A wise man once said, “east or west, home is best”. Is it possible however, to feel at home away from home?
For Australians planning to move abroad, there are several financial decisions that can be made to ensure they have the most beneficial stay overseas as possible by significantly reducing the burden of taxation.
Future expats should try to plan as much as possible ahead of the move, to ensure they can benefit from tax advantages as soon as they move overseas. Australia has entered into treaties with 40 countries which ensures that an expat is only treated as a tax resident in one of the countries, thereby eliminating the risk of an expat being subjected to double taxation.
There has been a lot of confusion for expats about how to determine whether one is a resident or a non-resident for tax purposes. Fortunately, a recent ruling has provided insight into this question.
Understanding Tax Residency Categories for Australians Living Abroad
So, how do you know where you stand when it comes to tax residency as an Aussie living overseas? The ATO has three main categories, and where you land determines exactly what you need to report back home. Let’s break down these classifications:
1. Australian Resident for Tax Purposes
If you’re still considered an Australian resident for tax purposes, you’ll need to declare all of your global income to the ATO—yep, that includes every dollar earned both in Australia and abroad. Even if you’ve paid tax overseas, reporting is mandatory, though you might be able to claim a foreign tax credit to offset some of that pain.
2. Foreign Resident (Non-Resident) for Tax Purposes
Find yourself classed as a non-resident? In this case, you only need to declare your Australian-sourced income. That covers things like rental income from your old place in Melbourne, employment left behind in Sydney, capital gains from Aussie property, and any pensions or annuities still flowing from Australia. Your offshore earnings are off the hook as far as the ATO is concerned.
3. Temporary Resident
Holding a temporary visa and not an Australian citizen or permanent resident (and your spouse isn’t either)? You’re likely a temporary resident. This means you only have to declare what you earned in Australia, along with any income from abroad you received while actually living in Australia under your temporary status.
Each of these categories can have big implications for your financial plans abroad, so it pays to know exactly which camp you fall into. The court allowed an appeal by an expat that upheld that the plaintiff had demonstrated his intention to remain in the overseas country. This was done by taking into consideration significant choices that the plaintiff had made while overseas, other than the mere question of whether he had a permanent residence overseas. Such other factors considered in the ruling include the decision to relocate one’s family abroad, enrolling children in schools and making significant investment decisions overseas. He was therefore treated as non-resident for tax purposes.
This is a win for Australians going overseas who hope to escape the burden of taxation in Australia by ensuring that ATO takes a closer look when determining whether the expat has demonstrated their intention to live in an overseas country permanently and should, therefore, be treated as a non-resident for tax purposes. It also provided a platform for the Australian Government to review its rules on Australian residency to provide more clarity.
Below we look at some tax considerations Australian expats should be aware of…
How are non-resident income tax rates different?
When it comes to income tax, Australians who are classified as non-residents face a unique set of rates, very different from what you may be familiar with for tax residents. For the 2024–25 financial year, non-residents are taxed at a flat rate from the very first dollar earned in Australia, with no tax-free threshold.
Resident Tax Rates for 2024–25
Here’s how the rates for tax residents are structured:
- $0 to $18,200: taxed at 16% plus 2% Medicare Levy
- $18,201 to $45,000: taxed at 16% plus 2% Medicare Levy
- $45,001 to $135,000: taxed at 30% plus 2% Medicare Levy
- $135,001 to $190,000: taxed at 37% plus 2% Medicare Levy
- Above $190,000: taxed at 45% plus 2% Medicare Levy
Foreign Resident Tax Rates for 2024–25
For those dipping their toes into life overseas, understanding your tax obligations back home is crucial. If you are classified as a non-resident for tax purposes, Australian tax rates differ from those for residents, and it pays to know where you stand.
Here’s a summary of the tax rates that will apply to foreign residents for the 2024–25 financial year:
- Up to $135,000 taxable income: taxed at 30%
- From $135,001 to $190,000: taxed at 37% on the portion over $135,000
- Above $190,000: taxed at 45% on the portion over $190,000
One small consolation: non-residents aren’t required to pay the Medicare Levy, which is typically imposed on residents. However, the lack of a tax-free threshold (every dollar earned by a non-resident is taxed from the get-go) and the steeper initial rate are important considerations for planning your finances before heading overseas.
With these rates in mind, careful tax planning before your departure can help minimise your overall tax bite—both at home and abroad.
