Transitioning from Temporary Residency to Australian Residency
Increased international labour mobility and the use of skilled temporary workers by Australian companies have resulted in a growing number of foreign nationals entering Australia. These people generally hold a temporary visa for immigration purposes. It is important to recognise that holding a temporary visa does not automatically qualify a person for temporary resident tax status.
When someone who is a foreign national first arrives in Australia, they are either a resident or a non-resident for Australian tax purposes. Depending on their visa and circumstances, they may then qualify as a temporary resident. As the tax outcomes differ, it is important to recognise and plan for the key ramifications of becoming a temporary or permanent resident of Australia for tax purposes.
Temporary resident tax status: key concept
A person qualifies for temporary resident tax status if they hold a temporary visa granted under the Migration Act 1958 and they (and their spouse) do not have Australian resident status within the meaning under the Social Security Act 1991.
A temporary visa granted under the Migration Act 1958 is generally a visa that allows someone to travel to and remain in Australia during a specified period, until a specified event happens (eg until a temporary contract ends), or while the holder has a specified status. Under the Social Security Act 1991, an Australian resident is a person who resides in Australia and either is an Australian citizen, holds a permanent resident visa or is a special category visa holder. A person who has been an Australian resident within the meaning of the Social Security Act 1991 cannot be a temporary resident for tax purposes.
The word “resides” is not defined in the legislation and therefore takes on its ordinary meaning. Factors that determine a person’s residency status on entering Australia are outlined in Taxation Ruling TR 98/17.
| Tax residency status is a question of fact and the test is determined on a case-by-case basis. |
Becoming a permanent resident: key tax implications
When a temporary visa holder (who also qualifies for temporary resident tax status) continues to reside in Australia and is granted permanent residency in Australia, they will cease to hold the temporary visa for immigration purposes. Generally, this occurs on the issue date of the permanent visa. This is also the time when they cease to be a temporary resident and are treated as a tax resident of Australia. The tax implications of becoming an Australian tax resident are considered below.
| A temporary resident who becomes a permanent resident in Australia may find themselves in a position where they are a dual resident, in Australia and their home country, for tax purposes. |
Income taxable in Australia
When a person qualifies as a temporary Australian resident for tax, certain modified tax rules in Subdiv 768-R of the Income Tax Assessment Act 1997 (ITAA 1997) apply. Broadly, these rules provide the following outcome:
- The temporary resident is taxed on all Australian source income (eg employment income earned while working in Australia and interest from Australian bank accounts).
- Any foreign source income the temporary resident derives is not taxed in Australia, unless the income relates to remuneration for employment or services provided in Australia.
- Any interest the temporary resident pays to foreign residents (eg overseas lenders) is not subject to withholding tax. This type of payment usually occurs when a temporary resident has to continue meeting their existing loan obligations with foreign lenders while working in Australia.
- Broadly, temporary residents are subject to the same capital gains tax (CGT) rules as foreign residents. Therefore, if a CGT event happens to a CGT asset the temporary resident owns and the asset is not defined as taxable Australian property (TAP), there is no CGT liability for that person. TAP assets include direct and indirect interests in Australian real property. Any gains on TAP assets are taxable to the temporary resident. As temporary residents are treated as non-residents for CGT, they are not entitled to the 50% CGT discount on assets held for more than 12 months.
- If a temporary resident receives shares and rights under an employee share scheme during their employment in Australia, the discount amount is generally taxable in Australia, unless a portion of the discount relates to services they performed in relation to their employment outside Australia.
- When a person becomes an Australian tax resident, they are taxed on their worldwide income, including any capital gains arising from CGT events that happen to the CGT assets they own.
- A temporary resident who pays tax on income earned in Australia may also be taxed in their home country. If this is the case, they may be eligible to claim a foreign tax credit for tax paid.
| Temporary residents are subject to tax at the same marginal tax rates as if they were tax residents. |
Additional levies and tax offsets
In most cases, a temporary resident is exempt from paying the Medicare levy. However, from the day that the person becomes a tax resident they become liable for the Medicare levy.
When an individual becomes an Australian tax resident they become eligible to claim certain tax offsets under the Australian tax system that are not available to temporary tax residents, such as the low income tax offset and the private health insurance rebate.
Capital gains tax implications
When a temporary resident becomes an Australian tax resident, they are taken to have acquired each CGT asset they own for its market value at the time they ceased to be a temporary resident. This excludes TAP assets (which are already subject to CGT) and pre-CGT assets. When someone is granted permanent residency in Australia, this cessation date is normally the issue date of the visa. This means that CGT only applies to capital gains or capital losses that accrue to an asset after the person becomes a tax resident.
| To access the CGT discount, the asset should be held for 12 months from the issue date of the permanent visa. |
The main residence exemption
A person who sells a property that was their main residence before they became an Australia tax resident can generally claim the main residence exemption (Subdiv 118-B of ITAA 1997).
If the dwelling is not the person’s main residence for the entire ownership period, a partial exemption may be available, calculated as follows:
For the purposes of the exemption, the ownership period of the dwelling begins from the time the person acquired the dwelling – not when the person becomes a tax resident.
Conclusion
Taxpayers who qualify as temporary residents for tax are given concessional treatment under Australian legislation, with a more relaxed tax system in relation to their foreign income and gains earned while they work and reside in Australia.
If you hold a temporary visa and have temporary resident tax status, you should carefully review your position from time to time and inform your tax adviser of any changes in your circumstances. Becoming a permanent resident in Australia will have a significant impact on the tax treatment of any foreign income and capital gains, so you need to plan appropriately if you plan to apply for permanent residency and have foreign income or investments.