TaxResidence and domicile
How does an individual become taxable in your jurisdiction?
In Australia there are four tests to determine if a person is an Australian tax resident. These are outlined as follows.
The Commissioner of Taxation (the Commissioner) will consider the following:
- physical presence;
- intention and purpose;
- the location of your family;
- business or employment ties;
- maintenance and location of assets; and
- social and living arrangements.
If an individual does not satisfy the residency test, they may still be considered an Australian tax resident if any of the three statutory tests below are satisfied:
The domicile test
The domicile test assesses an individual’s permanent residence. If the Commissioner is satisfied that an individual’s permanent home is located in Australia, the individual will be liable to pay tax in Australia.
The 183-day test
If an individual spends at least 183 days per income year in Australia, whether continuously or not, the individual will be considered an Australian tax resident.
The superannuation test
An individual will be considered an Australian tax resident if they, or their spouse, are a contributing member of the Public Sector Superannuation Scheme or the Commonwealth Superannuation Scheme.
If the Commissioner is satisfied an individual is an Australian tax resident, the individual may be required to pay:
- income tax;
- land tax on any real property owned by the individual subject to exemptions for a principal place of residence;
- goods and services tax (GST); and
- capital gains tax (CGT).
What, if any, taxes apply to an individual’s income?
Australian tax residents are required to pay income tax on their personal taxable income (including from employment, business interests, dividends, trust distributions and foreign income). The marginal income tax rate increases according to the level of income earned. For the 2022 to 2023 financial year, the marginal income tax rates are:
Tax on this income
19 cents for each A$1 over A$18,200
A$5,092 plus 32.5 cents for each A$1 over A$45,000
A$29,467 plus 37 cents for each A$1 over A$120,000
A$180,001 and over
A$51,667 plus 45 cents for each A$1 over A$180,000
The above rates do not include the Medicare levy of 2 per cent. The Medicare levy is a levy payable to fund Medicare, the national healthcare provider in Australia.
High income-earning individuals may also be liable to pay a Medicare levy surcharge (MLS), an additional levy payable by individuals who reach a certain level of income and do not have private health insurance. This surcharge is calculated at approximately 1 to 1.5 per cent of an individual’s taxable income over and above the existing Medicare levy of 2 per cent.
The MLS encourages those who can afford private health insurance to obtain appropriate health coverage for themselves and their dependants, reducing the financial burden on the Medicare system.Capital gains
What, if any, taxes apply to an individual’s capital gains?
An individual may be liable to pay capital gains tax (CGT) upon disposal of an asset. Most assets are subject to CGT, including real estate and assets purchased for personal enjoyment (such as boats, household items, cryptocurrency and electronics) over the value of A$10,000.
Some exemptions and discounts apply, including:
- Principal residence exemption: CGT is not payable if an individual sells or disposes of a property that is their principal place of residence. For a property to be considered a principal place of residence, the individual, their partner or their dependants must have lived at the property for the entire period of ownership, provided the property has not been used as a place of business during the period of occupation.
- CGT discount: when an individual disposes of an asset, Australian tax residents are entitled to discount the capital gain by 50 per cent, provided the asset has been held for at least 12 months.
CGT may also be rolled over (or deferred) in certain circumstances, including a transfer between spouses upon the breakdown of a marriage or relationship, or in the event of loss or destruction of the asset.Lifetime gifts
What, if any, taxes apply if an individual makes lifetime gifts?
Lifetime gifts are known as inter vivos gifts in Australia. Although there is no gift tax in Australia, depending on the nature of the assets gifted, there can be other tax implications of making an inter vivos gift.
There are no immediate tax consequences for gifts of money or personal chattels. However, for gifts of dutiable assets such as real property or shares, there may be tax consequences such as stamp duty or CGT, calculated on the market value of the asset gifted. Which of the parties (donor or donee) is liable to pay the tax on a gift will depend on the type of tax triggered.
CGT is triggered and payable by the donor upon the gifting of dutiable assets. The capital gain on assets held in excess of 12 months will be discounted by 50 per cent for Australian tax residents. However, the full gain is taxable upon the gifting of assets held for less than 12 months.
Stamp duty rates vary between states and territories in Australia and is payable by the donee.Inheritance
What, if any, taxes apply to an individual’s transfers on death and to his or her estate following death?
There are no inheritance or estate taxes payable in Australia. The legal personal representative of an estate will be responsible for lodging a tax return on behalf of the deceased for the year of their death, called a date of death return. Subsequently, an estate tax return is required to be lodged for income earned by an estate for each financial year until the estate is fully administered. There is no tax payable for the transmission of assets from the estate to beneficiaries. However, if an estate asset is sold to a third party, there may be CGT payable by the estate upon disposal of the asset.Real property
What, if any, taxes apply to an individual’s real property?
Land transfer duty (stamp duty), land tax, council rates and capital gains tax (CGT) are the main taxes that apply to an individual’s real property.
Stamp duty is tax payable upon acquisition of real property. It is calculated based on the dutiable value of the property and whether any concessions or exemptions are available. Different rates of stamp duty are generally payable by foreign residents. Concessions and exemptions are available in various circumstances, including for eligible first home buyers and in other circumstances such as transfers between spouses (or ex-spouses) or between trusts and beneficiaries.
