Among the thousands of Australians who head offshore each year to expand their horizons, a lucky few will fund their adventure by working overseas. Many will also take or be given the option to up-stumps and move to a foreign country to live and work for an extended period. But there is often confusion about the tax implications that can arise from taking advantage of such offshore opportunities.
Australian residents are taxed on their worldwide income, whereas non-residents are taxed only on Australian-sourced income. Non-residents are not eligible for the $18,200 tax-free threshold, so all assessable income is taxed right from the first dollar, and there are also variances in the tax rates applied (the differences between the taxation of residents and non-residents, and the factors used to determine residency status, are touched upon in the article, Resident or non-resident: What’s the difference?).
In cases where an Australian goes overseas for employment, even for some years, the maintenance or relinquishment of resident status can be a key factor in maintaining a favourable, or otherwise, tax outcome. Another factor to keep in mind is the tax law of the country in question, or whether there exists a “double taxation agreement” with this country.
A double taxation agreement sets out which country has the rights to tax each type of income that may be earned – to minimise the chances of being taxed in Australia due to having status as a resident, but also being taxed in the other country under their laws on the same income. The rules in these agreements generally take precedence over the local tax laws of each country. Where the agreement gives the other country the right to impose tax, the income earner is subject to the taxation laws of that country. It is important to know which countries have such agreements, and the outcomes expected because of them, so consult this office should you have questions.
In the case where an Australian takes up a post overseas but retains a domicile in Australia, the Tax Office is likely to consider that the taxpayer remains a resident for tax purposes. Some recent Administrative Appeals Tribunal cases have upheld this view. Should however the taxpayer rent out their home here or otherwise divest themselves of their domicile, due to an extended time of overseas employment, it is more likely that the Tax Office will consider them as a foreign resident for tax purposes for the period they are out of the country. The outcomes are very much determined on a case-by-case basis.
So, let’s consider what happens if you remain a resident for tax purposes and what happens if you don’t.
If you remain an Australian resident for tax purposes
If you are a resident for tax purposes, any income that comes from working outside Australia – including salary, wages, commissions, bonuses and allowances – is regarded as foreign employment income (which may be paid by a foreign or an Australian employer). As an Australian resident, this foreign employment income is in the vast majority of cases taxable in Australia and has to be included in your Australian tax return.
However, if you have paid tax on that employment income overseas, you should be able to claim some or all of the foreign tax as a credit against the Australian tax liability, so that you are not double-taxed. The mechanism for this is the “foreign income tax offset”, which you can claim for the foreign tax paid (converted to Australian dollars) on income, profits or gains (including gains of a capital nature) that are included in Australian assessable income. In some circumstances, the offset is subject to a limit, which generally broadly equates to the amount of Australian tax that would be payable.
To be entitled to a foreign income tax offset:
- you must have actually paid, or be deemed to have paid, an amount of foreign income tax
- the income or gain on which you paid foreign income tax must be included in your assessable income for Australian income tax purposes.
Certain aid workers, Australian Defence Force personnel, and employees of certain tax-exempt Australian institutions may be entitled to a full tax exemption on their foreign employment income if they worked overseas for at least 91 days.
If you cease to be an Australian resident for tax purposes
If you are not a resident for tax purposes, you will only need to submit an income tax return if you have Australian-sourced income — and there is no need to lodge a return if the only Australian-source income you receive is interest, dividends or royalties that has had the correct amount of non-resident withholding tax deducted and remitted.
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 has to withhold tax (at varying rates) on your behalf and you receive the income net of the withholding tax. As the withholding tax is a final tax, the income should not be included in your Australian tax return.
As a non-resident, if you dispose of assets you would 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. Further, when you become a non-resident, you are deemed to have sold all your CGT assets that aren’t taxable Australian property for market value at that time. So it is theoretically possible to pay the tax before you sell the asset, although you can generally choose to defer the tax until you actually divest the asset or become an Australian resident again.
And remember, non-residents of Australia are not required to pay the Medicare levy, so you can claim the number of days that you are not an Australian resident during a tax year as exempt days in your tax return.
If you’ve been living in Australia and have recently left (or intend to leave soon), check the Determination of Residency – leaving Australia tool at the ATO website.
This handy tool will help you consider your liability to pay Australian personal tax on your income.