Working overseas as an Australian expat sounds really good. It usually comes with a higher salary package and a new adventure in an exciting country. However, life still continues in Australia, and so do the taxation obligations.
In last three months, I have had three clients with major problems, all cause by a common issue: They simply ignored tax compliance in the periods they worked overseas.
In this respect, we will discuss the key points that make a big difference for expats.
1- Tax Residency
When it comes to taxation, the first question we need to address is whether the expat is still an Australian resident for tax purposes or not. The ATO will determine the residency status in accordance with taxpayer's particular circumstances and arrangements.
The main test, applied by the ATO is the Domicile Test. As a general rule, moving overseas for longer than three years, without a fixed term contract, and an intention to stay in that overseas country longer, makes it more likely that the taxpayer is a non-resident. However, if the taxpayer stays overseas for a shorter period, ATO will most probably consider him/her a tax resident. Period of stay is not the only criteria, of course. To pass the domicile test, the taxpayer shouldn't have any ties to Australia, such as, a family living here and frequent visits to see them, or an investment portfolio, still generating regular income here. We should also mention at this point that, even if the taxpayer cuts ties with Australia, in case he/she moves one country to another, as a normal course of business, the residency will most likely to stay with Australia as there is no specifically established residency in another country.
These are just a few examples of how residency status is assessed. Other details are also taken into consideration when the time comes for a tax return.
2- What are the implications of residency status?
If the taxpayer remains an Australian tax resident, the first impact is the obligation to report the income from all around the world, regardless of the nature. This may include, but is not limited to, the salary income and investment income, with a credit for any foreign tax paid overseas.
By contrast, becoming a non-resident means that the taxpayer will not have to disclose any foreign income to the ATO and will not pay Australian tax, although there will be Capital Gains Tax (CGT) issues to navigate on Australian investment assets, if any, and on foreign property assets at the time the residency status changed.
3- What happens to the family home in Australia?
The main residence exemption rules are heading towards a change as both parties support the measures to prevent people, who left Australian tax residency, from enjoying the benefits of the exemption. The proposed changes, which will most likely to pass in parliament to be applied from 1 July 2019 briefly say: If the taxpayer moves overseas and rents out his/her family home and then decides to sell that home in Australia while still overseas, CGT needs to be paid on the process of the sale.
In other words, main residence exemptions do not apply, so neither does the six year absence rule.
Rental income and deductions from an investment property must still be declared on an Australian tax return, even while the taxpayer is a non-resident, with a credit for foreign tax paid. Tax will be payable at the higher non-residents rates.
When calculating the CGT, the CGT discount is not available for any period after 8 May 2012 during which someone is a non-resident. For the investment properties already owned at the time before moving overseas, there must be an apportionment of the CGT discount for the relevant periods.
If the tax payer becomes a non-resident, investments such as shares in companies are generally treated as having been sold at the market value, triggering capital gains or losses. There will be no further Australian CGT implications if the shares are actually sold while the taxpayer is a non-resident.
If the expat comes back to Australian tax residency in future and still owns the shares, they will be deemed to be reacquired at that time for their current market value.
5- Non-resident withholding tax
First of all, the taxpayer needs to notify the banks and other financial institutions about the change in residency status because non-resident withholding tax is payable on the receipt of unfranked dividends, interest and managed fund distributions.
If the taxpayer has intentions to stay overseas for an extended period, he/she should definitely see a financial planner to discuss the options in regards to the management of superannuation funds or even an early release, if the criteria are met.
Members and trustees of a self-managed superannuation fund will lose their Australian tax residency status and may discover that their fund has become non-complying. Careful planning by a financial planner can help anticipate and overcome any negative consequences that may arise.
7- Tax Return obligations
In case the expat returns to Australia and recovers his or her residency status, there is still an obligation to notify the ATO about the non-resident years, either by making a non-lodgment declaration or lodging the actual tax returns. Otherwise, in most cases, such as my recent clients, ATO would expect tax returns for those years, without knowing where the taxpayer is, and may charge penalties for non-lodgment. They can even make a default assessment and charge a significant amount of tax before penalty and interest.