you could become an Australian tax resident.
Working holiday makers pay tax at a special rate on their Australian income. If you’re unsure about your status, the ATO’s residency tests and taxation rulings can help you determine your residency status for each income year.
How Does Dual Residency and Double Taxation Work?
Sometimes, you might be a resident for tax purposes in both Australia and another country. This is called dual residency. Australia has double tax treaties with many countries to prevent you from being taxed twice on the same income. These treaties contain rules to decide which country has the primary right to tax your income.
If you’re a dual resident, it’s important to check the relevant double tax treaty and seek advice to ensure you don’t pay more tax than required.
Managing Your Tax Obligations as a Non-Resident
Even as a non-resident, you may need to lodge a tax return if you have assessable income from Australian sources. Make sure you indicate your correct residency status on your return, so the right tax rates apply.
If you have a Higher Education Loan Program (HELP) debt, VET Student Loan, or Australian Apprenticeship Support Loan, you must declare your worldwide income or lodge a non-lodgment advice, even as a non-resident.
Australian government employees working at Australian posts overseas, or those covered by a superannuation act, may have different rules for tax residency and assessable income. If you’re unsure, it’s best to get professional advice.
Conclusion
Your residency status for tax purposes has a big impact on how much Australian income tax you pay, what income you must report, and your access to benefits like the Medicare levy. If you’re a non-resident, you pay tax on your Australian income at higher rates, without the tax free threshold or middle income tax offset. You also need to consider capital gains tax on Australian property and whether double tax treaties apply to your situation.
If you’re not sure about your residency status or need help with your tax return, our friendly team at ACT Tax Group is here to support you. We can help you determine your residency status, understand your obligations, and make sure you’re not paying more tax than you need to. Reach out to us today and let’s make tax simpler, together.