Alongside looking at income taxes for individuals, we will also focus on other forms of tax, including for firms and on capital gains taxes.
Whilst it shouldn’t be considered as tax advice, it is correct as far as we are aware at the time of writing.
If you are looking for portable expat tailored investment solutions, which is what we specialise in, you can contact me on this form or via WhatsApp on the screen.
Often it is far more tax-efficient to invest overseas, in a portable structure, as an expat, as opposed to sending money home.
Australia, the smallest continent and one of the largest countries on Earth, lies between the Pacific and Indian Oceans in the Southern Hemisphere. The capital of Australia, Canberra, is located in the southeast between the larger and more important economic and cultural centers of Sydney and Melbourne.
Australia is the only country in the world that spans an entire continent. It is one of the largest countries on Earth. Although it is rich in natural resources and has a lot of fertile land, over one third of Australia is desert.
Australia is known the world over as one of the most diverse and hospitable countries in the world. In fact, of Australia’s 23 million people, almost half (47%) of all Australians are either overseas born or have an overseas parent.
Over 260 languages are spoken in Australian families: in addition to English, the most common are Mandarin, Italian, Arabic, Cantonese and Greek.
Australia’s diversity and friendliness is matched by its economic stability. To date, Australia has experienced over 20 years of continuous economic growth.
They are as competitive in the global economic arena as they are in the global sports arenas. The country has over 120 certified sports organizations across the country, covering popular activities such as AFL, cricket, football, rugby league, golf, tennis, netball and hockey, just to name a few.
You may not know, but Australia is the largest island in the world, the sixth largest country in the world by land area, and the only country that rules an entire continent. This vast country has over 500 national parks and over 2,700 nature reserves, from wildlife sanctuaries to Aboriginal sanctuaries.
There are also seventeen UNESCO World Heritage Sites – more than any other country – including the Great Barrier Reef, Kakadu National Park, the Lord Howe Island Group, the Tasmanian Desert, Fraser Island and the Sydney Opera House.
Many people around the world know Australia as a beautiful country, but in this article, we will mainly be focused on Australian expats and the taxes they pay from their income.
So, Australia is a major destination for British and US expats for a variety of reasons. However, despite the many cultural similarities between the UK and Australia, the two tax systems have many fundamental differences.
We have prepared this overview of Australian taxes for expats primarily as a guide for British and US expats. Some of the information will be relevant to expats from other countries, however this guide should not be used in isolation to make any financial decisions regarding your Australian tax affairs and you should always seek the advice of an Australian tax professional.
Basics of the Australian Tax System
The Australian equivalent of the IRS is the Australian Tax Office (ATO). ATO is the main revenue collection agency for the Australian government. They collect revenue, administer taxes on goods and services for all Australian territories and states, and administer major aspects of the pension system.
The tax year in Australia is July 1st to June 30th. Australia’s tax system is much like the US tax system, where taxes are levied on the basis of your earnings, wages, business income and investment income.
Tax rates are progressive, meaning the more you earn, the higher the tax rate for each additional dollar of income.
Your Australian tax return must be filed by October 31st each year, unless you file an extension through a professional tax professional. If you file (or “file” as they say in Australia) your late return, you may be subject to penalties.
To file your tax return, you must obtain a Tax File Number (TFN). The TFN is the equivalent of the US Social Security Number and can be obtained from the ATO.
TFN is a unique number associated only with you and should be kept in a safe place to avoid identity theft. You will keep TFN for life, even if you leave and then return to Australia. Those without a TFN will have mandatory taxes withheld from their income, both salary and investment income.
Even if you are not permanently in Australia, you can still get a TFN. This is usually done if there is a need for taxes, for example, to obtain an income or temporary business visa.
Married couples cannot file a joint tax return, but each spouse must be listed on the other’s tax return.
Australian Tax Basics for Expats Living in Australia
If you are a foreign resident working in Australia, you report any income earned in Australia on your tax return, including:
- labor income
- rental income
- Australian Pensions and Annuities unless exemption is provided for by Australian tax laws or tax treaty.
- capital gains on Australian assets.
- You are not eligible for the tax-free threshold. This means that you pay tax on every dollar of income earned in Australia.
- You do not pay Medicare fees (and often are not eligible for Medicare health benefits).
- You do not declare any interest, dividend or royalties received from Australian sources that you receive as a foreign resident, provided that the Australian financial institution or company that pays you has already withheld tax. They would do this if you told them that you are a foreign resident.
- Australian residents with a tax number generally pay a lower tax rate than foreign residents.
However, before to start discussing tax types and their rates let’s answer these two most important questions:
Who pays taxes in Australia?
Australian residents are subject to Australian Global Income Tax. Non-residents are subject to Australian tax on Australian-source income only.
