You may want to work and live overseas. Unfortunately, moving overseas doesn’t mean you can just forget about tax in Australia. When you start to talk about tax between countries it gets very complicated. In this article I have tried to keep it simple by just focusing on tax in Australia and not the foreign country you want to move to.
Resident ‘for tax purposes’
If you earn income in a country, you will be taxed differently depending on whether you are a resident or non-resident for tax purposes. Being a resident for tax purposes has nothing to do with being a resident for immigration purposes. All mentions in this article of resident and non-resident refer to tax purposes rather than immigration purposes.
Australian resident versus non-resident
If you are a resident of Australia you are taxed on all your worldwide income.
If you are a non-resident of Australia you are taxed only on Australian sourced income (or taxable Australian property such as a rental property).
Working overseas – tax resident
If you work overseas and you are an Australian tax resident – you would include all income earned overseas in your Australian tax return (and claim a foreign tax credit for any foreign tax paid).
Working overseas – tax non-resident
If you cease residency of Australia on the basis of working and living overseas – you don’t include any overseas income in your Australian return.
Being a non-resident might be a better tax outcome
Most people working overseas for more than a year would probably prefer to cease residency in Australian and say that they are a non-resident on their tax return.
How do I cease Australian tax residency and become a non-resident?
If you are Australian born or raised, you are a resident of Australia unless you can prove that you should no longer be a resident.
Will you still be a resident or not?
There are four tests to determine if you are a resident or not, which are applied in the following order:
- Domicile – where you were born
- Residency – where you reside
- 183 day test – did you spend more than half the year in one country
- Commonwealth super test – are you an Australian government employee (eg. Consulate or Armed forces) working and living overseas
Below I have provided a few examples of resident versus non-resident.
Jenny goes to the UK for a gap year after which she returns to Australia. Jenny is still a resident of Australia and will need to declare all income earned.
Sam goes with Jenny for a gap year, but then decides to have a 12 month holiday backpacking around Europe. Sam is still a resident of Australia as he hasn’t become a resident elsewhere due to his travelling, therefore will need to declare all income earned.
Non-resident simple example
Nick goes to the UK on a 3 year contract. Nick doesn’t have any other income besides his job and interest income. He advises on his tax return that he has ceased residency, tells his bank that he is a non-resident (they will withhold 10% withholding) and each year lodges a form telling the ATO that he is not required to lodge a tax return.
Non-resident example – interest and shares
Peter also goes to the UK on a 3 year contract. As a non-resident, he is deemed to sell his Australian shares on the day he ceased residency so includes a capital gain in his return (though he still keeps the shares while he is overseas). He pays 10% withholding tax on his Australian interest income and because he receives a franked dividend from his shares he does not need to include them in his Australian return (he just loses the franking credits).
Matt goes to the Middle East for a 2 year job and keeps his apartment in Perth empty as he stays in it for a few weeks when he comes back to Australia every two months.
In a number of cases like Matt’s where the person has declared they are a non-resident, the ATO have found that the person hasn’t ceased residency in Australia and is still a resident. But of course it does depend on the individual circumstances, so if Matt rented his property and only returned to Australia a few times, perhaps he might have been considered a non-resident.
Have to be a resident somewhere
To break residency with Australia, you have to become a resident somewhere else – so you can’t simply travel the world and live “off the grid”, unfortunately. And if you spend half the year in Australia and half the year somewhere else – you may still be an Australian resident, unless you can prove that your present and future are elsewhere.
The ATO has further information about whether you are a resident – search “IT 2065″ if you are leaving Australia and ceasing residency, or “TR 98/17″ if you are coming from overseas and may become an Australian resident.