How Tax Residency Affects Your Plumbing Business Income Tax

The Four Tests That Determine Your Residency

The Australian Taxation Office uses four key tests to determine whether you’re an Australian resident for tax purposes. As a plumber, you need to understand how each applies to your situation:

• The Resides Test is the main way the ATO works out if you are an Australian resident for tax purposes. It looks at whether you actually live in Australia, based on things like where you and your family spend most of your time, where you keep your belongings, and whether you plan to stay in Australia or go elsewhere. The ATO also checks your business connections and what you do in the community. All these things together help decide your tax residency.

• The 183-Day Test applies if you’re physically present in Australia for more than half the income year. This is particularly important for plumbers who might work on projects across different states or internationally. However, simply spending less than 183 days in Australia doesn’t automatically make you a foreign resident if your permanent home remains here.

• The Domicile Test considers whether your permanent place of abode is in Australia, even if you’re temporarily working elsewhere. Many plumbers working on major infrastructure projects overseas still maintain their Australian domicile and remain an Australian resident for tax purposes.

• The Commonwealth Superannuation Test applies to specific Australian government employees working overseas and is less relevant for most private plumbers.

Why This Matters for Your Plumbing Business

The difference between being an Australian tax resident and a foreign resident can cost you thousands. Australian tax residents must declare their worldwide income and pay tax on everything they earn globally. Foreign residents only pay Australian tax on Australian sourced income and don’t receive access to the tax free threshold.

For a plumber earning $80,000 annually, the tax difference between resident and non resident tax rates can exceed $15,000 per year. Australian residents get access to the full tax free threshold of $18,200, while foreign residents start paying tax from the first dollar earned and face higher withholding tax rates.

Business Structure and Tax Residency Impact

How you structure your plumbing business significantly affects how Australian tax residency rules apply to your income.

Sole Trader Plumbers

If you operate as a sole trader, your business income is treated as personal income. Your individual tax residency status determines how your plumbing earnings are taxed. This means the residency tests directly impact your business tax obligations and determine whether you’re considered a resident for tax purposes or a foreign resident.

For Plumber Pete, a typical sole trader earning between $80,000-$110,000 annually, being classified as a non-resident instead of a resident for tax could increase his tax burden by over $20,000 per year. He’d lose access to the tax free threshold and face higher resident tax rates on his Australian sourced plumbing income.

Company Structure Implications

If you operate through a company, different Australian tax residency rules apply. A plumbing company is considered an Australian tax resident if it’s incorporated in Australia, or if it’s incorporated overseas but has its central management and control in Australia.

Recent Australian Taxation Office guidance has made it easier for foreign-incorporated companies to be deemed Australian tax residents. Even if you hold all your board meetings overseas, if the day-to-day management decisions for your plumbing business are made in Australia, your company could be treated as a resident for tax purposes.

Partnership Considerations

For plumbing partnerships, each partner’s individual tax residency status determines how their share of partnership income is taxed. The partnership itself doesn’t pay tax, but partners must declare their share based on their personal residency status and whether they qualify as an Australian resident or foreign resident under Australian tax law.

The GST and BAS Connection

Your tax residency status also affects your Goods and Services Tax obligations. If your plumbing business has an annual turnover of $75,000 or more, you must register for GST regardless of whether you’re an Australian tax resident or foreign resident. This triggers the requirement to lodge Business Activity Statements quarterly or monthly.

For plumbers working internationally, GST registration becomes complex. You need GST registration if you make taxable supplies in Australia, regardless of your tax residency status. This means overseas-based plumbers working on Australian projects may still need to register for GST and lodge returns.

The cash flow impact is significant. Pete’s plumbing business with $600,000-$1,000,000 annual revenue must collect GST on invoices and pay it to the Australian Taxation Office quarterly. Poor cash flow management around these payments is one of the biggest stressors for plumbers like Pete, who struggles with overdue invoices and seasonal payment variations.

