When you live and work solely in one country, tax residency is straightforward. However, if you are living away from your home country or living between multiple countries, then determining tax residency is complicated.

One of the difficulties in determining tax residency is that the laws applied to residency differ in each country. This means you may simultaneously meet the residency requirements in multiple countries within a given tax period. Alternatively, if you live a particularly transitory life, it may be difficult to identify primary residency.

Note that tax residency is different to citizenship or visa residency. This article discusses what you need to know about tax residency.

Why Residency Matters

As each country has their own rules for taxation, it is important to know which country has taxation rights over you as an individual resident. This is why residency is such a foundational concept.

Being a tax resident of multiple countries has potential implications on how your worldwide income is taxed. Generally, your country of residence has primary taxing rights over your income. It also raises double taxation concerns, with competing tax jurisdictions aiming to potentially tax the same income. As countries sometimes tax the same income, a dual tax resident could face significant tax consequences. For this reason, tax treaties between countries exist to help resolve conflicting taxation rights, including determining tax residency.

As this can be a particularly complex issue it is important to ensure that you consult with qualified tax professionals who are familiar with the tax laws of each country. The following information provides a general overview of the potential tax consequences of being a tax resident in multiple countries.

Taxation Rights

Once residency is determined, your country of residence will have the primary taxing rights. Income that is taxable from other sources will be taxed as income earned by a non-resident.

Double Tax Agreements (DTAs) between countries cover a range of factors to help mitigate double taxation issues, including who has primary taxing rights of specific types of income and can include limitations on the taxing rights of the country where the taxpayer is a non-resident.

For countries that tax on a territorial basis, the country of residence might only legislate taxation over income derived from the country of residence, or foreign income that is remitted into the country.

However, countries that tax on a worldwide basis assess all income earned by the individual, regardless of the source of income.

In either case, DTAs, and other tax relief provisions help alleviate the impact of being taxed in multiple countries. This typically means that when you pay foreign tax on foreign sourced income, your country of residence will count this tax towards the tax they assess on this income.

Tax Residency

As each country has its own rules for determining residency, your first step is working out whether you are a resident in each country that you are connected to. To give an example of how this works we consider the tax residency rules of Australia, Singapore, the USA and the UK.

Tax Residency In Australia

How Residency Is Determined

There are a number of tests used to determine residency in Australia, which are essentially designed to determine whether Australia is your home. This means that you are an Australian tax resident if you reside in Australia, or intend to reside in Australia for a significant period of time, and you have a permanent home there.

If you are an Australian permanent resident who is living and working overseas on a temporary basis, you may still be considered a tax resident of  Australia. If you have not established a permanent place of abode outside Australia, then your Australian tax residency will continue. A permanent place of abode is a place where you live and consider your home. This means you may still be considered an Australian tax resident even if you are not physically present in Australia for a given tax year. Individuals who are not Australian citizens may also remain Australian tax residents if they travel overseas for short periods of time, while maintaining their home in Australia.

In an income tax year where you become or cease being a resident you will be considered a part-year tax resident.

Income Taxes as a Resident

Australian tax residents are assessed on worldwide income. This includes all forms of income including capital gains.

Tax Residency In Singapore

How Residency Is Determined

In Singapore you are a tax resident when you are physically present in Singapore for at least 183 days in a calendar year.

Income Taxes as a Resident

Singapore tax residents are typically only required to pay tax on Singapore sourced income, or foreign income that is brought into Singapore. Singapore does not tax capital gains.

Tax Residency In The USA

How Residency Is Determined

In the USA, all US citizens and dual citizens are required to lodge a tax return to declare their worldwide income, regardless of their tax residency.

Non-citizens are tax residents if they hold a Green Card that legally allows permanent residency.

Tax residency is determined by a physical presence test. This test requires physical presence in the USA for at least 31 days in the relevant calendar year, after being present for a specific number of days totalling at least 183 days over the preceding two years.

Income Taxes as a Resident

Both citizens and tax residents of the USA are taxed on their worldwide income. Citizens are taxed on worldwide income even if they no longer reside in the US and do not meet the residency test. There are some foreign earning exclusions for individuals who meet specific requirements.

Tax Residency In The UK

How Residency Is Determined

In the UK you are a tax resident under the Statutory Residence Test. This test considers a range of factors including the number of days you are present in the UK, your connections to the country, and other relevant criteria.

The UK has an automatic overseas test. This means if you spend less than 16 days in the UK (or less than 46 days if you have not been a UK resident for the previous 3 tax years), or you are working abroad full-time and spend less than 91 days in the UK, then you are a non-resident.

There are three automatic resident tests:

1. You are present in the UK for at least 183 days.
2. Your only home is in the UK for at least 91 days in a row, and you visited or stayed for at least 30 days in the tax year.
3.  You worked full time in the UK for any period of 365 days and at least one of those days falls in the tax year you’re checking.

Where you do not meet either automatic test the “sufficient ties test” will determine if you are a resident. This test considers your UK connections, including family, accommodation, work, and physical presence, over a number of years.

Income Taxes as a Resident

UK tax residents are taxed on their worldwide income. However, non-UK sourced income may be exempt from UK taxation in certain circumstances.

Dual Residency

As can be seen from the various residency tests of just these four countries, there is variety in how residency is determined and the tax implications this could lead to. Given the variation in tests, you could easily be considered a resident of multiple countries over a single tax year.

When an individual is a tax resident in multiple countries the next step is to determine if there are tie breaker rules contained in a DTA. These rules provide guidance on determining an individual’s primary place of residence.