An annual land tax is generally payable on the taxable value of real property. An individual’s principal place of residence is generally exempt from land tax.
Council rates are a tax payable to the municipal council to cover costs of local government services such as waste management. Council rates are calculated based on an assessment of capital improved value undertaken by the municipal council.
CGT is payable by the vendor upon the sale or disposal of dutiable property other than a principal place of residence. A 50 per cent discount of any taxable gain is available on the disposition of dutiable assets held in excess of 12 months. However, the full gain is taxable for any assets held for less than 12 months. CGT may be rolled over (or deferred) in certain circumstances, including a transfer between spouses upon the breakdown of marriage or relationship, or in the event of loss or destruction of the asset.Non-cash assets
What, if any, taxes apply on the import or export, for personal use and enjoyment, of assets other than cash by an individual to your jurisdiction?
There are generally no taxes payable at the Australian border for goods imported with a value less than A$1,000. This excludes tobacco, tobacco products and alcoholic beverages.
Import taxes apply to goods over the value of A$1,000 and an import declaration must be lodged with the goods being imported into Australia.
All goods exported from Australia must be reported to the Australian Border Force using either an export declaration or an exemption code.
Goods that are exempt from export declaration include:
- personal effects;
- goods with a value of less than A$2,000;
- some goods temporarily imported under section 162A of the Customs Act 1901 (Cth);
- Australian Post or diplomatic bags of mail;
- Australian aircraft and ships' spares;
- military goods of any value that are the property of the Australian government for use overseas by Australian Defence Forces;
- Australian domestic cargo; and
- containers for the international carriage of cargo and ships' stores.
There are no taxes on exports that do not require an export declaration.Other taxes
What, if any, other taxes may be particularly relevant to an individual?
Medicare levy, goods and services tax (GST) and CGT are generally the main taxes applicable to an individual other than income tax.
The Medicare levy primarily funds Australia’s public health system. In addition to the marginal income tax rates, an additional 2 per cent of an individual’s taxable income is applied towards the Medicare levy. Reductions or exemptions may be available depending on the individual’s circumstances or that of their spouse. A Medicare levy surcharge of a further 1 to 1.5 per cent may also be imposed for higher income earners who do not hold private health insurance.
Goods and service tax
GST is compulsory tax included in the price payable for goods and services in Australia. Businesses with a turnover of over A$75,000 must be registered for GST and the rate currently payable is 10 per cent. Basic foods, some education, medical and healthcare products and services are exempt from GST.
Capital gains tax
In addition to income tax, CGT is payable by individuals on the capital gain from disposing of dutiable assets such as real property or shares. The amount of the capital gain is included as part of an individual’s taxable income and is taxed at marginal income tax rates. The amount of capital gain is discounted by 50 per cent discount where the asset disposed of has been owned for at least 12 months and where the owner is an Australian resident.Trusts and other holding vehicles
What, if any, taxes apply to trusts or other asset-holding vehicles in your jurisdiction, and how are such taxes imposed?
Assets in Australia can be owned by an individual person, by trustees on trust and through companies.
Trusts are recognised in Australia. Although a trust itself is not a separate legal entity, the trustee is the legal entity that holds the assets on trust for a beneficiary or class of beneficiaries. A trustee can be either a company or an individual. A trustee is responsible for dealing with the management and administration of a trust, including its tax affairs. Depending on the powers provided by the governing trust deed, the trustee may elect to accumulate income or make distributions in each financial year. If a trustee elects to accumulate income, this income is taxable at the highest marginal rate of 45 per cent. Alternatively, if the trustee declares a distribution of the income to an eligible beneficiary of the trust, and the beneficiary becomes ‘presently entitled’ to the income, this income is taxed at the hands of the beneficiary at the applicable marginal income tax rates. A beneficiary may be either an individual, a company or another trust.
Companies are subject to a tax rate of 30 per cent on taxable income except for ‘base rate entities’ that, from the 2021 to 2022 financial year, are subject to the reduced tax rate of 25 per cent. Base rate entities are companies with an aggregate turnover of less than A$50 million and 80 per cent or less of their assessable income is passive income such as royalties and rent, interest income, or a net capital gain.Charities
How are charities taxed in your jurisdiction?
Charities in Australia must be endorsed by the Australian Taxation Office to be eligible for income tax exemptions. Concessions are also available to endorsed charities in each state or territory, which include income tax exemptions, GST concessions and fringe benefit tax concessions.
To be endorsed, the charity must have an Australian business number, be a registered charity with the Australian Charities and Not-for-profits Commission and meet certain requirements relating to the type of concessions sought.Anti-avoidance and anti-abuse provisions
What anti-avoidance and anti-abuse tax provisions apply in the context of private client wealth management?
Anti-avoidance provisions in Part IVA of the Income Tax Assessment Act 1936 (Cth) apply to schemes where an individual obtains a benefit from a scheme that would have otherwise not been available and the scheme was entered into for the sole or dominant purpose of obtaining the tax benefit.
Common tax avoidance schemes include those where the taxpayer can reduce their taxable income, increase deductions against their income or avoid tax and other obligations entirely.