Tax Residency of an Individual – Why is it important?

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For individuals, the key considerations in determining Australian Tax Residency are:

 Source – residents are subject to tax on income from all sources, and capital gains from all sources, whereas non residents are only subject to tax on income from Australian sources, and
in respect of capital gains, only if the relevant Capital Gains Tax (CGT) asset is Taxable Australian property (TAP);

 Tax free threshold – residents are subject to different rates of tax compared to a non resident, but will also potentially be subject to medicare levy and the medicare levy surcharge whereas
a non resident is not subject to medicare;

 CGT event – if an individual ceases to be a resident, a CGT event is triggered for all non TAP assets held (noting there is a choice that is able to be made to treat the non TAP asset as
TAP so it effectively does not escape Australian tax when sold);

 Capital gains and non residents – a non resident is allowed to disregard a capital gain arising from a CGT asset – with the exception of a CGT asset that is TAP;

 A foreign resident is not eligible to the 50% CGT discount for CGT events after 8 May 2012 (subject to particularly complicated transitional provisions if the person owned the asset as at 8
May 2012);

 If a foreign resident sells a property, there will be an obligation for the purchaser to withhold tax (12.5% from the gross proceeds) – noting also there is an ability to vary the rate;

 If a foreign resident purchases property in Australia, they may be subject to a stamp duty surcharge (depending on the relevant state); and

 If a foreign resident is a potential beneficiary of a discretionary trust, and that trust owns property, the trust may be subject to the non resident land tax surcharge (again depending on the state).

This has always been a very complicated area of Income Tax law and appropriate professional advice should be sought before residents become non residents and non residents before selling TAPs.

 

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