Do you know if you are a resident or non-resident for tax purposes? Do you understand the tax implications of working overseas?
Thousands of Australians head offshore each year to expand their horizons. Some will fund their adventure by working overseas. Some will be living and working overseas for an extended period.
But there can often be confusion about the tax implications for Australians who take advantage of such offshore opportunities.
Why is the Australian residency test important?
When an Australian goes overseas for employment their tax residency status can be a key factor in how much tax they will need to pay in Australia.
Australian “residents” are taxed on Australian-sourced and worldwide income.
“Non-residents” are taxed only on Australian-sourced income.
Non-residents are not eligible for the Australian tax-free threshold. All assessable income is taxed right from the first dollar. There are also variances in the marginal tax rates.
Double taxation agreement
The tax law of the country in question, or whether a “double taxation agreement” exists, is also relevant. A double taxation agreement sets out which country has the rights to tax each type of income. This minimises the risk of the same income being taxed in both countries.
The rules in these agreements generally take precedence over the local tax laws of each country. It’s important to understand which countries have the agreements, and the relevant outcomes.
The domicile test
When an Australian is employed overseas but retains a domicile (broadly, a permanent home) in Australia, the ATO is likely to consider the person an Australian resident for tax purposes.
However, this is determined on a case-by-case basis. For example, if you rent out your home during extended overseas employment, it’s more likely the ATO will consider you a non-resident for the period you are overseas.
The 183-day test
If you are in Australia for more than half the year the ATO is likely to consider you a resident. This could be continuous or broken periods. Again, this is determined on a case by case basis.
If you remain an Australian resident for tax purposes
Any income from working outside Australia – including salary, wages, commissions, bonuses and allowances – is usually regarded as foreign employment income. Such income may be paid by a foreign or an Australian employer.
As a resident, foreign employment income is normally taxable in Australia and must be included in your Australian tax return.
However, if you have paid tax on that income overseas, you should be able to claim some or all of the foreign tax as a credit against your Australian tax liability. This ensures that you are not double-taxed. This credit is referred to as a “foreign income tax offset”.
To be entitled to a foreign income tax offset:
- you must have paid foreign income tax
- the income on which you paid foreign income tax must be included in your assessable income for Australian income tax purposes.
If you cease Australian tax residency
As a tax non-resident, you will only need to submit an income tax return if you have Australian-sourced income.
There is no need to lodge a return if the only Australian-source income you receive is interest, dividends or royalties that have had the right amount of non-resident withholding tax deducted.
All Australian-sourced interest, dividends and royalties derived after you ceased to be an Australian resident are subject to the non-resident withholding tax provisions. Basically, the payer of the income withholds tax on your behalf. The income should therefore not be included in your Australian tax return.
As a tax non-resident, if you dispose of assets you will only be subject to capital gains tax (CGT) if the asset qualifies as “taxable Australian property”. This includes Australian real property and certain holdings of shares in companies that have a majority of their assets as Australian real property.
When you become a non-resident, you are deemed to have sold all your CGT assets that aren’t taxable Australian property for their respective market values at that time. So, it is theoretically possible to pay the tax before you sell the asset. Although you can generally choose to defer any capital gain or loss until you later sell the asset. If you make such an election, your CGT assets are taken to be “taxable Australian property” and will fall within the Australian tax net if it is subject to a taxing event (such as disposal).
Remember too that non-residents for tax purposes are not required to pay the Medicare levy, so you can claim the number of days that you are not an Australian resident during an income year as exempt days in your tax return.