What are the tax implications of moving overseas?
Moving overseas brings excitement and adventure, but it also involves a multitude of practical and financial considerations. Let’s be honest – it’s a logistical nightmare. Among these, understanding the tax implications of your move is (unfortunately) an important note to make on the never-ending to-do list.
We’ve delved into two key scenarios: maintaining your Australian tax residency while moving overseas and transitioning to non-Australian tax residency if that’s what you choose to do. Whether you’re aiming to retain your Australian ties or exploring life as a non-resident, here’s what you need to know.
Key Highlights
- Know Your Tax Residency: Before moving overseas, confirm your tax residency. Australian residents are taxed on worldwide income; non-residents only on Aussie income, often at higher rates.
- Declare Foreign Income: Residents must report all global income and assets. Tax treaties and offsets can help avoid double taxation—so keep records and stay informed.
- Plan Before You Go: Ceasing residency changes your tax obligations. It may impact capital gains and super. Always speak to a tax advisor before you relocate.
The Basics of Australian Tax Residency
Tax residency sounds boring, but trust us—it’s worth figuring out before you pack your bags. The ATO has a few tests (like the 183-Day Test) to decide if you’re still on their tax radar. Get it right, and you’ll avoid nasty surprises like unexpected tax bills or overpaying!
What defines Australian tax residency under ATO rules?
Figuring out your tax residency is one of those “adulting” things you need to sort out before moving overseas. Why? Because it impacts how much tax you’ll pay and where! Here’s how the Australian Taxation Office (ATO) decides if you’re still in their tax net:
- The Resides Test: Basically, if you live in Australia and call it home, you’re a resident. This includes how long you’ve been here, your living situation, and your personal connections.
- The Domicile Test: If your permanent home (domicile) is in Australia and you’re only overseas temporarily, you’re likely still a tax resident.
- The 183-Day Test: Spend 183 days or more in Australia in a financial year. The ATO probably considers you a resident—unless you can prove stronger ties to another country.
- The Commonwealth Superannuation Test: This one’s for Australian government employees in certain super schemes and their families.
Why is understanding tax residency crucial before moving overseas?
Dreaming of a fresh start abroad? Amazing! But before you dive into your new adventure, let’s talk about taxes (boring but vital). Your tax residency decides where you’re taxed, how much you pay, and on what income. Get it wrong, and you could either overpay (painful) or underpay (even worse—penalties!).
If you stay an Australian tax resident, the ATO taxes your global income—even that side hustle in Paris. As a non-resident, you’re only taxed on Aussie-sourced income, but often at a higher rate. Tax rules aren’t One-size-fits-all, so knowing your status upfront avoids financial headaches later.
To simplify managing your financial responsibilities as you transition to a new location, consider exploring tailored small business bookkeeping solutions that can handle the intricacies of both local and international income.
The Tax Repercussions of Maintaining Australian Residency When Moving Overseas
Most of us hold onto our Australian residency when moving overseas as an expat because more often than not, we plan to come back. Here’s what it means for the state of your tax affairs…
Worldwide income taxation and exceptions: the reach of Australian taxation extends globally due to your Australian residency. This means that your income, regardless of its origin, remains taxable. It’s important to note that double tax agreement treaties may come into play here and exceptions can arise, particularly if you become a tax resident of another country. It’s very much country dependent and you need to look up the scenario wherever in the world you’re relocating to. Here’s a full list of income tax treaties for Australia and every country in the world.
Foreign tax offset: another important consideration is the possibility of a foreign tax offset. If you’re already paying taxes in your new country of residence, you might be eligible for this offset when paying your Australian tax. You can find out how to do the calculation for your tax offset via the ATO here.
For example: (let’s dream big).
You move to Vanuatu, and buy an island. A couple of years later, you want to sell up. In Vanuatu, capital gains tax doesn’t exist. In this scenario a tax treaty might be in place that means you’re also exempt from paying CGT in Australia.
Consulting tax authorities: to accurately determine your tax residency status and potential exemptions, we highly recommend consulting with the tax authorities of the country you’re moving to and letting your Australian accountant know well in advance of the move so they can advise you too. It’s a complicated area that means you need to look at your individual tax circumstance rather than taking a stab from a Google search!
The Impact of Foreign Income on Australian Tax Residency
As an Australian tax resident, you’re taxed on your worldwide income—whether it’s from a job in Paris or a rental property in Spain. But don’t worry; tax treaties and foreign tax offsets can help you avoid paying double tax on the same income, making it a little less stressful to juggle your finances across borders.
How does foreign income affect tax liability for Australian residents?
Earning income overseas while still being an Australian tax resident means you’re not off the ATO’s hook just yet. Australian residents are taxed on their worldwide income, so whether it’s salary from a job in Tokyo or rental income from a villa in Tuscany, it needs to be declared. But don’t panic—double taxation agreements (DTAs) and foreign tax offsets are here to save the day! These agreements ensure you don’t pay tax twice on the same income (phew!). So, if you’ve already paid taxes in the country where the income was earned, you might get an offset to reduce your Aussie tax bill.
What are the reporting requirements for foreign assets and earnings?
