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Have you recently left Australia to live overseas, or are you planning a move in the future? You will be considered either an Australian resident or non-resident for tax purposes, and this will have a substantial impact on the amount of tax you will pay on both your Australian and overseas-sourced income.
Some careful planning prior to leaving Australia will help you understand your likely tax obligations, help decide whether you’ll intend to make your move temporary or permanent, and ensure that necessary records are kept.
What are the Implications?
You are taxed differently depending on your residency status. Residents are liable for the Medicare Levy, non-residents are not. Residents benefit from the tax-free threshold, non-residents do not. At all income brackets, tax rates are higher for non-residents.
Consider an example where an individual earns $36,000 per annum on an Australian investment property and no other income. As a resident the tax liability will be $4,102. As a non-resident the tax liability will be $11,700.
However, if you will be earning foreign-sourced income, the calculations prove more complicated. Generally;
- residents’ foreign-sourced income will be taxed at Australian tax rates, with some credit for tax already paid in the country of origin.
- non-residents’ foreign-sourced income will not be taxed in Australia, rather only taxed in the country of origin.
Your final tax position will depend on how much you are earning in Australia and overseas, and the tax rates of the country you are moving to.
What Determines Your Residency Status?
Even if you are living overseas, you may still be considered an Australian resident by the ATO. Parting with your Australian tax obligations may be more difficult than you’d think, as the surprise tax bill recently sent to one of our clients proved. It is not enough to physically leave Australia.
Just who is or is not a resident is in reality a complicated question interpreted by ATO rulings and a steady stream of case law.
A few of the many factors that the ATO and ultimately the courts will weigh up are:
- Your length of time spent overseas,
- Your intention to stay there,
- How established you are in your new home, and
- Your ongoing connection to Australia.
The weight of these factors will depend on individual circumstances and the interpretation of the ATO Commissioner.
If you think that you may still be considered a resident for tax purposes whilst living overseas it is better to be proactive and build your case now, before you are contacted by the ATO and while the relevant documentation is both close to hand and fresh in mind.
The ATO undertakes sophisticated digital surveillance activities and can investigate suspected avoidance years after the person in question has left the country. Taking simple administrative steps now – such as keeping records of your communications to employers, friends and family and Government departments regarding your plans – will ensure that any future audit process is as painless as possible.
Contact us if you are overseas and have concerns about your tax residency, or would like advice on the steps you should take before you leave the country.