EXPATLAND TAXES

Australia is generally regarded as a high taxing country.

Nevertheless, there are excellent tax concessions depending on whether you meet certain definitions and criteria under the Australian taxation law.

This chapter provides a non-technical plain language guide to questions commonly asked by expats in relation to the Australian tax system.

However, the chapter should not be substituted for advice about your specific situation and circumstances. Australian income tax law is complicated and certain concessions which may be available for some expats may not be available to others.

It is important that you engage the services of a qualified tax advisor or specialist accountant when seeking advice and handling your tax situation in Australia.

Australia Taxes Worldwide Income

After you becomes a resident of Australia for tax purposes, you will be taxed on your worldwide income, i.e all the income that you earn from whatever source. This means you will pay tax on the income whether the income was earned in Australia or outside Australia.

This applies even if you have paid tax on this income in another country. However double taxation is usually avoided as Australia law allows for a foreign tax credit for foreign income tax paid. The foreign income tax offset system is not perfect as foreign tax credits can, on occasion, be lost.

It is thus important that you obtain advice before you relocate to Australia about your specific tax situation

What are Australian Tax Rates

Australia has a progressive system of tax meaning that the more income you earn, the more tax you pay at a higher rate.

Resident tax rates for the year ended 30 June 2019 are as follows

Taxable Income Base Tax Excess

$ 0-18,200.00 NIL NIL

$ 18,200.00 - $ 37,000.00

NIL Plus 19% of

excess over $ 18,200.00

$ 37,001- $90,000.00 $ 3,572.00 Plus 32.5% of excess over $

37,000.00

$ 90,001- $ 180,000.00 $ 20,797 Plus 37% in

excess over $90,000.00

$ 180,001+ $ 54,097 Plus 45% of

excess over $ 180,000

Non Resident tax rates for the year ended 30 June 2019 are as follows:

Taxable Income Base Rate Excess

$0-$90,000.00 N/A 32.5% of each $1.00

$90,000.00-$180,000.00

$ 29,250.00 37% of the excess over $90,000.00

$ 180,000+ $ 62,550 45% of the excess

over $ 180,000

When do you become a resident of Australia for tax purposes?

As can be seen from difference in the comparable tax rates, it is important to determine whether you become a resident of Australia for tax purposes and when this is the case.

There are a whole range of laws which determine whether you become a resident of Australia for tax purposes and when such residency commences.

The first legal test for residency which will always apply is whether you can be said to be residing in Australia under the ordinary meaning of the term. In effect, you could be regarded as residing in Australia even if you spend a few months here provided the facts of your personal situation indicate that you are living here.

Another such law is the domicile test which provides that if your domicile is Australia, then you are a tax resident of Australia unless you have a permanent place of abode outside Australia.

Unfortunately, the term “permanent place of abode” is not defined in Australian tax legislation and so, reference to case law and tax office rulings is required.

In addition to the domicile test, Australian tax law provides for the “183 day test”. This provides that if you stay in Australia for at least 183 days totally a year then you will be recognised as a tax resident unless there is enough evidence to prove that your usual place of abode is outside of Australia and you do not intend to live in Australia for a long time.

Generally, if you have left your home country and are arriving in Australia to work and live then you will be considered a resident of Australia for tax purposes.

However, if you are spending a short time in Australia and you do not intend to reside in Australia and are maintaining a home overseas, then you will not be considered a resident for tax purposes.

When are you a "Temporary Resident"?

You will be considered to be a temporary resident for tax purposes if you hold a visa which is considered a “temporary visa” for immigration purposes.

However, you will not be considered a temporary resident if you have a spouse who is an Australian citizen or an Australian permanent resident.

If you are a temporary resident;

• You will be taxed on foreign salary income but not on otherforeign income

• You will pay capital gains tax on gains made on Australian realestate or interests in Australian real estate but will not be taxedon other capital gains

What About Bonuses Paid?

If you receive a bonus from your employer after you become a tax resident of Australia then you will be liable to pay tax on it.

This is because bonuses are treated as income under Australian tax law.

This is the case even though the bonuses relate to work done before you arrived in Australia.

Tax also applies if the bonus is payable into a non Australian bank account.

Does Australia Tax Capital Gains?

Australia does tax capital gains and they are included in a person’s income for tax purposes. If you are a resident of Australia for tax purposes, then it does not matter where the asset is located, ie whether the asset is located within Australia or overseas.

This does not apply if you are a temporary resident as any gains made on foreign assets are not taxable in Australia if you are considered a temporary resident. This applies even if the overseas gains are brought into Australia. Assets for CGT purposes range from the traditional type of assets, such as real estate and shares to assets such as antiques or artworks.

Australian tax law taxes the disposal of assets even when the asset was acquired before you moved to Australia. However, the capital gain is calculated by comparing the proceeds on the sale with the “market value” of the asset on the day you became a resident of Australia.

As such, you would be well advised to obtain a valuation of all your assets when you become a resident of Australia for tax purposes. Currently there is a CGT exemption on the sale of a family home provided certain criteria is met, such as the home being lived in in the previous 6 years. Taxation law and public policy in Australia has always been that Australians should not have to pay tax on any capital gains made on the sale of their family home (providing certain criteria were met).

However, in early 2017, the Australian government’s 2017/2018 budget proposed to eliminate the main residence exemption for Australian expats and other non-residents with a new rule which was due to commence on the 9th May 2017. Basically, the new proposed rule means that if an expat sells their family home while living overseas as a non-resident, they may be taxed on every dollar their home has increased in value since the day they purchased it.

Under the previous rules, 100% of those gains would have been totally tax-free. Further, their gains will be now be subject to tax at Australia’s non-resident tax rates.