Residency Tie Breaker Rules

Most countries adopt the Mutual Agreement Procedure, specifically Article 4 of the OECD Model Tax Convention, to resolve dual residence situations. Accordingly, there is a fairly standard set of tie breaker rules across various DTAs. These tiebreaker rules are outlined as follows:

1. Permanent Home – Where you have a permanent home in one country but not the other, you will be a resident of the country where your home is located.
2. Centre of Vital Interests – The country in which you have closer personal and economic connections will be your country of residence. This may include family and personal ties, social and economic activities such as work and club memberships, and where you keep your main assets.
3. Habitual Above – Where neither of the previous tests assist, the country where you regularly abide or reside in will be your country of residence.
4. Nationality – Where none of the previous tests assist you will be a resident of the country in which you are a national.

In most cases an individual will be able to determine their residence using one of these tie breaker rules.

When it comes to Australia, Singapore, the USA and the UK, most of these countries adopt comprehensive DTAs between one another, in which Article 4 of the OECD Model Tax Convention is essentially utilised. This includes the DTAs between the following countries:

• Australia and Singapore
• Australia and the USA
• Australia and the UK
• Singapore and the UK       
• The UK and the USA

Notably, there is no DTA between Singapore and the USA. This means that dual residents of Singapore and the USA will need to rely on the taxation rules and access to tax relief options in each country in order to avoid double taxation.

Dual Tax Residents

In very rare cases an individual may have sufficient ties to multiple countries in which they are either not a citizen, or in which they hold dual citizenship, leading to a situation whereby they may not be able to effectively use tie breaker residency rules to accurately determine their country of residence. This creates a complex situation wherein no country has clear priority for determining tax residency and a decision regarding residency is subjective.

This situation could theoretically lead to an individual being subject to taxes being assessed on their worldwide income in multiple tax jurisdictions. The Mutual Agreement Procedure contained in some DTAs enables a taxpayer to request the competent authority in one country to engage with their counterparts in another country to resolve double taxation.

Managing Dual Tax Residency

In summary, determining residency is an important factor because it determines which tax jurisdiction has primary taxation rights.

DTAs exist to help mitigate the risk of double taxation by providing tie breaker rules in determining residency and placing restrictions or limitations on taxation rights over certain types of income, as well as providing tax relief through the recognition of foreign tax credits.

Where no DTA exists, or where an individual’s residency cannot be determined, other provisions are required to mitigate the impact of double taxation. 

Tax residency can be a very complex area and it is recommended you seek specialist international tax advice for your particular situation. 

Australia does not have an inheritance tax. When a person dies, the estate, or person who inherits the assets does not have to consider any special inheritance tax on the money or assets that are taking ownership of. While a beneficiary may be required to pay taxes from Superannuation death benefit payments, or capital gains on the sale of assets that have been inherited if those assets are sold, there is no specific tax levied on the value of inherited assets. 

However, there are many countries that do have inheritance taxes, including the United Kingdom.  

This means that when an Australian inherits money or assets from abroad, they may find themselves subject to an unfamiliar “inheritance tax”.

What is inheritance tax?

Inheritance taxes are special taxes that are levied on the assets that are received from the estate of a deceased person. As the beneficiary of a deceased estate you are required to pay taxes on the value of the inheritance that you are receiving.

In a similar vein, estate taxes are levied on the value that is paid out of a deceased’s estate. The estate is required to pay these taxes, rather than the beneficiary. This means that the beneficiary receives the net assets after the estate has paid any required.

In some countries these taxes are referred to as “death duty”.

The laws around inheritance taxes vary between tax jurisdictions. There may be different tax rates, different inclusions on what type of assets are taxed and different types of exemptions or limits.

Some countries like the United Kingdom levy inheritance taxes where assets are transferred to trusts and for this reason many British expats should seek inheritance tax advice before establishing a trust in Australia.

When would an Australian resident be required to pay Inheritance taxes?

As an Australian resident you are not subject to inheritance tax, regardless of where the inheritance is coming from. However the deceased estate may be subject to estate taxes prior to paying or transferring your inheritance to you.

In essence this means you, as an individual taxpayer, do not have to be concerned about being assessed for specific inheritance taxes.

What taxes does an Australian need to be aware of when inheriting assets from overseas?

The biggest difference is the added complications that inheriting from overseas may impose, including:

• Potential capital gains tax on exchange rate fluctuations when withdrawing foreign currency
• Estate taxes imposed on the estate that are paid prior to distributing your inheritance
• Foreign taxes imposed on continuing to hold onto any foreign assets or investments

Once you receive the inheritance the assets or money received are yours. This means that their ongoing use and benefit are assessed, where applicable, in your hands, just as any ordinary assets or finances that you earn or invest in yourself, would be. 

In June 2020 new legislation was passed that changes how directors are required to identify themselves. This change was the first step made in an effort to modernise business registrations. It means that all directors are now required to obtain a unique Director Identification Number (Director ID).

What is a Director ID?

A Director ID is a unique 15 digit number that all directors will soon be required to have. This identification number will help ensure that an individual can be correctly identified across all their roles as a director. The unique Director ID will stay with an individual regardless of name changes, location, or how many companies they become a director of.

Why is the Director ID being introduced

The Director ID is being introduced to mitigate the risk of fraudulent director nominations. It also increases the ability to trace relationships with directors and their companies. This is part of a broader plan to improve data integrity and security around company registrations and regulation.

What the Director ID means for you

If you are already a director it means that you will need to apply for a Director ID within the next year. If you are planning to become a director you will need to apply for a Director ID as part of your appointment as a director.

             New companies and new director appointments

Until 5 April 2022, any director appointed since 1 November 2021 has 28 days from the date of their appointment to verify their identity and apply for a Director ID.

From 5 April 2022 all individuals with new director appointments will need to apply for a Director ID prior to their appointment as a director. Anyone who is intending to become a director within the next 12 months is eligible to apply for a Director ID.

             Existing company directors

All existing directors (appointed prior to 1 November 2021) have until 30 November 2022 to identify themselves and apply for a Director ID.