Working Across Borders: The 183-Day Rule

Many plumbers work on major projects that take them interstate or overseas. The 183-day rule creates particular challenges for this mobile workforce when determining if they remain an Australian resident for tax purposes.

Understanding Physical Presence Requirements

If you’re in Australia for 183 days or more during a financial year, the ATO will see you as an Australian resident for tax purposes. But this isn’t a hard and fast rule. There are other things the ATO looks at, like your job, home, and family ties, to decide whether you’re really living here. If you’re a plumber who works across state lines or goes overseas for jobs, you shouldn’t just count your days in Australia—check with an accountant to make sure your situation has been assessed properly.

The days are calculated as physical presence, including arrival and departure days. For plumbers working fly-in-fly-out arrangements or traveling between project sites, every day counts toward the total for Australian tax purposes.

Common Mistakes Plumbers Make

The 182-Day Fallacy: Many plumbers believe staying under 183 days automatically makes them foreign residents. This is wrong. If your permanent home is Australia and you intend to return, you can still be a tax resident even with fewer than 183 days presence.

Travel Days Don’t Count: Days spent traveling between countries don’t contribute to the 183-day total. However, if you’re traveling for work within Australia, these days typically count toward your physical presence for tax purposes.

Project-Based Thinking: Some plumbers think each project is assessed separately. In reality, the Australian Taxation Office looks at your total annual presence and overall circumstances to determine your tax residency status.

Practical Impact for Plumbing Businesses

Consider Arborist Andrew, who despite generating $1.2M-$1.6M annually, only takes home $90K-$100K personally. If Andrew works on overseas projects and incorrectly assumes he’s a foreign resident, he could face massive penalties when the Australian Taxation Office audits his returns.

The solution isn’t simply counting days. Andrew needs to examine his overall ties to Australia, including where his business is managed, where his family lives, and where his Australian assets are located to properly determine his residency status.

Proposed Changes: What’s Coming

The Australian Government has announced plans to replace the current individual tax residency rules with a simpler primary test and secondary test system.

The New Primary Test

Under the proposed changes, anyone physically present in Australia for 183 days or more in an income year will automatically be considered an Australian tax resident for tax purposes. There will be no exceptions for permanent place of abode or intention.

Secondary Factor Test

For individuals present between 45-182 days, a four-factor test will apply:

• Right to reside permanently in Australia as an Australian citizen or permanent resident

• Australian accommodation arrangements and living arrangements

• Family location and employment ties maintenance

• Economic connections to Australia including Australian assets and bank accounts

Meeting two of these four factors would make you an Australian tax resident under the new test system.

Timeline and Impact

These changes were initially proposed for implementation by July 2026, but there’s been no recent confirmation. The delay creates uncertainty for plumbers planning international work arrangements and their tax residency status.

For plumbers currently managing their residency through careful day counting, these changes could eliminate many planning strategies. The bright-line 183-day primary test leaves little room for interpretation under the new Australian tax law framework.

Special Considerations for Different Visa Categories

Your visa status significantly impacts how tax residency rules apply to your plumbing business income.

Temporary Residents and Working Holiday Makers

Temporary residents face different withholding tax provisions and don’t have access to the tax-free threshold. Working holiday makers are subject to special resident tax rates and withholding arrangements that can significantly impact their take-home pay from plumbing work.

Temporary residents also face restrictions on claiming certain deductions and may be subject to additional Medicare levy obligations despite not being eligible for full Medicare benefits.

Overseas Students

If you’re an overseas student enrolled in an Australian institution and working in plumbing to support your studies, your tax residency status depends on your intention and the duration of your stay. Many overseas students incorrectly assume they’re automatically foreign residents for tax purposes.

Australian Citizens Working Overseas

Australian citizens working on plumbing projects overseas often remain Australian tax residents due to their ongoing ties to Australia. This means they must declare their worldwide income and may be liable for Australian tax on their foreign source income, subject to any applicable double tax agreement provisions.

Tax Treaties and Double Tax Agreements

Australia has comprehensive double tax agreement networks that prevent double taxation for residents working internationally. These tax treaty provisions can significantly impact plumbers working across borders.