Think you can quietly hold onto that Swiss bank account? Think again! Australian residents must declare all foreign assets—yes, that includes your vacation house in Bali and even that humble savings account in London. The ATO loves transparency, and failing to report overseas income or assets could land you with penalties or fines. Keep your records tidy because the ATO doesn’t mess around when it comes to foreign income reporting.
How do tax treaties influence the taxation of foreign income?
Here’s where it gets interesting: tax treaties. Australia has agreements with many countries to avoid the dreaded double taxation nightmare. These treaties decide which country gets to tax what type of income, and they ensure you don’t pay tax twice—one less thing to worry about! For example, if you’re earning dividends from shares in the US, the treaty might allow you to claim a tax credit in Australia for taxes already paid in the US. Knowing the details of these treaties can save you some serious cash, so make sure to brush up on them or get advice from your tax pro.
Tax Considerations of Transitioning to Non-Australian Tax Residency
First thing’s first: unsure of your tax residency status? Here’s a helpful ATO tool.
Global income taxation ends: wave goodbye to worldwide income taxation. As a non-Australian resident, you’ll only be accountable for taxes on income sourced from your new country of residence. No more ATO for you.
Foreign income tax offset: you’re potentially in for a treat – a foreign income tax offset. This offset can effectively reduce the taxes you owe in your new resident country.
For example:
Let’s say you decide to move to the south of France to live your best life and enjoy the Riviera. You become a non resident in Australia for tax purposes. You still rent out your investment property in Australia and therefore, will still need to pay tax in Australia at a non tax resident tax rate (there’s a tongue twister for you). You pay $10,000 of tax. In your French tax return, you will declare the Australian rental income received and you will be able to apply a tax offset of $10,000 in your French return.
Capital gains tax revisions: the sale of assets in Australia could still have tax implications. The capital gains tax you face will be influenced by factors like the duration of ownership and the profit generated.
Exit tax implications: some assets might attract an exit tax upon sale after you move overseas. This is an important aspect to consider in your financial planning.
Note: you won’t be charged both CGT and exit tax on the sale of the same asset. You may, however, be charged more CGT because of the exit tax. As a non-resident for tax purposes, you will no longer be eligible for the 50% CGT exemption for example. So expect the bill to be higher.
Superannuation adaptations: Expect shifts in your superannuation strategy. As a non-resident, contributing to Australian superannuation funds might be restricted, prompting potential transfers to foreign equivalents. It can also complicate accessing your super funds – this is an entire blog post on its own! It’s particularly important to consult your financial advisor about the knock on effects moving overseas will have on your superannuation.
Resident, non-resident… France or Brazil, there are endless scenarios when it comes to the tax implications of packing your bags and moving overseas. If you take one message away from this blog it’s this: you *must* speak to your accountant and financial advisor before getting on the plane! Find a time here.
FAQ
Do Australian residents need to lodge tax returns while living abroad?
Yes, as an Australian tax resident, you’re still required to lodge a tax return if your worldwide income exceeds the tax-free threshold. This includes income earned both domestically and internationally.
What happens if you cease Australian residency in the mid-financial year?
If your tax residency status changes mid-financial year, your tax obligations will also shift. For instance, you’ll need to account for your income under Australian residency rules up to the date of departure, after which non-residency rules will apply.
How can you minimise tax liabilities while living abroad?
To minimise your tax liabilities, it’s all about being clever with your residency status. Make sure you fully understand your new country’s tax system, claim all eligible deductions, and keep an eye on any double taxation agreements (DTAs) that might save you from paying taxes twice. Also, consider foreign tax offsets—they can reduce what you owe back home if you’ve already paid tax in your new country. And hey, it never hurts to consult a tax expert. It’s like having a financial GPS to avoid those detours!
What are common mistakes to avoid in expatriate tax planning?
The classic mistake of thinking you can simply ignore the ATO once you’ve left Australia. Nope! One of the most common slip-ups is failing to properly assess your tax residency status, which can lead to overpaying (ouch) or underpaying (double ouch with penalties). Another biggie is not keeping track of foreign income or assets and missing out on tax offsets or deductions. Lastly, don’t forget to research any double taxation treaties—they’re like a secret weapon to avoid double taxation. Always double-check before you double down on mistakes!
What steps are involved in ceasing Australian tax residency?
To cease your Australian tax residency, you’ll typically need to demonstrate that you’ve moved your permanent home to another country and severed ties with Australia—goodbye, Aussie address, hello, new digs abroad! You’ll also need to make sure you spend less than 183 days in Australia during the financial year. Don’t just pack your bags and hope for the best—getting the paperwork right is key. Also, keep in mind that your superannuation may need to be dealt with before you fully sever ties.
What are the key countries with favourable tax treaties for Australians?
If you’re looking for the best tax buddy to avoid double taxation, countries like the United States, the United Kingdom, and New Zealand have got your back. These nations have double taxation agreements (DTAs) with Australia, meaning you won’t get hit with double the tax on your hard-earned income. Other places with solid tax treaties include Singapore, Germany, and Japan—they’re like your tax treaty superheroes, swooping in to protect you from those nasty tax bills.