In preparation for the application it is important to ensure that all existing company details relevant to your position as a director are up to date. If any personal details need to be corrected then Form 492 should be lodged to request corrections. This includes correcting errors in names, shortened forms of names, inaccurate dates or place of birth, or other information that may not have been submitted accurately with your initial nomination.

How do I apply for a Director ID?

Directors can only apply for a Director ID themselves. This is not something you can appoint an agent or representative to do on your behalf. You can make an application for your Director ID through one of the following methods:

1. Apply through the myGovID app (preferred method). Please note that myGovID is different to myGov.
2. Providing proof of identification documents over the phone.
3. Completing a paper application and mailing in the form.

To complete the digital application you will need to install the myGovID app on a smart device. Note that myGovID is a separate app to your personal myGov app that you use to manage your personal tax and other government related matters. You will then need two forms of identification, such as your driver’s license, Australian passport, birth certificate, visa, citizenship certificate, ImmiCard or Medicare card.

For more detailed information on how to set up your myGovID please see here:

https://www.mygovid.gov.au/set-up

If you do not have relevant Australian identification documents (for example, due to being a non-resident) or do not have an email address, then you will need to use the alternative forms of application.

The link to access the paper application form is here:

https://www.abrs.gov.au/director-identification-number/about-director-id

This link will also give you more information about the proof of identity documents that you are required to provide.

What happens if I don’t apply for a Director ID?

If you are required to have a Director ID and fail to apply for one within the required timeframe then you may be liable for penalties. Failing to apply for a Director ID when required can leave you exposed to both civil and criminal penalties.

Australian Business Registry Services

The requirement for all directors to obtain a Director ID is the first step in modernising and streamlining Australian business registry services. Phase 2 will commence in 2023 and will involve linking of Director IDs to their respective companies.

While the Federal Government’s Jobkeeper and Cash Flow Boost have wrapped up, the ongoing pandemic and resulting lockdowns continue. This means that businesses and individuals right across the country, particularly in the capital cities, continue to face income loss. As of August 11th 2021, additional economic assistance packages have been announced as a direct result of the most recent lockdowns and restrictions.

FEDERAL GOVERNMENT

At present the government has not reinstated the JobKeeper initiative. Instead, they have provided a payment directly for individuals who have lost work hours.

             COVID-19 Disaster Payment

On 3rd June 2021, the Federal Government announced a COVID-19 disaster payment. This is now a tax-free, non-assessable, non-exempt income payment for the individual recipient. At the time this payment was made in response to the Victorian lockdown in May/June, however it was also made available to future Commonwealth declared hotspots.

This payment is aimed at individuals who have lost paid work hours due to the restrictions imposed by lockdowns. The support provided is based on the number of working hours lost:

• Over 20 hours = $750 a week payment
• 8-20 hours = $450 a week payment
• JobSeeker, Austudy, Age pension recipients who have lost at least a full day’s work in a week may also be eligible for a payment of $200 a week.

NEW SOUTH WALES

NSW has a number of measures available to provide economic support due to the current wave of lockdowns.

The NSW 2021 COVID-19 Business Grant and NSW 2021 JobSaver payments are available for NSW businesses (including non-profit organisations and sole traders) with a turnover between $75,000 and $50 million in the 2020 financial year, and have had under $10 million in wages.

             NSW COVID-19 Business Grant

Eligible businesses can apply for grants of between $7,500 and $15,000. The amount of the grant depends on the extent to which the business turnover declined during the first 3 weeks of the Greater Sydney lockdown (26 June to 17 July 2021) compared to:

• The same period in 2019; or
• The same period in 2020; or
• The 2 week period immediately before the Greater Sydney lockdown.

The amount of the grant will depend on the decline in turnover:

• 30% or more decline = $7,500 grant
• 50% or more decline = $10,500 grant
• 70% or more decline = $15,000 grant

These grants are likely going to be declared to be tax-free grants. Applications can be made until 13 September 2021.

             NSW 2021 JobSaver

The JobSaver cashflow boost is a cashflow boost for eligible businesses available from week 4 of the current NSW lockdown. It is to help businesses maintain their employee headcount. This payment is made in fortnightly amounts based on 40% of their NSW payroll payments, with a minimum of $1,500 a week and a maximum of $100,000 a week.

To receive the payment, the business must maintain their staff levels through the lockdown. Non-employing businesses (sole traders) may receive a payment of $1,000 a week.

             Micro Business Grants

For smaller businesses, with turnovers between $30,000 and $75,000 (in the 2020 financial year), who have experienced a decline of at least 30% of their income, but are not able to apply for the previous two grants, the Micro Business Grant is available.

Applications for this grant close on 18 October 2021.

             NSW Payroll Tax Concessions

Businesses with under $10 million in payroll for the 2021/2022 financial year, who have experienced a 30% decline in turnover will have their annual payroll tax liability reduced by 25%. 

Businesses will also have the option to defer their 2020/2021 annual payment as well as the July and August monthly payments until 7 October 2021. 

             NSW Land Tax Concessions

Up to 100% relief may be available to residential or commercial landlords who have provided rent reductions to eligible tenants. Note that the property owner cannot apply for this concession as well as the Residential Tenancy Support Payment.

             Residential Tenancy Support Payment

Residential landlords with eligible properties may be eligible for grant up to $3,000 if they provide rent reductions to their tenants. They will be eligible for either this grant, or up to 100% land tax concession.

             Short Term Eviction Moratorium and Other Tenant Safe Guards

An eviction moratorium is in place until 11 September 2021. Where a residential tenant has lost at least 25% of their income due to COVID-19 (along with other eligibility criteria), the landlord will not be able to evict the tenant prior to mediation.

             Targeted Industry Support

Other targeted industry support applies to some of the most hard hit industries (such as tourism and entertainment industries).