Medicare Levy Obligations for Non-Residents
One of the more welcome financial implications of moving overseas is that, as a non-resident for Australian tax purposes, you are generally not required to pay the Medicare Levy. Expats who are no longer considered Australian residents escape this particular tax, which can add up to a considerable saving in your annual tax bill.
Of course, it’s important to ensure your residency status is clear and documented, as this determines whether the levy applies. This is yet another incentive to review your situation before heading abroad and take the necessary steps to cement your non-resident status for tax purposes.
Tax Obligations for Temporary Residents
For Australians in the “temporary resident” category, there are some distinct tax rules to be aware of. If you or your spouse aren’t Australian citizens or permanent residents, but instead hold a temporary visa, you fall under this classification. In practical terms, this means the Australian Tax Office (ATO) generally only taxes you on Australian-sourced income—things like salary earned from a job within Australia or investment returns from Australian assets.
What about your overseas income? For most temporary residents, foreign-sourced income is typically not taxed in Australia, provided it was earned while you held your temporary visa status. However, any income derived from your Australian employment (whether performed within or Australia, or outside Australia for some time) or investments within Australia still needs to be declared to the ATO. This approach provides some welcome relief, sparing you from reporting and paying tax on your worldwide earnings during your temporary stint Down Under.
This regime is designed to make tax affairs more straightforward for skilled migrants and those on temporary assignments, removing much of the usual paperwork and potential for double taxation that permanent residents or citizens face.
Understanding these distinctions can make a real difference when planning your finances and ensuring compliance during your Australian sojourn.
Capital gains tax
Most assets other than Taxable Australian Property (TAP) assets are potentially subject to Australia’s deemed disposal rules on the date that you become a non-resident for Australian taxation purposes. Non-Taxable Australian Property (NTAP) assets such as most ASX listed shareholdings, foreign shareholdings, cryptocurrency and foreign property, are subject to Australia’s deemed disposal rule. Real estate assets located in Australia however, will be subject to capital gains tax (CGT) even after the date of departure and as such, will be taxed as at the actual date of the sale.
Unless you elect to pay CGT at the time when you actually sell your NTAP assets, you will be subject to a deemed disposal of those assets upon your change of residency status from that of tax resident to that of non-resident. For many, this can create a tax liability which may not be planned for. Given that non-residents are not entitled to reduce their gains by 50% when they sell their assets (like resident’s are entitled to), it may be wise to choose NOT to defer the CGT on those assets, and settle up your CGT as at the date that your non-residency status changes. If you do, and if you’ve owned that asset for at least 12 months, you’ll be entitled to the discount at that time (but not afterwards)!
Additionally by declaring a capital gain on the deemed disposal of all of your NTAP assets, any subsequent capital gains will not be subject to CGT in Australia (whilst you are a non resident). Thus, if the calculated gain is relatively minor at the date that your residency status changes, then it may be wise to declare the gain, pay the tax and then look forward to CGT-free status in Australia for that asset going forward!
Superannuation
A common question that we are asked regularly is, can I contribute to superannuation whilst I’m a non-resident and if so, how much? And the answer is “yes, you can” (subject to limits) but when it come’s to how much you want to contribute, that’s entirely up to you.
Just bear in mind however, that although you can make tax deductible (concessional) contributions, and non-deductible (non-concessional) contributions into superannuation from overseas (whilst you are a non-resident) there are contribution caps that limit the amount that you are allowed to contribute in any given year.
It’s also important to note, that you can only claim so much of a superannuation contribution as a deduction that offsets the income in your tax return – putting this another way, this means that you can only claim a deduction for superannuation to the extent that it does not create a tax loss or increase a tax loss in your return.
Typically we’d recommend that you contact a professional adviser (such as ourselves here at Expat Taxes Australia), before making any decision to contribute (or not) to your Australian superannuation fund whilst you are living and working overseas as a non-resident. It’s important that you understand the implications from both an Australian tax perspective and from the perspective of the country where you live. For example, if you are an Aussie expat who lives and works in the United States, although it depends upon your circumstances and the history of your fund, you may find that any contributions that you (or your employer) make into your Australian superannuation fund, are taxable in your US tax return, notwithstanding that you are unable to access your superannuation to pay that US tax liability!