How Tax Treaties Work

A tax treaty typically contains tie breaker rules that determine which country has the right to tax specific types of income. For plumbers working internationally, understanding these rules is crucial for proper tax planning and compliance.

The treaties also contain withholding tax provisions that may reduce the amount of tax withheld from Australian sourced income paid to foreign residents.

Common Treaty Benefits

Most tax treaties provide reduced withholding tax rates on various types of income and contain provisions to avoid double taxation through credit systems. These benefits can result in significant tax savings for plumbers working internationally while maintaining their Australian tax residency.

Managing Your Tax Obligations

Understanding your obligations as an Australian tax resident or foreign resident is crucial for compliance and cash flow management.

Record Keeping Requirements

Maintain detailed records of your physical presence in Australia, business activities, family circumstances, and financial arrangements. The Australian Taxation Office may request this information when reviewing your tax residency status.

Income Tax Return Obligations

Australian tax residents must lodge a tax return declaring their worldwide income. Foreign residents only need to declare Australian sourced income but may still need to lodge returns depending on their circumstances.

Medicare Levy Considerations

Australian tax residents are generally subject to the Medicare levy, while temporary residents and foreign residents may be exempt. However, temporary residents may still be liable for the Medicare levy if they have access to Medicare benefits through reciprocal healthcare agreements.

Higher Education and Trade Support Loans

Your tax residency status affects repayment obligations for Higher Education Loan Program debts, VET Student Loan obligations, and Trade Support Loan repayments. Australian tax residents overseas may still need to make repayments on these loans based on their worldwide income.

Practical Strategies for Plumbing Businesses

Given the complexity and potential changes ahead, here are specific strategies for plumbing business owners to manage their tax residency effectively:

Documentation and Record Keeping

Maintain comprehensive records of days spent in each country, purpose of travel, location of business meetings and decisions, family circumstances and accommodation arrangements, and location of bank accounts and Australian assets.

Professional Structure Advice

Consider whether your current business structure improves your tax position under both current and proposed tax residency rules. Company structures can provide more certainty around residency, but recent Australian Taxation Office guidance has made it easier for companies to be deemed Australian tax residents.

Cash Flow Planning

Tax residency affects your cash flow planning significantly. Australian residents eligible for the tax free threshold have different withholding requirements than foreign residents. Plan your obligations around your expected residency status to avoid cash flow surprises.

International Work Considerations

If you’re planning overseas plumbing projects, structure your arrangements carefully. Consider duration and frequency of visits, where business decisions are made, family and accommodation arrangements, and asset and banking locations.

Don’t assume that working overseas automatically changes your tax residency status. The Australian Taxation Office looks at substance over form when determining whether you remain a resident for tax purposes.

Conclusion

Understanding how tax residency affects your plumbing business income tax obligations isn’t optional—it’s essential for protecting your business and minimising your tax burden. This isn’t just about the income you earn from jobs across the ACT or overseas; it also covers what happens if you sell business assets like work vehicles, equipment, or even land. These situations can trigger Capital Gains Tax, and your tax residency status will determine how much tax you pay and what you need to declare to the Australian Taxation Office.

With the current complex four-test system and proposed changes ahead, getting professional advice is crucial. The way Capital Gains Tax applies to your plumbing business will depend on whether you’re classed as an Australian resident for tax purposes or a foreign resident. Australian tax residents generally pay Capital Gains Tax on assets owned anywhere in the world, while foreign residents normally only pay Capital Gains Tax on Australian property, such as land or houses used in your business. This difference can have a big impact on your tax bill if you decide to sell or change part of your business assets.

The key is taking action now. Don’t wait until the Australian Taxation Office questions your residency status or the new rules take effect. Review your current situation, ensure proper documentation, and consider whether your business structure and arrangements put you in the best position under Australian tax law. This includes thinking about how Capital Gains Tax might affect your plans to buy, sell, or upgrade business assets—especially if you have connections in other countries or your family situation changes.