VICTORIA

The Victorian government has issued a range of grants to assist businesses impacted by the shutdowns.

             Business Costs Assistance Program Round Three (BCAP3)

Eligible businesses who received the Round Two payments (BCAP2) for business costs assistance were automatically paid this additional grant.

Businesses who missed the Business Costs Assistance Program Round Two may be able to apply for the “BCAP2 July Extension” grant instead.

             Small Business COVID Hardship Fund

Businesses who were not eligible for support under existing programs but experienced a turnover reduction by at least 70% (and have a payroll of under $10 million) may be able to access pay grants of up to $5,000. A second round of funding under this grant was announced on 6 August 2021. This grant enables Small Businesses to access grants of up to $8,000.

             A New Business Continuity Fund

This is an additional grant announced on 28th July 2021, that will be automatically applied to any business that was eligible for the BCAP2 or BCAP2 July Extension, where their business was impacted by capacity limits in the CBD.

             Specific Industry Funds

Licensed Hospitality Venues, Alpine Businesses, and Events organisers, have specific grants available for their Industry, due to recognition of the particular hardships that these industries have faced during lockdowns. These grants are between $5,000 and $25,000 for eligible businesses located in areas impacted by the lockdowns.

             Commercial Tenancy Relief for Victorian Businesses

This relief involves the reintroduction of the Commercial Tenancy Relief Scheme. Support is also being provided to landlords who provide rent relief. This relief is generally available where the business has a turnover below $50 million and their revenue has reduced by at least 30% due to coronavirus.

QUEENSLAND

Queensland also has a range of grants available, primarily for small to medium businesses. To be eligible, the business must have a turnover of at least $75,000, an annual payroll of under $10 million and a reduction in turnover of at least 30%.

             2021 COVID-19 Business Support Grants

Eligible small businesses within areas that were locked down may apply for a $5,000 business support grant. Larger businesses in hospitality and tourism have now been added to this grant, subject to meeting relevant criteria.

             Queensland Tourism and Hospitality Package

A range of measures specific to the tourism and hospitality industry includes:

• Deferral of payroll tax liabilities
• Waiving, refunding, or deferring certain fees and licensing costs
• A cleaning rebate to aid eligible businesses and nonprofit entities impacted as potential exposure sites

OTHER

State assistance has also been offered in South Australia, Western Australia, and the Northern Territory.

With lockdowns continuing to be announced, particularly in the Eastern States, it is likely that further extensions, top ups or additional grants will continue to be announced.

There is one fundamental principle that guides what income you are assessed on when you lodge your Australian tax return: 

Tax residents of Australia are taxed on their worldwide income, while non-tax residents of Australia are only taxed on Australian sourced income. 

If you live and work in Australia, it is likely that a majority of your income will have an Australian source. But what happens when you reside in Australia while working for a foreign based employer?

Tax Resident

For the most part, your residency is usually determined by the place where you live. If you are an Australian who permanently lives in Australia, then, even while working for a foreign based employer, you will remain an Australian tax resident.

Technology has made it possible for many Australians to continue to live in Australia while working for a foreign employer. The ongoing pandemic has quickly pushed even more taxpayers into situations where they can reside in one country while working for an employer who has no physical presence in the country where they live.

If you have found yourself back in Australia, but still working for a foreign employer, then there are a number of matters that require consideration.  

Double Tax Agreements

Since both the source country and the country of residence typically have jurisdiction to assess taxes, Double Tax Agreements (DTA) operate to ensure that you are not taxed twice on the same income. 

Typically, a double tax agreement will contain a clause providing the basis as to who has the taxing rights with regards to employment or independent contracting income. One country will typically enable the other country to exclusively tax the income if that person has lived in that country for more than 183 days in a twelve month period.

If there is no tax treaty, then the country from which the employer is located may subject the income to their tax system, whether through withholding taxes on each payment, or through the annual assessment system.

While agreements can vary between countries, they typically ensure that foreign tax paid on foreign sourced income by a tax resident of the other country to the agreement can be claimed as a tax credit in the taxpayer’s tax return. A DTA typically also limits the amount of taxation that the foreign source country can impose on certain types of income. 

How Foreign Tax Offset Limit the Total Tax Paid

The foreign income tax offset is designed to ensure that an Australian resident taxpayer avoids double taxation where they pay foreign tax on foreign income that is also taxable in Australia. The offset is based on the total foreign income tax paid, but is limited to the amount of the Australian income tax that would be payable on the income. Any excess foreign tax that remains is non-refundable.

Example where Australia has the Higher Tax Assessment:

Peter is an Australian who works remotely from Australia for a Hong Kong based company.

For the 2020 financial year Peter is paid AUD $150,000 from his Hong Kong employer. The Hong Kong tax he paid on this income is AUD $26,000. 

The paid Hong Kong tax can be applied as a foreign income tax offset in Peter’s tax Australian return.

Peter has other income to declare in his tax return, resulting in a tax liability of $67,500, assessed on the taxable income.

If he was required to pay the Australian tax on top of the Hong Kong tax then he would be paying a total of $93,500 in taxes between the two countries. However, he can apply the $26,000 already paid in Hong Kong as a credit against the $67,500 Australian assessment. This means he will only need to pay the additional difference of $41,500 to the ATO, bringing his net total tax paid to the Australian assessment of $67,500.

Example where the Foreign Country has the Higher Tax Assessment:

Julie is an Australian working remotely for a company based in Portugal . 

In the 2020 financial year she is paid the equivalent of AUD $50,000. She pays AUD $15,000 in Portuguese taxes for this income.

Julie has no other taxable income to include in her Australian tax return. This means she is only assessed for $8,797 in her Australian tax return. She can only apply the $15,000 in foreign tax paid as foreign tax credits up to the point where it reduces the Australian assessed tax on her foreign income to nil. She is not entitled to a refund for the excess foreign tax she has paid. This means that her total tax liability is the amount paid to the Portuguese tax authorities and she is not required to pay any tax in Australia.

