Are you going to work overseas? If so, you will be exposed to various tax consequences. The starting point to determine the tax impact is whether you remain resident of Australia for tax purposes, or whether you become a tax non-resident under Australian laws.
When living overseas, there are three possible tax scenarios:
- You remain an Australian tax resident and are taxed on all worldwide income, but credits are available for foreign taxes paid.
- You remain an Australian tax resident under our law, but also become a tax resident of the foreign country. If there is a Double Tax Treaty with that country, then Australia’s ability to levy tax will be limited or excluded.
- You become a non-resident under Australian laws, and only taxed in Australia on certain income and gains from Australian sources.
You will be considered an Australian tax resident if you fall within one or more of the following categories:
- Whether you reside in Australia. Important factors to determine this include your intention, family and business/employment ties, social and living arrangements, maintenance and location of assets.
- Where you are considered ‘domiciled’ or permanently residing in Australia, then you will be an Australian tax resident unless the ATO is satisfied that your ‘permanent place of abode’ is outside Australia. ‘Permanent’ generally means two years or more, but factors such as whether a home is established overseas and the connections maintained in Australia are also relevant.
- Physical presence in Australia for 183 days or more in a tax year generally triggers Australian tax residency
- Membership of a specific Commonwealth or public sector superannuation scheme or spouse/child of such a person.
To cease being a tax resident of Australia, you would generally need to depart Australia with the intention to live abroad for a minimum of 2 years, be accompanied by your immediate family/dependents, and have rented out or sold your home in Australia.
How common income items are taxed for Australians working abroad
Below is an indication of how common items are taxed depending on whether you are considered a resident or non-resident of Australia. Note that the application of any Double Tax Treaty in place will generally prevail over Australian laws.
- Employment income – Generally Australian tax residents are liable to pay tax on income earned from overseas employment. A resident may claim a foreign income tax offset (FITO) where this income is taxed in the relevant foreign country. Other exemptions and concessions may apply in limited circumstances. (eg approved overseas projects)
- Investment income – All worldwide investment income for residents is taxable in Australia. Where a resident purchases shares with borrowed funds to earn dividend income, certain share portfolio expenses such as interest are deductible. Rental income for properties located worldwide is taxable in Australia.
- CGT – A capital gain arises where the proceeds of disposing an asset exceed the amount paid for the asset plus any transaction costs. Assets held for more than 12 months will qualify for a 50% general discount, such that only 50% on the gain is taxable.
- Medicare levy – Residents pay a 2% Medicare levy on their income. An additional surcharge may also be payable where residents exceed certain income thresholds (unless prescribed private health insurance is held).
- Employment income – Income from employment services will generally be regarded as being ‘sourced’ from the location where the services are performed. Where employment is sourced in the foreign country, no Australian tax will be imposed.
- Investment income – Interest, royalties and dividend income on Australian investments of non-residents are subject to withholding tax of 30% for unfranked dividends and royalties, 10% for interest and 0% for fully franked dividends. Withholding rates may be reduced by any double tax agreements between Australia and the other relevant country. No claims can be made for deductions for share portfolio expenses. Income from investments in foreign countries held by non-residents is not taxed in Australia.
- CGT – Only certain assets (such as real property located in Australia) are subject to capital gains tax for non-residents and temporary residents. The 50% discount on capital gains ceased with effect from 8 May 2012 for non-residents. Be aware that the ability to claim the CGT exemption for a former home is in the process of being removed if you are not a tax resident at the time the sale contract is signed (subject to transitional rules).
- Medicare levy – Non-residents are not liable for the Medicare levy or surcharge.
- Rental income – This remains taxable for both resident and non-resident taxpayers in respect of property located in Australia and the net rental income needs to be included in an annual tax return, and tax paid on the assessment issued by the ATO. Deductions can be claimed on items like for repairs, interest on a mortgage, and agent fees.
Your individual circumstances
For Australians working abroad, the determination of tax residency is dependent on individual circumstances. A multitude of factors are taken into account and these change each year as the Courts decide new tax cases. We recommend that you discuss your circumstances with your Accru adviser to get an accurate picture of how your tax situation will be affected by an overseas move.
Accru Felsers assists multi-national businesses with inpat/expat tax effective salary arrangements for key senior executives as part of our international tax services.
The information in this article is up to date as at August 2018. Accru Felsers apologises for any delay in answering questions. If you have a complex international tax situation, high income, assets and/or superannuation, then consider engaging Accru to get the right advice for your specific situation to ensure your wealth is not put at risk. Please email your enquiry to Brett Cox.