Renting vs. purchasing overseas
The decision whether to rent or to purchase a home overseas not only depends upon your longer term plans, but on the tax implications arising from either choice. Although most Australian expats live in rented accommodation overseas, both for the speed of access (no long settlement periods), plus the flexibility and convenience to move back home or to another location quickly, a growing number of Australians are seeking to purchase property overseas.
Our advice (particularly when you are new to a country) is to rent initially and get settled in. Take your time to understand the local real estate market, the economy of the country generally, learn about the tax consequences of owning property in that country, and ultimately be patient and get comfortable first so you can determine whether that country is where you really want to be, or where you really want to hold real estate.
On that note, it’s also important to understand the Australian tax implications of such a purchase for when you eventually return home to Australia (if at all). You’ll need to understand all about foreign rental income, capital gains tax on foreign properties and you’ll need to understand what happens when your residency status changes from non-resident back to tax resident of Australia again.
Reducing debt on personal and property loans
Clearing private debts such as credit card debts and personal loans should be considered seriously before you go for a few reasons. Debts of this nature do not typically provide you with any tax benefits and usually these debts attract higher interest rates, so they’re costly also.
Additionally, if you chose to reduce debts after moving overseas, particularly where the exchange rate has moved in your favour (as has been the case with the USD/AUD whereby the USD buys almost 50% more AUD than it did 5-10 years ago), in many cases, the repayment of your Australian debt may result in the generation of taxable income in that foreign country because you have made a foreign currency gain.
For example, if when you moved overseas the exchange rate was USD$1:AUD$1, and you owed AUD$90,000 in debt to repay that debt with USD, you would need to pay USD$90,000. However if the rate has moved positively for you and if you now decided to repay that $90,000 in debt in full when the rate was USD$1:AUD$1.50, you would only have to pay USD$60,000 to clear the AUD$90,000 loan. In that instance, you’d have made a $30,000 foreign exchange gain and that gain may be subject to tax in the country where you live and work!
Note that the interest that you will pay on any mortgage that was used to fund a property that you are generating rental income from, will generally be tax deductible for you and will thus provide you with tax benefits in the form of tax savings. So you should only consider repaying these debts AFTER repaying non-deductible debts (such as personal loans and credit cards) first.
Investing in Australian shares
Acquiring Australian shares whilst living and working overseas as a non-resident can be a very tax-effective strategy. Choosing which shares to invest in can be a tough decision to make. However, with the appropriate advice, acquiring Australian shares is an excellent option to save. This is because most ASX listed share investments, acquired whilst living and working overseas as a non-resident are not subject to capital gains tax in Australia, because unfranked dividends are subject to a withholding tax of only 15% if you live in a treaty country (30% if you live in a non-treaty country), and tax dividends are treated as tax paid and can be excluded from your return.
Even better, upon your return to Australia (i.e. the date that you regain your Australian tax residency status), your ASX listed shares will again become subject to capital gains tax, but you’ll only pay CGT on any gain you make above the market value of each shareholding as at the date you regained your Australian tax residency status. In short, depending upon your circumstances, most capital gains that you’ll accumulate as a non-resident (on the ASX listed shares that you acquire whilst you were a non-resident), will be free of Australian tax.
Investing in other non-Australian shares and trusts
The same rule that applies to an Australian expat investing whilst overseas also applies to non-Australian shares. Tax only begins to accrue on gains from the excess of the market value on return to Australia. There are special rules that apply to a selected group of investments held in non-public trusts where such capital gains are taxable each year annually on an accrual basis. This can be a complex area where expert advice is needed to be applied on a select case to case basis just to be certain on the tax implications arising.
This also applies to other assets purchased while overseas such as property or antiques that become taxable only upon an expat’s return to Australia as a tax resident. Similarly, these capital gains will only be taxed if the amount to be paid is in excess of the market value on the return date. To protect the value of the property, which is very important to do, the expatriate should obtain a sworn affidavit determining the market value of the said property in order to avoid any problems in future that may arise while trying to establish the market value.
Australian expats can, therefore, have peace of mind knowing that their savings and investments made whilst overseas will yield maximum tax benefits whether they intend to settle overseas or return to Australia. These benefits coupled with the increase in disposable income will ensure that any Australian expat will enjoy their stay overseas. Should they decide to return to Australia at any given time in their life, they will still reap the benefits from the decisions made whilst overseas.
The above are financial decisions to consider and plan ahead of and after departing Australia.
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