In the past few years Australia has become a hub for highly skilled expats. Professionals from all countries come to Australia for work. Their priority is to capitalize on the higher earnings and support their families back home via international money transfers (remittances). Many migrants decide to settle in Australia. For those planning for long term stays in the country the tax regime of Australia deserves a closer look.
Tax liability and eligibility
Compared to the some of the other countries in Asia Pacific, Australia seems to have stricter and more complex tax laws. The first recommendation for new expats in Australia is to ascertain their tax category. According to the Australian Taxation Office (ATO) there are 3 options.
- Australian resident for tax purposes
- Foreign resident for tax purposes
- Temporary resident
ATO determines everyone’s residency with the ‘resides test’. The result depends on several factors. These include the expats’ intention of staying in Australia, whether your family lives in Australia, the period of stay in Australia, and more.
Those who stay in Australia for more than 183 days within a tax year are taxed as residents. Australian residents for tax purposes are liable to pay taxes on all of their worldwide income as well as gains in Australia. The ATO defines some exceptions to this.
Foreign residents for tax purposes are expats who stay in Australia for less than 6 months. They must pay taxes only on the income earned in Australia and gains from property in Australia.
Temporary residents must pay taxes on all worldwide income, except foreign-sourced personal and investment income. Capital gains not earned from Taxable Australian Property are also exempt. Moreover temporary residents are not liable to pay taxes on interest paid to foreign lenders.
Tax on employment income
Employment income includes all salary, wages, allowances, bonuses, and commissions that an individual earns while staying in Australia. These are irrespective of the source of the income. All residents and temporary residents are liable to pay taxes on worldwide employment income. Salaries that an expat earned prior to arrival in Australia and received after arrival are also considered taxable. This is a provision of the Foreign Income Tax Offset (FITO). There are some exceptions for temporary residents.
Non-residents are required to pay taxes only on Australian employment income. An exception is given in cases where expats qualify under a Double Taxation Agreement (DTA) between their home country and Australia.
Tax on Employee Share Schemes (ESS)
Australian residents are liable to pay taxes on the full ESS discount received. Temporary residents are liable to pay taxes only on the portion of ESS discount sourced in Australia. Similarly non-residents are liable to pay taxes only on the Australian portion of the ESS discount.
Tax on interest income
Australian residents must pay taxes on interest incomes earned worldwide. Temporary residents and foreign residents are liable to pay taxes only on interest incomes arising from Australian sources. For foreign residents the rate of tax depends on the terms of the DTA between the two countries.
Tax on dividend income
Australian dividend income is of two types – franked and unfranked. Australian residents are liable to pay taxes earned on worldwide dividend income. Temporary residents and foreign residents must pay taxes only on dividends earned from Australian sources.
Tax on rental income
Australian residents are liable to pay taxes on rental income earned from properties all over the world. Temporary and non-residents are liable to pay taxes only on rental income earned from Australian properties.
Capital gains tax (CGT)
CGT is applicable to assets acquired on and after September 19, 1985. It may be real property or personal property, irrespective of its use in trade or business. CGT encompasses shares as well. Australian residents are liable to pay taxes on the returns earned from selling capital assets. If the asset was used for at least 12 months, taxes apply on 50% of the capital gain. This provision of 50% discount is not applicable for temporary and foreign residents since May 8, 2020. They have to pay taxes only on the sale of Taxable Australian Property (TAP).
All Australian residents are liable to pay 2% of their taxable income as Medicare Levy. There are some exceptions for expats in lower tax brackets. Foreign residents and non-residents are not required to pay the levy.
Double tax relief
Australia has DTAs with 45 countries. Expats can avoid paying taxes on the same source income in both countries. It is always a good idea to check beforehand whether Australia has a DTA with your home country, and how to claim DTA benefits and exemptions.
About the author:
Hemant G is a contributing writer at Sparkwebs LLC, a Digital and Content Marketing Agency. When he’s not writing, he loves to travel, scuba dive, and watch documentaries.