A certain income tax exemption is available to individuals, potentially expats, who qualify as temporary residents. Temporary residents are generally exempt from Australian tax on investment income from foreign sources (but not on income from working abroad) and capital gains derived from assets that are not subject to Australian Property Tax (TAP).
Who is considered a resident of Australia?
As mentioned above, a residence permit for tax purposes is different from a residence permit for citizenship or immigration purposes. Meeting any of these criteria determines that the person is resident in Australia for tax reasons.
- Always resided in Australia
- Moving to Australia for good
- Residing in Australia for more than half a tax year (unless your usual home is not in Australia and you do not intend to live in Australia permanently)
- Having lived in Australia for at least 6 months (continuously), living in one place and having one job
How does Australian expat income tax work?
Taxes for expats in Australia are calculated by deducting deductible expenses and losses from the taxpayer’s taxable income.
Wages, bonuses and most cash benefits are included in the employee’s calculated income in the year in which it is received.
Most of the non-cash employment benefits received by an employee are subject to fringe benefits tax (FBT), which is paid by the employer. The tax fiscal year in Australia runs from 1 July to 30 June of the following year; for example, fiscal year 2019/2020 runs from 1 July 2019 to 30 June 2020.
Self-employment and business income – Taxable income from self-employment or business is subject to Australian tax. Each partner in a partnership is taxed on his or her share of the partnership’s taxable income.
Directors ‘Fees – Directors’ fees are included in calculable income as personal income and are taxed in the year they are received.
Dividends – Taxable income for resident shareholders includes all dividends received. Dividends on francs (that is, dividends paid out of taxable corporate profits) paid by Australian corporations are pooled against corporate taxes paid. Shareholders can request the appropriate corporate tax as a credit on their personal tax return.
Dividends from Australian sources that are paid to non-residents are generally subject to a final withholding tax of 30% (or 15% according to applicable treaties) on the non-rated portion (that is, the portion paid out of tax-free corporate profits).
Dividends from foreign sources are included in the estimated income of Australian residents. If the tax was paid in a foreign country, a foreign income tax credit (generally equal to the lower of the foreign tax paid or Australian tax payable) is allowed.
Temporary residents are not taxed on foreign investment income and profits from tax-free Australian property.
Interest, royalties and rental income — Interest, royalties and rental income earned by residents are included in the estimated income, net of any applicable expenses.
If tax on foreign rental income is paid in a foreign country, the resident may claim a foreign income tax credit. If the foreign investment results in tax losses (ie, the deductible expense exceeds taxable profit), the tax loss may be offset against the full amount of Australia’s taxable income.
Temporary residents are not taxed on foreign investment income and therefore cannot offset foreign expenses or losses against other assessed Australian income.
Interest paid by a resident to a non-resident creditor is subject to a final withholding tax of 10%. Interest paid by a temporary resident to a non-resident lender (such as a foreign mortgage holder) is exempt from withholding tax. Royalties paid to non-residents are generally subject to a final withholding tax of 30% (or 10% to 15% according to applicable agreements).
Everything about Capital Gains
Residents (but not temporary residents) are taxed on their worldwide income, including profits from the sale of property, plant and equipment. Fixed assets include real estate and personal property, whether used in trade or business, as well as shares purchased for personal investment.
For an asset held for at least 12 months (not including the dates of purchase and sale), typically only 50% of the capital gains generated on disposal are taxable.
Assets acquired before September 19, 1985 are generally exempt from income tax. Generally, any gain (or loss) generated from the sale of an individual’s primary residence is ignored for CGT purposes. However, special tax rules for expats may apply if the main residence was used to generate rental income.
Capital losses in excess of capital gains in the current year (prior to the application of the 50% discount, if applicable) are not deductible from other profits, but can be carried forward to future capital gains.
Non-residents and Temporary Residents are taxed only on profits from the sale of Taxable Australian Property (TAP). The following assets are considered TAP:
- Real estate in Australia
- Indirect interest in Australian real estate
- Business asset of a permanent establishment in Australia
- Option or right to acquire any of the CGT assets specified in the first three paragraphs above
- A CGT asset that is considered a TAP as a result of the taxpayer choosing to disregard any perceived gain or loss arising from leaving Australia.
As of 8 May 2012, the 50% CGT discount will no longer apply to temporary and non-Australian residents. Foreigners who receive capital gains after May 8, 2012 and are considered either non-residents or temporary residents at any time on or after that date now have a limited opportunity to qualify for a 50% discount.
If an individual makes a market valuation of the asset as of May 8, 2012, the portion of profits accrued prior to May 9, 2012 may still be eligible for the full CGT discount.
Tax evasion prevention measures ensure that non-residents and temporary residents continue to be taxed when divesting interests in companies whose balance sheets are predominantly comprised of real estate assets, including mining interests.
