Does not having Australian residency status necessarily mean you are not an Australian tax resident? Must-read before a property transaction!

Resident Status Assessment Test 

Under the Australian Taxation Office (ATO) definition, tax residency status is not directly linked to nationality. Determining whether you qualify as an Australian tax resident is often the first challenge many individuals face. The ATO provides several tests to assess tax residency, with the most commonly used being the residency test. This test primarily evaluates whether an individual has been living in Australia for an extended period. Additionally, the domicile test examines whether an individual has a permanent home in Australia; the 183-day test applies to those who have stayed in Australia for more than 183 days within a financial year; the Commonwealth Superannuation Test is relevant for individuals receiving Australian government pensions. 

1. Resides Test

According to this test, individuals who live in Australia on a long-term and stable basis are considered Australian tax residents. The official definition of “residency” is: “Living in Australia permanently or for a considerable period, having a fixed or usual place of residence, and residing in a specific location.” Other factors that may be considered include intent and purpose of residing in Australia, family and business/employment ties, maintenance and location of assets, and social and living arrangements. For example, if you have a fixed residence in Australia, stable family relationships, and regular social interactions such as gatherings with friends, you are highly likely to be classified as an Australian tax resident. 

2. Domicile Test 

According to this test, if your domicile is in Australia, you are generally considered an Australian tax resident. Domicile refers to a legally recognized permanent residence, reflecting an individual’s long-term connection and sense of belonging to a specific location. Determining domicile is not solely based on actual residence but also involves personal intent and future plans. Unlike residence, which may change frequently, domicile has strong legal continuity—meaning that even if a person temporarily relocates, their original domicile may still be legally valid unless it is explicitly abandoned or changed. The ATO states that a person can have only one domicile but may be a resident in multiple locations. 

The ATO classifies domicile into three main types: Domicile by origin, Domicile by choice, and Domicile by operation of law. You may retain your domicile of origin, but you can also choose a domicile based on your intention to permanently reside in a particular location. Domicile by operation of law generally applies before the age of 18, meaning a minor’s domicile follows their parents’ domicile. 

The domicile test is particularly relevant for Australian residents working or living overseas for an extended period. For example, if an Australian resident relocates overseas for work but maintains a home in Australia and intends to return in the future, they may still be considered an Australian tax resident under the domicile test. Conversely, if they establish a new permanent home abroad and sever ties with Australia, they may no longer be classified as an Australian tax resident. 

3. 183-Day Test

If you spend more than half of the year (whether continuously or intermittently) in Australia, you will be considered an Australian tax resident under the 183-day test, unless it can be determined that your domicile is outside Australia, and you have no intention of residing in Australia. It’s important to note that the 183-day test is based on Australia’s financial year (from July 1 to June 30 of the following year), not the calendar year. 

If an individual has already settled in Australia, this assessment generally does not apply, regardless of how many days they spend abroad (refer to the definition of domicile). In practice, this assessment is primarily relevant for individuals planning to arrive in Australia, especially immigrants, international students, or temporary visa holders. For individuals who are already Australian residents, this rule typically does not change their tax residency status unless there are exceptional circumstances indicating a fundamental change in their residence and life focus. 

4. Superannuation Test

This test applies only to Australian government employees who are eligible to contribute to the Public Sector Superannuation Scheme (PSS) or the Commonwealth Superannuation Scheme (CSS). If an individual meets this condition, they (along with their spouse and children under the age of 16) will be considered Australian tax residents, regardless of other factors. It’s important to note that this assessment is only applicable to members of the PSS and CSS, and these two superannuation schemes are no longer accepting new members. 

Resident Status Classification 

According to the four tests provided by the ATO, if you meet any of the resident status assessments, you will be considered an Australian tax resident, required to declare worldwide income and apply for a clearance certificate to be exempt from the Foreign Resident Capital Gains Withholding (FRCGW) rules. However, if none of the resident status assessments apply, you will be classified as a foreign resident, only required to report taxable income earned in Australia, and in certain cases, you can apply to adjust the withholding tax rate. 

