How you can win as a temporary tax resident

Like many countries, Australia taxes its residents on the income and capital gains they generate irrespective of where they are sourced.  

For ‘temporary residents’, understanding how the rules operate in detail – and even your relationship status – is necessary to determine your tax position.

Why is temporary residence for tax purposes important to understand? 

Understanding temporary residence rules is critical because:

• many tax rules differ for temporary residents compared with permanent residents;
• while temporary residents are treated in many respects like foreign residents, there are some differences; and
• if a person ceases temporary residence and becomes a permanent resident, there may be significant tax implications. 

Who is a temporary resident for tax purposes?

Temporary residency one of the residency categories that a person may fall into for tax purposes in Australia.

Broadly, there are three categories of residency for tax purposes:

• A temporary resident
• A resident (also referred to as a permanent or full resident)
• A foreign resident (also referred to as a non-resident)

A temporary resident is defined in the tax law as a person who meets all the following:

• Holds a temporary visa; and
• Is not an Australian resident under the Social Security Act 1991 definition; and
• Does not have a spouse who is an Australian resident under the Social Security Act 1991 definition.

Let’s unpack each of these criteria in more detail below:

a)    Holds a temporary visa

A temporary visa is a visa that permits the holder to stay in Australia for a period of time – for example, while undertaking study or engaged for a particular job.  A temporary visa is distinguished from a permanent visa, which permits a person to remain in Australia indefinitely.

The types of temporary visas available change from time to time.  As such, there isn’t a definitive list of visas that apply.  Instead, it is important to look into the details of the visa a person holds to ascertain whether it is a temporary visa.

b)    Is not an Australian resident under the Social Security Act 1991

In addition to holding a temporary visa, a person can only be a temporary resident if they are not an Australian resident under the Social Security Act 1991.  Broadly, this Act determines that only an Australian resident is entitled to social security benefits in Australia.  It defines an Australian resident as someone who is a citizen or a permanent resident of Australia or a Special Category visa holder.  

Generally, if a person holds a temporary visa but also is potentially entitled to social security benefits under the Social Security Act 1991, then they are not a temporary resident for tax purposes.

c)    Does not have a spouse who is an Australian resident under the Social Security Act 1991

If a person who would otherwise be a temporary resident for Australian tax purposes has a spouse (including a de facto partner) who is a full Australian resident (e.g., an Australian citizen or permanent visa holder) then the person on the temporary visa is taken to be a full Australian resident for tax purposes.  

From the time that a holder of a temporary visa has such a spouse, the temporary visa is no longer relevant, and the person is treated as a permanent or full tax resident for Australian tax purposes.

What are the tax implications of being a temporary resident?

For the most part, temporary residents are treated the same as foreign residents for tax purposes.  Broadly, this means that they are only assessed in Australia on the following:

• Income that is sourced from Australia
• Employment income sourced from Australia
• Foreign employment income for services provided while a temporary resident
• Capital gains from taxable Australian property

Because they are treated similarly to foreign tax residents, other implications of being a temporary resident include:

• Not being eligible for the 50 per cent CGT discount
• Not being subject to section 99B taxation in relation to a foreign trust’s foreign source income (see here for more information on section 99B)

Importantly, most income temporary residents receive from investments or sources outside of Australia is not taxed in Australia, and such income does not have to be declared in their Australian tax return.

Subdivision 768-R of the ITAA 1997 sets out the key taxation rules for temporary residents.

Superannuation

It should also be noted that in some cases a temporary resident who is departing Australia can claim superannuation that was paid in Australia while a temporary resident.  This is referred to a Departing Australia Superannuation Payment. 

What can change a person’s residency from a temporary resident to a resident?

Life events may happen that cause someone to not change their location and yet to change residency status.  Relevant events that will impact a temporary resident include:

• Obtaining an Australian permanent visa or citizenship; or
• Marrying or establishing a de facto relationship with a full Australian tax resident (eg Australian citizen or permanent visa holder).

Tax is not usually front of mind when forming new personal relationships but for temporary residents it needs to be considered as pre-relationship planning steps could prove valuable. Timing could mean everything so be careful where you leave your toothbrush or undertake other steps that signify that a de facto relationship has commenced. 

Implications of changing from a temporary to a permanent or full tax resident 

A temporary resident becoming a full Australian tax resident has tax implications, including:

• They are deemed to have acquired any assets they hold, other than taxable Australian assets, at their market value on the date they became a resident
• From that date, they are assessed in Australia on income and capital gains from all sources, regardless of the location of those assets or the source of that income 

Can you change from a temporary resident to a permanent resident and then back again to a temporary resident?

In general, the answer is no.  For example, if a person becomes a permanent resident due to a marriage or a de facto relationship, and that relationship ceases, they continue to be an Australian resident for tax purposes.  

They do not resume temporary residence, despite continuing to hold a temporary visa, and no longer having a spouse or de facto partner who is an Australian resident.

Potential complexities 

It should be noted that a person may fall into more than one of the above residency categories.  For example, they may be a resident as well as a temporary resident.  

If so, all the relevant facts and the sequence of relevant events need to be analysed to determine the person’s residency for tax purposes.  In some cases, the relevant double tax agreement will also need to be considered. 

Why New Zealanders should take special care?

There are special rules to facilitate their easy entry to Australia from New Zealand.  New Zealanders are issued with a non-protected Special Category Visa (SCV subclass 444) on arrival to Australia. This visa is a temporary visa.

These arrangements have been in place since 27 February 2001.  Prior to that date, New Zealanders attained a protected SCV, the main practical difference being that protected visa holders can access Australian government support benefits and services while non-protected visa holders cannot.

This distinction has a flow on impact on the tax residency status.  Generally, New Zealanders who first entered Australia after 26 February 2001 have been able to claim temporary resident status for tax purposes since the temporary tax resident category was first introduced on 12 December 2006. However, those holding a ‘protected SCV’ have been taxed as full tax residents.

The ease in which New Zealanders may enter Australia can bely the tax complexity that might be associated with their arrival here or due to the immigration status of their life partner.  And as temporary residents, they are subject to the same risks outlined above if they later marry or form a de facto relationship with an Australian resident or permanent visa holder.  Further, New Zealanders should also be wary of taking advantage of the easier path to Australian citizenship that was introduced on 1 July 2003.  Activating this could be very costly tax-wise.

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_{Article contributed to by Victoria Carmody - Private Business, Tax and Advisory}