Australian residents who are not Temporary Residents immediately prior to termination of residence will be subject to CGT for the deemed disposal of all non-TAP assets held at the time of termination.
The taxpayer may decide that this contingent disposal fee does not apply. However, with this choice, the asset is considered TAP until resuming residence or until the asset is sold (even if the asset would not have been TAP otherwise). As a result, if assets are disposed of while the individual is not a resident, a CGT fee is charged. Temporary residents are generally exempt from tax on profits earned on non-TAP assets.
Australian Social Security
Australia has a three-pillar pension system. The first pillar (government pensions) consists of a tax-funded retirement pension (government pension) that provides basic benefits (similar to social security) for men and women (aged 65 and over).
In addition to the retirement pension, the government has established the Fund for the Future, which is funded by the budget surplus and the privatization of Telstra (a telecommunications company). The fund of the future was created to pay off unfunded public sector pension obligations.
The second pillar (professional pensions) is a pension fund system funded by compulsory contributions from all employees between the ages of 17 and 70. Although this defined contribution system requires a minimum contribution to the pension fund, voluntary contributions can be made by employees.
The third pillar (Personal Pensions) consists of retirement savings accounts (RSA), which operate under the same tax rules as retirement accounts. RSA are low cost retirement plans offered by depository institutions or life insurance companies.
Australian employees are not subject to US Social Security tax. Under the Australian-US taxation agreement (called the Summation Agreement), self-employed expats in Australia can decide which system – US or Australian social security – they would like to participate in.
Residents for medical services pay a Medicare fee of 2% of taxable income (provided they are eligible for Medicare services).
This is the only social security tax equivalent in Australia. A Medicare fee exemption may apply if the person is a citizen of a country that has not entered into a MHC with Australia.
There is no maximum taxable income. However, a benefit is granted to certain low-income individuals.
High-income resident taxpayers who do not have adequate private health insurance may be subject to a Medicare Levy surcharge of 1% to 1.5%.
High-income expatriate taxpayers with hospital coverage of over Australian $ 500 copay for single expatriates or AU $ 1000 for couples or families must also pay the Medicare surcharge.
What is an Australian Pension Fund?
Pension security is a mandatory retirement savings program to which both the employee and the employer contribute. Employee contributions are voluntary, but employers must pay a minimum contribution of 9.5% of an employee’s base salary if they earn more than $ 450 per month.
Employee contributions are exempt on Australian tax returns, but not on US tax returns. US citizens must include contributions to their worldwide income when filing US tax returns. Retirement accounts are similar to US 401 (k) plans, where income that goes into the account is tax deferred until they withdraw funds (and hopefully profits).
The disadvantage of this account is that funds cannot be withdrawn until retirement age or special circumstances.
Taxes for expats in Australia: double taxation relief and tax treaties
Foreign tax payments similar to Australian income tax payable on the same income may be offset.
Both Australian and foreign expatriate taxpayers may claim a tax credit (equal to the lower of the equivalent foreign tax paid or Australian tax payable) on the amount included in the taxpayer’s accrued income on which they paid the foreign income tax.
Excess foreign tax deductions cannot be carried forward.
Australia has entered into double taxation treaties with 45 countries.
The Australian Internal Revenue Service has a useful calculator to help you determine your tax liability in Australia as an expat.
About the US-Australia Tax Treaty
The US and Australia have a tax treaty. The agreement defines the terms that are used in tax relations between the United States and Australia and provides rules for deciding which country taxpayers are resident in.
This is important mainly for people who are not sure about their place of residence. Much of the tax treaty deals with property and trade, and also includes provisions granting each government the right to tax certain forms of income, depending on the country from which the income was received.
Article 22 of the tax treaty sets out the rules for double taxation. Please note that there are provisions in the agreement to prevent double taxation of pensions, social security income and annuity income received by a resident while in their home country.
For example, an Australian resident who lives in Australia but is a US citizen may be eligible for Australian Pension Income Tax Credit. Other examples might include taxes on Australian pensions.
Is it obligatory to file an Australian tax return?
The basis for whether you need to file an Australian tax return with the ATO is where you live. ATO uses the term “resident for tax purposes” to define filing requirements.
This type of residence determination is different from that used for immigration or citizenship purposes.
The ATO determines that you are a resident of Australia for tax purposes if you meet any of the following criteria:
- You have always lived in Australia
- You moved to Australia to live permanently
- You have lived in Australia for more than half of the Australian tax year – unless your regular home is located outside Australia and you do not intend to live in Australia permanently.
- You have been in Australia continuously for six months (or more) and have lived in the same place and job.
However, regardless of where you live, if you have Australian-sourced income, you will need to file your tax return with the ATO.
Therefore, here was everything that each expat should know while moving to Australia to work. There is no way to escape the income tax, or taxes in general as first of all that is your investment in your country, in your home.
What capital gains taxes might expats have to pay?