Australian Tax Residents 

• Typically, if any of the resident status assessments are met, you will be considered a tax resident of Australia.

• Australian tax residents must declare both domestic and international income, even if taxes have already been paid overseas. 

• Foreign Resident Capital Gains Withholding (FRCGW) Rules: When engaging in property transactions, sellers can apply for a Clearance Certificate to be exempt from the withholding tax. 

Foreign Residents 

• Typically, if none of the resident status assessments are met, you will be considered a foreign resident.

• When filing taxes in Australia, you must declare income earned within Australia, including any capital gains from taxable Australian properties. 

• Foreign Resident Capital Gains Withholding (FRCGW) Rules: Foreign residents do not qualify for the clearance certificate, but under specific circumstances, property sellers can submit a Variation Notice to reduce the withholding tax rate. 

Common Questions  

Based on our breakdown of the four tax residency tests, you should now have a clearer understanding of tax residency concepts. Let’s revisit the three key questions we raised at the beginning:

1）Does being an Australian citizen automatically make you an Australian tax resident? 

Even for Australian citizens, tax residency status must still be assessed based on the four tests set by the ATO. Generally, citizens who reside in Australia long-term and live and work locally are recognized as tax residents, whereas those who have lived overseas for an extended period and have no close ties to Australia may not be considered tax residents. Under the “resides test,” the former qualifies as a tax resident due to their stable social connections, permanent residence, and prolonged stay in Australia. In contrast, under the “domicile test,” if the latter has voluntarily changed their permanent place of residence and their core connections—such as social ties and economic activities—have shifted overseas, they may be regarded as foreign residents.

2）Does not having Australian residency status mean you cannot be an Australian tax resident? 

Taking international students as an example. In fact, an international student’s tax residency status depends on their time spent in Australia and their intentions. If an international student lives in Australia for more than six months (satisfying the 183-day rule) and has the intention of long-term residence (for example, planning to stay in Australia to work after completing their studies), they are likely to be considered an Australian tax resident. However, if the student is in Australia only for a short-term study and does not have long-term residency intentions, they may be considered a non-resident for tax purposes. 

3）Under the Foreign Resident Capital Gains Withholding (FRCGW) rules, what steps should Australian tax residents and foreign residents take? 

According to the regulations, Australian tax residents are eligible to apply for a Clearance Certificate to be exempt from withholding tax deductions. In contrast, foreign residents can only apply for a Variation Notice under specific circumstances to reduce the withholding tax rate. For a more detailed analysis, check out our previous article: Australian Property Transactions: How Australian Tax Residents Can Obtain a Clearance Certificate to Avoid Withholding Tax—What Should Non-Tax Residents Do? 

Conclusion

The Foreign Resident Capital Gains Withholding (FRCGW) rules have significant implications for both Australian tax residents and non-residents, making it crucial to correctly determine your tax residency status. Property sellers should promptly confirm their status, prepare the necessary documentation, and submit it to the buyer to avoid unnecessary withholding taxes. Buyers must also correctly process the tax submissions in accordance with the provided documents, as failing to do so could expose them to potential penalties from the tax authorities. 

If legal issues arise during a property transaction, Sunfield Chambers Solicitors & Associates is happy to provide professional support. However, for tax-related issues, it is advisable to consult a tax accountant or registered tax agent. Proper planning and compliance will help minimize transaction risks and protect your rights. 

*Specific situations may vary for individuals. For more detailed information, please visit the official website of the Australian Taxation Office (ATO) or consult a professional tax advisor. 

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Writer: Xueying(Grace) Yang; Content Planner: Yan Zhou Yan Zhou; Xueying(Grace) Yang; Proofreading: Gang(Abraham) Sun

This article is based on publicly available information and the author’s understanding, and does not constitute any form of professional legal advice or business decision. Readers should refer to this article in light of their own actual situation and consult relevant professionals for specific guidance. The author and the publishing platform assume no legal responsibility for any consequences arising from the use of the information in this article.