Medicare Levy

Medicare levy is generally paid by Australian tax residents. Excess foreign tax credits can be used to offset the medicare levy and the medicare levy surcharge. 

The Tax Impact of Relying on Foreign Sourced Income

As you can see from the above examples, while a double tax agreement will limit the impact of being taxed from both the source country and the country of residence, you, as the taxpayer, are liable for the higher amount of tax that is assessed. 

Many countries tax their foreign residents at a flat tax rate, denying them any tax free or lower tax threshold concessions. The underlying assumption behind this method is that if you are a foreign resident then you are not earning your primary income from a foreign country. However, as indicated earlier, for some taxpayers this is not necessarily the case. 

If you are an Australian who lives in Australia but works permanently for an overseas based company, your primary, or even sole, source of income may be this foreign sourced income. If you’re one of the many taxpayers who came home for the pandemic but retained your overseas employment, then this is your potentially unenviable position. 

Given that Australia has one of the highest rates of income tax in the world, high income earners are more likely to find themselves subject to paying some additional tax on top of the foreign tax payments. This is particularly true if the foreign country caps their foreign resident tax at a lower rate than Australia’s higher tax margins. 

Things can get more complicated, and result in higher amounts of tax being paid, if you are compensated for your employment in benefits that are in addition to regular wages. 

The Impact of Tax Payable Assessments

One other thing to note is that where you are assessed on foreign income, the ATO may implement PAYG Instalment obligations. This means that you would be required to lodge and pay PAYG Instalments through Instalment Activity Statements over the year. This helps ensure that expected tax obligations are covered when it comes time to lodging the income tax return. 

Tax Consequences of Working for an Overseas Employer

In summary, if you are an Australian earning employment income from an overseas employer, then you may be subject to taxes in both the country of employment, and your country of residence. A DTA can help limit the potential for such income to be double taxed.  

Since Australia has one of the highest tax rates in the world, most individuals in this situation are likely to find that if they pay taxes in the country that employs them, they may need to pay additional taxes on lodgement of their Australian tax return. 

The actual overall impact of working for an overseas employer will depend on which country your employer is situated in and whether Australian has a DTA with the country where your employer is located.

If you’re an Australian expat who came home to ride out the pandemic then you may have found yourself in an unusual situation. Thanks to the advantages of technology, moving back to Australia doesn’t necessarily mean changing employment.

Living in Australia while continuing to work for an overseas employer could mean you face a range of complex tax issues. For this reason it is important to seek professional advice for your specific situation so that you can make appropriate plans and preparations.

Below is a brief overview of some of the considerations you will need to cover.

Tax Residency

The first issue is determining your tax residency.

While the standard residency tests still exist, the ATO has advised that individuals who returned to Australia for the pandemic may remain non-residents (continuing to be residents of their overseas home), provided they intend to return to the country they now call home as soon as possible. This means that if you are still actively planning to return to your overseas home as soon as possible you have some reassurance that you remain a non-resident in Australia.

However, your residency status still depends on your activities in Australian as well as your ties to your overseas home. The longer you stay in Australia, the more you settle down, the more difficult it gets to determine residency. Unfortunately the ATO’s guidelines are unclear about when exactly you would be expected to return to your overseas home and how you can clearly show that this is your intention. If your stay in Australia means you no longer qualify as a tax resident overseas then this may also complicate matters.

Since this is a particularly complicated and nuanced issue it is important to get specific tax advice for your situation as soon as possible. Note that your residency status can change if your actions and intentions change as well.

Non-Residents Working for an Overseas Employer

What happens if you have an overseas employer and you continue to be a non-resident while living in Australia? In simple terms this means you will only be required to lodge an Australian tax return for any Australian sourced income.

If your primary source of income is from your overseas employer, it may result in the income being exempt. However, any double tax treaty will require consultation to determine the ultimate taxing rights. Remaining a non-resident is also likely to keep things simpler as your tax issues will continue as if you were still living back in the country in which you are employed, and to which you intend to return.

Residents Working for an Overseas Employer

On the other hand, living in Australia for the duration of the pandemic could mean that you become an Australian tax resident. In this situation you will be required to include all of your income from worldwide sources in your Australian tax return.

This means that despite your primary source of income being derived from an overseas source, you will have to consider Australian taxes on top of the foreign taxes paid. Note that double taxation agreements typically ensure that you don’t pay more than the amount of tax required from the jurisdiction with the higher taxation rate.

Comparison of Tax Impact as a Resident/Non-Resident

For a basic comparison let’s assume the following:

You earn
– AUD $200,000 from your foreign employer
– AUD $5,000 from Australian interest income

As an Australian tax resident you would be required to pay Australian income taxes and medicare levy of $67,017.

To avoid double taxation you would typically get a tax credit for any foreign income tax paid on the foreign employment income. For example, if you paid foreign taxes of $40,000 on your foreign employment income, then you would only have to pay the difference of $27,017 in your Australian return.

Since Australia’s tax rates are amongst the highest in the world it is likely that you would have to pay some Australian tax on top of your foreign tax paid.

If the country you work for has higher overall tax rates than Australia, then you would effectively only have to pay taxes on the Australian sourced interest income. In this scenario this means you would end up paying $2,350 for the Australian interest income (on top of the foreign taxes paid).

On the other hand, if you remain a non-resident for Australian tax purposes then you would only be required to pay income taxes on the employment income at their source country (your country of residence). Since interest income is typically covered by double taxation agreements it is likely you would only have to pay $500 in Australian taxes on the Australian sourced income. (Though you may also have to pay any additional foreign taxes on this income in the country of residence).

