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Your residency status for tax purposes determines how much tax you pay in Australia. The Australian Taxation Office (ATO) classifies individuals as either Australian residents for tax purposes or foreign residents. This classification affects your tax rates, access to the tax-free threshold, and eligibility for tax offsets.
Who Is Considered An Australian Resident For Tax Purposes?
The ATO applies several tests to determine tax residency, including:
- Resides Test: Whether you live in Australia on a permanent basis.
- Domicile Test: Whether your permanent home is in Australia, even if you are temporarily overseas.
- 183-Day Test: Whether you have spent at least half of the financial year in Australia.
- Superannuation Test: Whether you are an Australian government employee working abroad.
Your tax residency is not necessarily the same as your visa status, so it is important to check your classification using the ATO’s Residency Tool.
Employee Responsibility For Declaring Residency
It is the responsibility of the employee to determine and declare their residency status for tax purposes, not the employer or their payroll software provider. This is done by completing a Tax File Number (TFN) declaration form when they start a new job.
As the ATO states: “If your employee has answered no to the question ‘Are you an Australian resident for tax purposes?’ on their Tax file number declaration, you will need to use the foreign resident tax rates.” See: ATO – Employee Declarations
Employers are required to withhold tax according to the answers provided on the TFN declaration. If an employee is unsure of their status, they should use the ATO’s Residency Tool or contact the ATO directly for guidance.
How Does Residency Affect Tax Rates?
Tax rates differ based on your residency status:
- Australian tax residents are eligible for the tax-free threshold, which reduces the amount of tax they pay on lower incomes. They also benefit from lower progressive tax rates.
- Foreign residents are taxed at a higher rate from the first dollar earned in Australia and do not qualify for the tax-free threshold.
What About Temporary Residents?
Temporary residents are generally taxed as Australian residents for income earned in Australia. However, they are not required to pay tax on foreign-sourced income and typically do not have capital gains tax obligations on overseas assets.
Do Working Holiday Makers Have Special Tax Rates?
Yes. Workers on a Working Holiday visa (subclass 417 or 462) are subject to different tax rates from regular residents or foreign workers. These rates are set by the ATO and differ from standard tax scales.
How To Configure Working Holiday Visa Tax In Lightning Payroll
Employers using Lightning Payroll can set up tax scales for working holiday makers to ensure correct tax withholding. For detailed instructions, refer to our guide: How To Set Up Working Holiday Visa Tax Scales In Lightning Payroll.
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