The general rule is that Australia taxes Australian residents on their worldwide income and non-Australian residents on their Australian sourced income. There is an exception to this for temporary residents, which are not subject to tax on non-Australian sourced income.
If you are moving from Hong Kong to Australia, it is important to identify the date on which you become a resident, whether you are a temporary resident and if so, the date on which you cease to be a temporary resident. It is also important to determine how Australia may tax you in respect of your controlled entities after you become an Australian tax resident.
Residency tests
The Australian test for individual tax residency states that, firstly, an individual is a resident of Australia if the individual resides in Australia according to the ordinary meaning of that term. Taxation Ruling TR 2023/1 states:
The ordinary concepts test is asking whether your presence in Australia is usual and settled in contrast to temporary and casual. This is informed by both the nature, duration and quality of the person’s physical presence and an intention to treat Australia as home.
That is, if you move to Australia with an intention to treat Australia as your home, you may be an Australian resident for tax purposes from the date of your arrival.
In addition to the ordinary concepts test, there are three additional tests for tax residency; of these only the 183 day test is likely to be relevant to people moving from Hong Kong to Australia. The 183 day test states that an individual is a resident if they have been present in Australia for more than 183 days in an income year, unless the Australian Taxation Office is satisfied that their usual place of abode is overseas and that they do not intend to take up residency in Australia.
Dual residency
It is possible to be tax resident in Australia while also tax resident in another place, such as Hong Kong. Where an individual is tax resident both in Australia and another country that has a tax treaty with Australia, the effect of the tax treaty is generally that the individual will effectively be taken to be resident in only one country.
Although Australia has a tax treaty with China, that treaty does not apply to Hong Kong because Hong Kong has its own independent taxation laws. This means that there is no tax treaty that would prevent an individual from being tax resident in both Hong Kong and Australia. If this occurred, the individual may need to lodge tax returns in both places. Where the individual has Hong Kong tax payable on Hong Kong sourced income, the Australian tax system would generally allow a credit for the Hong Kong tax paid against the Australian tax payable.
Temporary residency
As discussed above, temporary residents are not subject to tax on non-Australian sourced income. An individual will be a temporary resident if they hold a temporary Australia visa under the Migration Act 1958 and neither them nor their spouse is an Australian resident for the purposes of claiming social security benefits in Australia.
Controlled entities
Another important feature of the Australian taxation system is how Australian resident individuals may be taxed in respect of their controlled entities, including by direct attribution.
Companies
Australia has controlled foreign company attribution rules that may apply where an Australian resident controls a non-Australian resident company.
Broad exemptions apply in respect of companies that are resident in Canada, France, Germany, Japan, New Zealand, the United Kingdom and the United States on the basis that those countries have broadly similar taxation systems.
The controlled foreign company rules are complex, but broadly where an Australian tax resident controls a non-Australian resident company that is also not resident in one of the countries listed above, the Australian resident who is controlling the non-resident company, may be directly taxed on an attribution basis on the passive investment income of the non-Australian resident company.
Trusts
Where an individual that is an Australian tax resident has contributed assets to a non-Australian resident trust, that Australian resident individual may be taxed on a direct attribution basis on the income of the trust, even where they have no entitlement to trust income or capital. In this respect, where the individual contributed assets to the trust before becoming an Australian resident, there is a further condition that that individual must control the trust at any time after the beginning of the first year of income after the individual became an Australian resident.
The taxation of trust distributions received by Australian residents from a non-Australian resident trust to which the trust attribution rules do not apply is also very complex. Not only can it be difficult to establish that those distributions are not fully assessable, there is a mechanism which in some circumstances may effectively charge the Australian resident “interest” on the tax payable for a notional period starting from, broadly when the income that funded the distribution was originally derived by the trust and ending when the tax is actually assessed to the Australian resident.
If you have any other questions about an actual or potential move from Hong Kong to Australia, please do not hesitate to contact your Nexia advisor.