Ultimately the exact amount of tax you would pay depends on where you are employed and where you are a resident. However, it is usually advantageous to be classed as a resident in the country from where you are earning your primary income.

Other Implications of Changing Residency

If you continue to remain a non-resident for Australian tax purposes there are no additional tax implications to consider. However, if you do become an Australian resident again then there are a few issues to consider and plan for. This includes capital gains and investment income.

             Capital Gains Considerations

One of the potential disadvantages of changing residency is capital gains. If you resume Australian residency then you will be required to value any foreign assets for capital gains purposes at the date you become a resident. These assets then become subject to Capital Gains Tax either when you sell them, or if you move back overseas and become a non-resident again.

Since some countries don’t have a capital gains tax, or they calculate capital gains taxes differently – returning to Australia as a resident, whether on a permanent basis or for a number of years, may have a significant tax consequence that you hadn’t planned for. 

             Investment Income

Investment income such as rent, interest and dividends, can be taxed very differently in different countries. Your residency status can also change how you are taxed on such income. Any double tax agreement between Australia and the country from which the investment income is derived, will further impact the overall way in which you pay taxes on such income.

This may be as simple as needing to advise banks, property managers, and investors that your country of residence has changed. This way they can withhold the appropriate amount of taxes required to cover the foreign tax obligations. Or it may require more complex considerations such as the requirements of being a Director, laws around owning controlling interests in a foreign company, and even residency status of a foreign company that you manage. 

Understanding your Tax Situation

The pandemic has created a situation where many Australians are either returning home as unintended residents, or are left uncertain as to their tax residency status. Since this can have a dramatic impact on your finances it is important to get professional, expert advice, sooner rather than later. 

The longer you continue to stay in Australia, the more important it is to assess your tax residency status and understand the potential tax implications of this.

It can understandably be confusing to determine the difference between being an Australian tax resident for tax purposes compared to visa residency.

If you’re an Australian citizen who was born and continues living in Australia, then it’s pretty straightforward. You are an Australian for both citizenship and tax purposes.

But what about when things aren’t so clear? Can you be an Australian citizen but not an Australian tax resident? Can you be an Australian tax resident without being an Australian citizen? And what about Visa status? How does this change things?

Citizenship and visa residency are pretty clear cut. You are either a citizen or you aren’t. You either have an Australian residency visa, or you don’t. Tax residency, whilst linked to some degree to having visa residency or citizenship, is not as straightforward.

Australian Citizenship

You are an Australian citizen when Australia is legally your home country. This could be because you were born in Australia, or because you were born to Australian parents, or because you applied for citizenship. As an Australian citizen, Australia is considered to be your default country for all purposes, including taxation. This is why an Australian citizen may, in certain situations, continue to be treated as a tax resident, despite living in another country.

However, what about for those citizens from another country, living in Australia?

Australian Visa Residence 

People who are citizens of other countries are only permitted to stay in Australia per the terms of their Visa. There are many different types of visas, ranging from short-term holiday visas, through to permanent residency visas.

The type of visa you hold will play a part in your circumstances when determining tax residency. For instance, individuals on short-term visas are less likely to be considered Australian tax residents, while individuals on long-term or permanent residency visas are more likely to be considered Australian tax residents.

Australian Tax Residency

Despite what your citizenship and visa status is, tax residency is a matter of fact and intention. There is no application form to be completed nor automatic rule to become a tax resident.

When considering whether you are an Australian tax resident the primary factor is whether you, the individual, is living in Australia (see the “resides test” below). Conversely, you may be a foreign resident for tax purposes if you live outside of Australia. Living in Australia is distinguished between having a holiday in Australia, or staying in Australia for an extended period, whether temporary or permanent.

To help distinguish “permanency”, an individual must typically be living in Australia for at least six months to be considered a tax resident. Conversely, Australian citizens who are living overseas are typically still considered to be Australian tax residents if they are living overseas for less than 2 years. Indeed an Australian citizen may be living overseas for up to 5 years and continue to be considered an Australian tax resident if there are sufficient ties remaining in Australia to demonstrate that the nature of their overseas stay is “temporary”.

In order to determine tax residency specific residency tests are considered.

Tests for Australian Residency

To determine whether an individual is a tax resident there are a number of tests that can be applied. Passing any one of these tests will determine residency status.

             Resides Test

The first test for residency is the ‘resides test’. If you are physically present in Australia, intending to live here on a permanent basis, and have all the usual attachments in Australia that one would expect of someone living here, then you are a tax resident.

Factors considered include whether your family lives in Australia with you, where your business and employment ties are, where you hold most of your assets and what your social and living arrangements are. If you pass this test then there is no need to consider further tests. 

It is possible to be found to be a resident of more than one country. In cases where you are found to be a dual resident, you may need to consider tie breaker rules in any relevant Double Tax Agreement. 

If you don’t pass the resides test then you may still be a tax resident if you satisfy one of the three statutory tests instead.

             Domicile Test

The domicile test states that you will be found to be an Australian tax resident unless you have a permanent home elsewhere. An Australian citizen will have Australia as their domicile by origin. This means that even if an Australian citizen is living or travelling overseas their default home will be Australia. 

In such situations residency only changes when there is an intention to permanently set up a new domicile overseas. (For this reason people holidaying overseas or living overseas on a short-term basis can continue to be Australian tax residents even if they don’t step foot in Australia for years). Individuals who were domiciled in Australia but who do not cut their connection with Australia, will continue to be Australian residents.

             183-Day Test

The ‘183 day test’ is the day count test. This test is typically to capture foreign residents coming to Australia, rather than applying to Australians moving overseas. Individuals who come to Australia from overseas for at least 183 days may find themselves being Australian tax residents. Note that being in Australia for 183 days of the year does not automatically make such an individual a tax resident. Non residents who come to Australia for more than 183 days but do not have any intention of taking up residence in Australia may, depending on their intent and actions, be considered visitors or holiday makers, and therefore not qualify as tax residents.

