Australia’s Shocking New Tax Law Change: What You Need to Know

As a digital nomad or someone living overseas, figuring out where and how much tax to pay can be quite the headache. This is especially true in the United States, the only country that taxes its citizens no matter where they live or how long they’re abroad for.

But not for long…

A new ruling by the Australian Tax Office (“ATO”) has made tax laws stricter for Australians living overseas. This could be the start of a trend of more and more countries adopting tax measures like those of the U.S.

So, if you’re Australian, what’s changed? And what do these changes mean to you?

Let’s find out!

Residential Taxation — The Common System in Western Countries

In many countries, like the UK, Canada, and Germany, if you live there, you have to pay taxes on all the money you earn, no matter which country you earn it in. This system is called “residential taxation”.

However, if you move abroad and prove it’s your new home, you might not have to pay taxes on the money earned outside your original country. By doing this, you become a “non-resident” for tax purposes in your original country.

Australia used to follow this model and proving non-residency (and therefore avoiding tax there) used to be fairly straightforward. You simply had to establish a permanent home outside Australia, not have a residence inside Australia, and limit your time in Australia to less than 183 days a year.

Australia still technically follows this residential taxation system and hasn’t fully converted over to the citizenship-based model of taxation in the United States. With that said, its rules around being able to be deemed non-resident for tax purposes have gotten stricter.

The New Tax Rules for Australia

On 7 June 2023, the ATO released Taxation Ruling TR 2023/1, making it harder to qualify as a non-resident for tax reasons. Now, simply staying outside Australia for most of the year isn’t enough.

The ATO will now look more carefully at your reasons for staying abroad, how long you stay there, and your connections back to Australia when deciding whether you’re a tax resident of Australia or not.

The new rules probably won’t bother you if you’re really moving to another country. However, if you like to travel a lot without settling down and living the digital nomad lifestyle, this new change could bring major problems for you.

Physical Presence and Intent

Staying out for 183 days is still a must, but it really is the bare minimum now when it comes to being deemed a non-tax-resident. Nowadays, the emphasis is on your intentions: why are you outside Australia, and do you plan to stay abroad permanently?

For example, if you’re abroad for a holiday or work trip for longer than half a year, you’ll probably still have tax residency in Australia. A good rule of thumb is that if your name is still on bills in Australia, that’s going to be a sign to the ATO that you’re still “present” in the country — even if you’re physically somewhere else.

To keep track of your days outside of the country, the Flamingo — Travel Days Tracker App, a comprehensive trip itinerary planner, is a lifesaver. This app does it all — from acting as your Schengen calculator for trips to Europe, to tracking your visa expiry dates, to automatically recording how long you’ve stayed in each country.

It’s the go-to for making sure you don’t stay in Australia for more than 183 days in the year.

Your Permanent Home

Although it’s not mandatory, establishing a permanent home in another country, with everything that goes with it like bringing your children there, joining clubs or groups, and starting local employment, is one of the strongest indicators to the ATO that you don’t have Australian tax residency.

The focus here is on your life setup — where you work, where your family lives, and where your main social life happens. These are all indicators of where your “true” home is for tax purposes.

It’s worth noting that the ruling specifically mentions temporary accommodation. Staying in hotels, serviced apartments, or accommodation provided by your employer generally indicates to the ATO that your presence overseas is not permanent. This will be crushing for digital nomads!

More Proof Required

Whilst it was never enough to simply claim that you live abroad, the ruling has provided clarification of these requirements by defining them more specifically. The ruling also provides detailed examples, which all point in the direction of needing more proof of everything you’re claiming.

In Summary: Key Differences Now

1. Stricter Criteria: Australia now requires more concrete evidence of a person’s permanent shift abroad for non-residency. This includes demonstrating that any ties to Australia are minimal and that the individual lives and intends to remain living abroad permanently.

2. Global Income Still Taxed: Like before, if you’re still counted as having tax residency in Australia under these new rules, you’ll still have to pay Australian taxes on all the money you make worldwide.

3. The Concept of a Permanent Home: Before, having a permanent home in another country made it easier to prove you weren’t a resident of Australia for tax purposes. Now, just having another home might not be enough. You’ll need to show stronger ties to your new country and fewer connections to Australia.