Tax residency – Part I: General introduction to tax residency concept

It is a common mistake to confuse the residency standing of a person between his/her immigration residency status and tax residency status. 

Whilst the immigration residency status of a person or a family may affect the determination of his/her tax residency status, it is untrue that a migrant of a country will automatically become a tax resident of that country. 

Why is it so important to determine the taxation residency status of a person or an entity in any country? 

The tax liability of a tax resident is vastly different from that of a non-resident; this difference becomes more important for those countries that tax their residents on all their worldwide income. 

The determination of tax residency status is one of the main ingredients that will affect the tax liability of a person or an entity. Whilst the concept of tax residency arises from the laws and regulations of the country in question, essentially it works on the same concept as in a “household budget” where the household may welcome guests to their house, although, when the guests continuously draw down on the resources of that household, the guests will be requested to make the necessary contributions to that household budget. 

The primary tax residency definition in Australia is based on whether the individual is ordinarily residing in Australia. There are many legal cases to determine when that individual is ordinarily residing in Australia. However the basic concept is similar to that we have explained above in the household budget example. 

When the individual is ordinarily residing in Australia, that person will be expected to draw on the facilities and services provided by the various State and Commonwealth Australian governments. The provision of these facilities and services has to be fully funded by revenue collected by the State and Commonwealth Australian governments. 

In the modern society of Australia, the revenue collected by the Australian governments does not rely solely on taxes, however the main source of their revenue come from taxation. 

After setting the scene in the reasoning of why it is necessary to distinguish the individual tax residency status for taxation purposes, we will now embark on the definition of tax residency for an individual and non-individuals. 

The basic tests of tax residency for an individual in Australia are : 

The definition of tax resident of a non-individual can be summarised below: Companies 

A company is a resident of Australia if: 

• it is incorporated in Australia, or 
• although not incorporated in Australia it carries on business in Australia and has either: 

- its central management and control in Australia, or 

- its voting power controlled by shareholders who are residents of Australia.

Corporate limited partnerships 

A corporate limited partnership will be considered a resident of Australia if: 

• the partnership was formed in Australia, or 
• the partnership either carries on business in Australia, or has its central management and control in Australia. 

Trusts 

Trusts fall into three basic categories for the purpose of establishing residency. 

Trusts other than unit trusts will be considered Australian residents in any given income year if: 

• a trustee of the trust estate was a resident at any time during the year, or 
• the central management and control of the trust estate was in Australia at any time during the year.

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Unit trusts (other than corporate unit trusts or public trading trusts) will be considered Australian residents in any given year if: 

• a trustee of the trust estate was a resident at any time during the year, or 
• the central management and control of the trust estate was in Australia at any time during the year, 

and if they also meet one of the requirements in the first column and one of the requirements in the second column of the following table:

Tax residency is a large topic, this is Part I of the three part series. Part II of this article is about Tax Residency – from technical perspective.