             The Commonwealth Superannuation Test

Australian Government employees in CSS or PSS schemes, who work in Australian posts overseas, will be considered Australian residents regardless of other factors. 

Examples of Tax Residency and Foreign Tax Residency

To understand the difference it might help to look at a few examples of different scenarios.

             An Australian Citizen who is a Tax Resident

Tom is an Australian citizen who was born in Australia. He has lived in Australia his whole life, and intends to continue living here. During the year he goes on a 6 month holiday, travelling around Europe. At the end of his 6 months he decides to take advantage of another opportunity and stays in Africa for 3 months. After this time, he returns home to Australia. 

Tom’s tax residency never changes. Despite travelling overseas for 9 months of the year, he continues to be an Australian resident for tax purposes. This is because Australia is always his home, and his time overseas is not in the nature of a permanent move.

             An Australian Citizen who is not a Tax Resident

Jill is an Australian citizen who was born in Australia. She has lived in Australia for her whole life. However, in 2019 Jill accepts an opportunity to take a job in England. The position is a permanent position and requires Jill to move to England on a permanent basis. After acquiring the necessary visa to work and live in England, she sells her home and uses the proceeds to make the move to England, where she buys a new home and settles down. Jill brings her son to England with her, and closes down her Australian bank accounts. She does not expect to return to Australia, other than for occasional holidays.

On the day that Jill departs Australia she becomes a foreign resident for tax purposes. The fact that she is an Australian citizen does not change this. This is because it is clear from her actions and intentions, closing off ties to Australia, and establishing a new home in England,  that she is moving to England on a permanent basis. 

             A Tax Resident Living in Australia on a Permanent Residency Visa

Bob is from the United States of America. While in Australia on a working holiday visa, where he travels around the country, his final stop is at a small country town that feels like home to him. He makes friends and is even offered a permanent job there. Bob’s visa is almost up, so he goes back to the United States as planned, then takes the necessary steps to return to Australia and apply for a permanent residency visa. Bob effectively cuts his ties with the US and intends to make this small country town his new home and moves into a room with one of his new mates.

On Bob’s initial time in Australia under his working holiday visa, he will be considered a non-resident, or a temporary resident, depending on his visa. Even though he started thinking about making a permanent move at this stage, he had yet to take any steps to show this intention. However, on his return, which was made with all the actions necessary to show that this was a permanent move to Australia, he then becomes an Australian tax resident. 

             A Foreign Tax Resident with an Australian Permanent Residency Visa

Jane is a British citizen who has been living in Australia on a permanent residency visa for the past ten years. She just received news that her parents were in a bad accident and both need permanent care. Jane decides to pack up and move back home to care for her parents. She sells off her assets, closes her Australian bank account, and returns home to live with her parents. She also finds a part time job overseas.

Even though Jane has a permanent residency visa in Australia, she is no longer living here on a permanent basis. This means she is now a foreign resident for tax purposes.

Permanent and Temporary Residents

Even if an individual is deemed to be a tax resident, the ATO further distinguishes between temporary residency and permanent residency. Temporary residency typically occurs when an individual is genuinely residing in Australia on a “permanent” basis, however, are only in Australia on a temporary Visa, as opposed to living in Australia on a permanent residency Visa or obtaining Australian citizenship.

Temporary residents are only taxed on their Australian-sourced income.

Tax Residency is based on your Permanent Residence

As you can see from the above examples, tax residency is based on where an individual is permanently residing. If you are in Australia on a holiday, or only for a short time (less than 6 months), then you would not be considered an Australian resident for tax purposes.

However, holding a permanent residency visa, does not necessarily mean you are a tax resident. If you actually live in another country on a permanent basis, having your social and economic ties in another country, then you will be a foreign resident for tax purposes. 

It is important to note that there must be a permanent home elsewhere. If an Australian resident decided to travel the world for several years, although they may think they have departed Australia permanently, as they do not have a permanent home elsewhere, this would not constitute a decision to permanently reside in another country. Australia would continue to be their home, even though they are absent from Australia for a prolonged period of time. 

Since determining tax residency can be quite complex, it is important to speak to a tax specialist to understand your situation.

There are many pathways that you can take when coming to live in Australia on a permanent basis. The “Distinguished Talent Visa”, subclass 858, is one of them. This Visa allows you to stay in Australia on a permanent basis, and permits you to work and study in Australia.

As an individual living in Australia on a “Distinguished Talent Visa”, you need to be aware of your tax obligations. Below we outline the most common questions clients on the “Distinguished Talent Visa” want to know.

Is a person living in Australia on the Distinguished Talent Visa an Australian tax resident?

An individual living in Australia on a Distinguished Talent Visa is most likely an Australian tax resident. 

This visa allows you to live in Australia on a permanent basis. If you choose to live in Australia on a permanent basis and take actions to make this move, then you would be considered to be an Australian tax resident. 

However, if you simply use the visa to stay in Australia on a short term basis while continuing to live in your usual country of residence, then you would remain a foreign resident for tax purposes. 

This means that the Visa itself is not evidence of tax residency, however it is a pathway that could allow you to become an Australian permanent resident, and accordingly, an Australian tax resident. You would still need to actually move to Australia and begin residing here.

If your intentions and living situation changes whilst in Australia, your tax residency status can also change. 

What are the tax implications of moving to Australia on a Distinguished Talent Visa?

Assuming you are coming to Australia on a permanent basis, then moving to Australia on a Distinguished Talent Visa will mean you become a temporary Australian tax resident. This will mean that in Australia you may: 

• be taxed on your worldwide income, including income that comes from your former home country
• need to obtain market valuations on any overseas assets you own in order to establish their cost base for capital gains purposes
• Be required to consider any double taxation issues with the country that you are departing from
• As a temporary resident you will not be subject to capital gains tax on property you hold overseas.