Currently, the Australian government has proposed a grace period for existing properties until 30th June 2019.

As at the current date, the new proposed law is yet to be debated by the upper house of Federal Parliament. As such, it is unclear, at the moment, as to whether this proposed change in law will be put into effect.

The following are some case studies to illustrate the proposed change in law further -

Example 1 – CGT applies

Sarah acquired a dwelling on 10 September 2010 for $200,000. As soon as practicable she moved in. On 1 July 2018 Sarah got a job in New York and moved out but unfortunately she could not sell her property in time before she left Australia to take up her new role. On 1 August 2019, while resident in New York, she signed a contract for the sale of her house at a sale price of $1,200,000.

The whole profit (totalling $1,000,000) on the sale will be subject to capital gains tax under the proposed law at Australia’s non resident tax rates. Had she sold the property before 30 June 2019,the whole of the profit would have been tax-free. CGT applies on the full amount of the gain.

Example 2 – CGT does not apply

Jessica bought her home in February 2003 and moved straight in. She sells the house in 2020, but between those two dates she spent considerable periods overseas, and when she did so she rented her house out. From October 2007 until March 2011 she lived in a rented apartment in London. She came back and lived in her house from March 2011 until she went to Hong Kong until 10 June 2017.

While she was in Hong Kong she rented her house out. When she came back in 2017 she lived in her house until she sold it in 2020. There is no CGT on the sale under the proposed law because at the time Jessica is resident in Australia. It is important that if you are an Australian expat or are contemplating an overseas posting then you understand these proposed laws and how they may affect your personal situation.

This will allow you to properly plan your finances and situation ahead of your journey.

Does Australia have an inheritance or death tax?

Unlike the United Kingdom or the United States of America, Australia does not have an inheritance tax or death tax. Nevertheless, capital gains tax applies if you subsequently dispose an asset that you inherited. There are a number of tax rules that apply to such disposals and in particular the value to be placed on such assets when inherited. It is important that you receive specific advice from a tax professional when seeking to dispose of any asset which you have inherited.

Do you pay tax on the sale of your home?

Generally, there is an exemption for capital gains tax if you move to Australia and you sell your former main residence in your home country. There are specific rules surrounding this area and it is important that you obtain advice before you sell any property or assets that you may have overseas.

Taxes paid on foreign companies

The rules relating to taxes paid in relation to interests held is foreign companies are complex. Generally, unless the company is situated in a country which has a comprehensive tax system as in Australia, then it is likely that you will pay tax on income derived from a foreign company which is considered “passive in nature” under the Controlled Foreign Company rules.

Furthermore, Australian tax law can treat a foreign company as a tax resident of Australia if the central management and control of the company is located in Australia. It is important that you obtain professional advice in relation to interests held in foreign corporations and the income earnt from such an entity.

Practical steps you should take when you first move to Australia

The following practical steps should be taken by you when you first move to Australia -

• Ascertain if you are a temporary resident

• Register for Medicare if eligible

• Apply for a tax file number with the Australia TaxationOffice

• Open a bank account

• Obtain private health insurance to avoid the 1% medicarelevy surcharge on taxable income

• Engage/appoint a tax agent and provide them with a list ofall your assets and their current market value

• if you own any foreign companies or have interests in anytrusts then advise your tax agent of this and seek adviceregarding your Australian tax obligations.

Do you have an obligation to report foreign income?

Australian tax residents must report their worldwide income. There are a number of questions that you must answer on an Australian tax return in relation to foreign income, taxes paid overseas in relation to this income and foreign assets held

Departing your home country

It is important that you plan for the tax systems of your home country and Australia prior to the move.

The following matters should be considered by you -

• does your home country tax you on exit and when you changetax residency?

• does your home country levy taxes on your income when youare living overseas?

• how will the assets and income in your home country be taxedin Australia? If they are taxed, then at what likely tax rate?

• if your home country assets, such as real estate and shares,are sold while you are a tax resident of Australia, what are thetax consequences ?

These are some basic matters which should be considered by you when moving to Melbourne. Failure to consider these matters could prove costly even some years down the track from the move.

Specific advice from a tax professional about your personal financial situation is suggested at all times.

• If you are a tax resident of Australia then you aretaxable on your worldwide income. This does notapply if you qualify as a “temporary resident”under Australian tax law.

• There are a number of rules which determinewhen you become a resident of Australia for taxpurposes. Generally, you become a tax resident ofAustralia from the date of entering with theintention to live in Australia.

• One rule to determine tax residency is the domiciletest. This provides that if your domicile isAustralia, then you are a tax resident of Australiaunless you have a permanent place of abodeoutside Australia

• It is prudent that you list and value all your assetsat the time you become a resident of Australia fortax purposes.

• You will be considered a temporary resident for taxpurposes if you hold a visa which is considered a“temporary visa” for immigration purposes. Thisdoes not apply if you have a spouse who is anAustralian citizen or a permanent resident ofAustralia.

AT A GLANCE

• Only the federal government levies income taxesin Australia. There are no state income taxes.

• Australia has a broad capital gains tax system.Currently main residences are exempt fromcapital gains tax. There is a current proposal bythe Commonwealth Parliament to eliminate thisexemption for Australian expats living overseas.

• Australia does not have inheritance taxes or estatetaxes. However capital gains tax may apply toassets which are inherited and subsequentlydisposed of. There are a number of tax rules thatapply to such disposals and it particular the valueto be placed such assets when inherited.

• There are a number of tax laws relating to sharesthat a tax resident may hold in a foreign companyand the income derived from such share(s).

• Employment income is usually taxable if receivedafter moving to Australia even though they mayrelate to services outside Australia.