Determining tax residency can be a complex matter, particularly when an individual leaves Australia partway through the income year. This article aims to shed light on the tax implications associated with such circumstances. It is important to note that residency status is determined on a case-by-case basis, considering various factors and intentions of the taxpayer. Seeking professional advice is crucial in navigating these matters effectively.

 

Tax consequences of part-year residency

Assuming an individual ceases to be a resident of Australia for tax purposes mid-year, several general tax consequences arise:

1. Adjusted tax threshold: The person’s tax threshold for the income year will be prorated to reflect the period they were a resident. This prorated threshold will apply to assessable income from all sources within and outside Australia while they were a resident and from Australian sources while they were a foreign resident.
2. Tax rates: The resident tax rates remain unchanged based on part-year residency. Only the relevant tax-free threshold is adjusted.
3. Foreign income: Assessable income derived from sources outside Australia during the period the person is a foreign resident will not be subject to tax in Australia since it falls outside the Australian taxing jurisdiction.
4. Subsequent years: In the following income years, the person will be assessed as a foreign resident and will pay tax in Australia only on assessable income sourced from Australia, subject to foreign resident tax rates.

 

Capital Gains Tax implications

Ceasing to be a tax resident of Australia triggers certain CGT implications:

1. Deemed disposal of CGT assets: When an individual ceases to be a resident, they are deemed to have disposed of all their Australian-sourced CGT assets at their market value at the time of departure. However, this rule excludes “taxable Australian property” (which remains subject to CGT regardless of residency) and “pre-CGT” assets.
2. Opting out: An individual has the option to opt out of the deemed disposal rule. By doing so, all Australian-sourced CGT assets will continue to be treated as taxable Australian property until they are actually disposed of, or the taxpayer becomes a resident of Australia again for tax purposes.

 

The complexity of residency determination

Determining an individual’s tax residency status can be challenging, as illustrated by recent tax decisions. Factors such as the presence of family, property ownership, and other connections to Australia can influence residency status. In some cases, individuals may be considered residents for tax purposes despite spending a significant portion of the year working overseas. Given the complexity involved, seeking professional advice is crucial to ensure compliance and accurate determination of tax residency.

 

Conclusion

Part-year residency raises important tax considerations for individuals leaving Australia mid-year. Adjustments to tax thresholds, tax rates, and the treatment of foreign income apply during the relevant periods. CGT implications, including the deemed disposal of Australian sourced CGT assets, should also be taken into account. However, determining tax residency remains a complex matter, and seeking professional advice is highly recommended to ensure proper compliance with tax regulations.

Contact our experienced team for more information and assistance.