The evolving landscape of work, especially with the rise of digital nomadism, poses unique challenges in understanding tax obligations and tax residency laws have not kept up. The Australian Tax Office (ATO) has provided specific guidelines that impact digital nomads and their tax residency status in Australia.
Understanding the Australian Tax Residency Tests
The ATO’s new ruling on tax residency was published on 7 June 2023 offers additional guidelines on tax residency that bind the ATO. This ruling is particularly relevant to digital nomads who travel and work remotely. The four tests for determining tax residency include:
- 183-Day Test: If you spend more than 183 days in Australia during an income year, you are considered a tax resident.
- Ordinary Concepts Test: This involves assessing factors such as physical presence, intention of stay, social and economic ties, and the purpose of presence in Australia.
- Domicile Test: Digital nomads remain Australian tax residents unless they establish a permanent place of abode outside of Australia. This test is particularly challenging for nomads without a fixed overseas residence.
- Commonwealth Superannuation Fund Test: Generally not applicable to digital nomads, this test is for Australian government employees contributing to specific superannuation schemes. This test is very rare as it only applies to older Commonwealth superannuation schemes.
If any one test is passed, a person is a tax resident of Australia at that time.
Issues for Digital Nomads
Many digital nomads are thinking about the 183-Day Test, and believe that staying out of Australia for 6 months of the year means they are not tax residents. This is not the case. It is usually the Domicile Test that digital nomads cannot pass, even if they are not in Australia for the year.
It is not possible for people with an Australian domicile to be a “tax resident of nowhere”. Losing your domicile is very difficult to do and is not related to citizenship. Digital nomads should usually seek to acquire tax residency in a suitable country, with a double tax treaty where possible, and get personal tax advice that they are no longer Australian tax residents.
Chris, originally from Australia, underwent significant life changes, leading to a nomadic lifestyle with only his laptop for running his remote flamingo re-colouring consulting business. After separating from his wife and leaving his four children in their care, Chris developed a relationship with a Laos national and frequently visited Laos. Eventually, he resigned from his Australian public service job and relocated to Phonsavan, Laos, for a three-month contract, pursuing both work and his relationship.
Chris’s journey continued across Asia, with various short to medium-term contracts in different countries:
- Phonsavan, Laos: 5 months in housing provided by his new partners.
- Phnom Penh, Cambodia: 18 months in a rented apartment, initially on a 12-month lease, then month-to-month.
- Dubai, UAE: 9 months in a rented apartment, initially on a 6-month term, followed by month-to-month.
Despite these travels, Chris lacked social or ongoing connections in any of these locations, often returning to Laos between contracts to spend time with his partner. His visits to Australia were sporadic, usually for family events, and he stayed with friends or family, having no assets in Australia. He was in Australia for less than 2 weeks in most years.
Chris, under the ordinary concepts test, wasn’t considered a resident of Australia as he didn’t maintain a connection consistent with residing there. However, under the domicile test, he remained an Australian tax resident. His nomadic lifestyle, characterised by working across countries without establishing a permanent overseas abode, reinforced his Australian residency status. The 183-day test was inapplicable since Chris wasn’t in Australia for 183 days in any income year since his departure.
Implications and International Tax Agreements
As a tax resident of Australia, you must declare and pay taxes on worldwide income in Australia. Digital nomads should be aware of the tax implications in other countries they reside in.
While Australia has double tax treaties with some countries, the lack of such treaties with popular nomad destinations such as the UAE, Portugal and many tropical destinations can lead to double taxation unless carefully planned.
The complexity of Australian tax laws for digital nomads underscores the importance of understanding their tax residency status at all times. Formal tax advice should be obtained when leaving Australia and digital nomads should consider whether they have a “permanent place of abode” abroad which can protect them from continued tax obligations in Australia.
This material is produced by Cadena Legal, a NSW-registered legal practice. It is intended to provide general information and opinions on legal topics, current at the time of first publication. The contents do not constitute legal advice and should not be relied upon as such. Contact us here for advice.