Australian Tax Rules for Expats: A Comprehensive Guide
Introduction
We have been working with a number of expatriate executives who have recently relocated to Asia from Australia and often request a high level understanding of Australian tax rules now that they are working in Asia.
Living abroad as an Australian expatriate comes with numerous benefits, but it's important to understand the tax implications that come with it. Even if you have relocated from Australia, as an Australian citizen with a tax file number, you are still subject to Australian expat tax regulations by the Australian Tax Office (ATO).
In this introductory guide, we will explore the key aspects of Australian tax rules for expats, including residency status determination, tax obligations when leaving or returning to Australia, income tax rates, offsets and exemptions, taxable foreign income, double taxation concerns, tax treaties, and more.
Determining Residency Status for Tax Purposes
The ATO determines the residency status for tax purposes on a case-by-case basis for Australian expats living abroad. To be considered a non-resident for tax purposes, the individual must have little intention of returning to Australia.
Conversely, individuals living and working in Australia for six months or more are considered tax residents. The ATO provides four tests, including the resides test, domicile test, 183-day test, and Commonwealth superannuation, to determine residency status, with only passing one necessary.
To prove a long-term commitment to living abroad, an expat may open foreign financial accounts, earn foreign employment income, or purchase property in a foreign country. If deemed a tax resident, the individual must pay taxes on their worldwide income in Australia.
Tax Regulations When Leaving Australia
When an individual leaves Australia, their tax obligations change depending on their residency status and the nature of their income. Individuals leaving Australia will only be taxed on their income sourced in Australia if they can demonstrate their non-residency status for tax purposes through ATO's tests or by opening foreign bank accounts.
This means they won't be taxed on their foreign-earned income if they live and work abroad. For example, if someone is employed in Hong Kong but owns an investment property in Australia, they will only be taxed on their rental income.
Tax Obligations When Returning to Australia
Upon returning to Australia for a period exceeding six months, an individual will become a tax resident starting from their arrival date. As tax residents, they must pay taxes on their total global income, including income sourced from foreign countries.
This means they will have to pay Australian taxes on any rental income earned from foreign properties and capital gains tax if they sell such properties.
Income Tax Rates for Tax Residents
The tax rules and rates vary based on an individual's residency status, with Australian resident tax rates being lower than those for non-residents.
In the current tax year,Australian citizens receive a tax-free threshold of $18,200, with a marginal tax rate starting at $18,201 and a rate of 19% for residents earning up to $45,000, among others.
Permanent residents must also pay capital gains tax and the Medicare Levy, with the ATO adding their capital gains to their worldwide and Australian income and taxing the net sum.
A 2% Medicare Levy is required for all Australian residents, and those earning above a certain amount must pay a Medicare Levy Surcharge.
However, temporary residents are exempt from the Medicare tax given that they have adequate health insurance and cannot access Medicare services.
Tax Resident Offsets and Exemptions
Tax residents in Australia may be eligible for certain offsets and exemptions, such as:
Tax-free threshold: The first $18,200 income is not taxed for Australian residents.
Capital gains tax principal residence exemption: Tax residents are exempt from capital gains tax (CGT) when selling their primary residence in Australia if they have lived there for 12 months or more.
Low-income tax offset: A tax offset of up to $700 is available for residents with a total income of less than $66,667.
Low and middle-income offset: Residents earning between $37,001 and $126,000 can receive up to $1,080 in offset.
Foreign income tax offset: Double income tax may be offset in full or partially if income tax is paid in two countries.
Medicare Levy surcharge exemption: The surcharge is not required if an individual has sufficient private health insurance.
Types of Taxable Foreign Income
As a foreign resident in Australia, you must pay taxes on your worldwide taxable income. This includes the following:
Foreign pensions and annuities
Earnings from foreign employment, excluding specific professions like those in the defence forces, police, international organisations, and aid projects
Investment income generated from foreign sources such as interest, dividends, and rental income
Business or company income from abroad
Capital gains made on foreign assets. For instance, if you live in Australia, your overseas property would be considered a taxable asset in Australia.
Avoiding Double Taxation
For permanent residents of Australia, paying double tax on the same income is a significant concern. However, if an individual earns income in multiple countries in a tax year, they will not have to pay double taxes, although it is possible.
Australia has established double tax agreements or treaties with numerous other countries to address this concern. These tax treaties can be complex, and it's recommended to seek the advice of professional expatriate tax services to navigate them successfully.
Australian Expat Tax Treaties
Australia has agreements with over 40 countries to reduce or eliminate double taxation. However, these agreements may only provide partial tax benefits and do not always offset foreign taxes entirely. The country where the taxable income is sourced is typically given priority.
For example, if you sell Australian capital assets while living in Singapore, you would have to pay Australian capital gains and income taxes, but Singapore would retain the right to tax its residents under its laws. Most tax treaties include provisions for dual citizens and allow for foreign tax credits and relief against their tax obligations.
Tax Tips for Non-Residents
If you're not a resident of Australia for tax purposes, you still need to be mindful of the tax consequences on your Australian and foreign earnings. Even if you live abroad and don't have any Australian income, you still need to file your income tax return or inform the Australian Taxation Office (ATO) with a Return Not Necessary form.
However, if you live outside of Australia but still receive income from Australia, such as rental income from owning a property, you are required to declare that income on your tax return and pay taxes accordingly. As a non-resident, you will be subject to higher foreign income tax rates and not eligible for most offsets, exemptions, or the tax-free threshold available to residents.
Conclusion
Understanding the Australian tax rules for expats is crucial for Australian citizens living abroad and foreign residents earning income in Australia.
From determining residency status to tax obligations when leaving or returning to Australia, it's important to comply with the ATO's regulations and seek professional advice when needed.
By staying informed and proactive, expatriates and migrants can optimise their tax strategies and minimise their tax burdens, ensuring compliance with the tax laws of both Australia and their country of residence.
How InterRetire Can Help You
If you’re an Australian expatriate who is considering moving back to Australia, we can help you maximise your assets, minimise your tax obligations and help you transition smoothly.
Disclaimer: This article provides general information on avoiding double taxation in Australia and should not be considered as professional tax advice. It is recommended to consult with a qualified tax advisor or accountant for personalised guidance based on your specific circumstances.