Since the Distinguished Talent Visa alone is not sufficient to confirm that you are becoming an Australian resident, it is important that you get your residency assessed and obtain adequate tax advice for your specific circumstances. 

Should I sell my assets prior to moving to Australia?

Whether or not you sell your property and investments prior to moving to Australia is a personal decision that you should make based on your investment and financial needs and goals. You should always take financial advice from a qualified financial advisor.

From a tax perspective, you will only need to declare capital gains from the sale of your overseas assets if you become a resident and are not also a Temporary Resident before you sell them. 

In this situation your assets are valued and taken to have been acquired at the time that you become a resident and are not still a Temporary Resident.

Assets that are subject to capital gains tax will be eligible for a 50% discount on the amount that is assessed, once they have been held for at least 12 months.

Getting adequate advice on the tax consequences of choosing when to sell your assets is something that should be done as soon as possible, so that you are able to make more informed decisions.

What happens with the taxes I am required to pay in my home country?

After moving to Australia on a permanent basis it is possible that you will still be required to pay income tax in your former country of residence. 

If there is a Double Tax Agreement (DTA) between Australia and your former country of residence, then the DTA will contain provisions that minimise the potential of being taxed twice on the same income. 

DTAs can minimise the amount of foreign tax that is paid on investment income such as interest. They also include tie breakers for situations where you are deemed to be a resident of both countries. 

Paying Tax in Australia

Whether you are a permanent resident, a temporary resident, or a non resident of Australia, you will be required to lodge an Australian tax return on an annual basis while earning income in Australia. 

Non residents are only required to include income that is sourced from Australia. 

Permanent residents are required to include income from worldwide sources.

Under the Australian tax system your employer withholds some tax from your pay, known as PAYGW (pay as you go withholding). The PAYGW is remitted to the ATO who then offset this against your assessed tax liability for the year. Any excess PAYGW is refunded at this time, or a notice of payment is issued where you owe additional tax. 

Discretionary trusts provide flexibility in relation to revenue and capital distributions. This is one of the reasons they are a common choice for families. However, when there is a potential foreign beneficiary, the discretionary trust can find itself facing additional costs in the form of foreign surcharges. Foreign surcharges are additional fees that various state jurisdictions impose on the duties and/or land taxes over and above the original impost.

The 2020 changes to foreign surcharge requirements mean that administration for Australian discretionary trusts became a lot more complex.  

Foreign Surcharges are subject to a complex array of rules

Each state and territory has its own rules for determining when a beneficiary is a “foreign person”. They also have their own rules for governing foreign surcharges, with some states even imposing clawback rules in the event a beneficiary later becomes a foreign resident. For this reason it is important to obtain specific advice for the relevant state or territory when a discretionary trust intends to purchase property. 

Ultimately, any discretionary trust that is determined to have foreign beneficiaries will be required to pay both the ordinary state duties and/or land tax, as well as the relevant foreign surcharge. For this reason most discretionary trusts aim to avoid having foreign beneficiaries. Where this is not practical for the purpose and primary aim of having the trust in the first place, the trustee must be aware of how having foreign beneficiaries will impact their financial considerations.

Changes for NSW discretionary trusts that own residential property

On 24 June 2020 the State Revenue Legislation Further Amendment Act 2020 came into effect in NSW. This Act changed the foreign person surcharges for both land tax and duties where residential land located in NSW was owned by a discretionary trust. 

The change means that a trustee is deemed to be a foreign person unless the trust deed explicitly excludes all foreign persons from being beneficiaries or potential beneficiaries. This clause in the trust deed must be irrevocable. This means an individual beneficiary who has children overseas, who are defined as foreign persons, would not be able to amend the deed to include their foreign child as a beneficiary. 

Non-compliant trusts, i.e. trusts that do not exclude both foreign persons, and potential foreign persons, as beneficiaries, will deem the trustee to be treated as a foreign trustee. The trust then becomes subject to the foreign surcharge rate of duty. 

In NSW the rate of foreign surcharge is presently 8% of dutiable transactions relating to residential land while for land tax the rate is 2%. These charges are payable in addition to ordinary rates. 

Retrospective Impact of the change in NSW

One of the most concerning things with the change in NSW is that the law applies retrospectively from 21 June 2016 for dutiable transactions, and from 2017 for land tax surcharges. 

If you don’t have any foreign beneficiaries then you have until 31 December 2020 to amend your trust deed to irrevocably remove both foreign persons and potential beneficiaries who could be foreign persons, if you wish to avoid the foreign surcharge. 

If you have previously not had foreign beneficiaries, but you do not wish to amend the trust deed because you will, or potentially will, have foreign beneficiaries, then you will need to consider if you are liable for any retrospective duties and land taxes.

Victorian changes

Victoria has also implemented some changes as of 1 March 2020. While these changes essentially have the same impact as in NSW, the law does not apply retrospectively.  

What should you do if you have a discretionary trust with property?

If you have a discretionary trust that holds property, or is intended to hold property then you need to assess the importance and likelihood of having beneficiaries who are foreign persons, or could potentially be foreign persons. This includes assessing your current trust deed, evaluating the goals and purpose of the trust, and reviewing the financial impact of having, or potentially having, foreign beneficiaries.

This may result in a change to your trust deed in order to intentionally exclude any foreign, or potentially foreign beneficiaries, or it may involve a change in your investment strategy. 

The Australian tax system is surprisingly different to the UK tax system.

This makes a simple comparison between the two challenging. 

Determining, from an individual taxpayer perspective, which country has higher taxes, isn’t straightforward. Both countries apply progressive rates of tax, as well as a range of potential adjustments and offsets.

Income taxes are lower in the UK due to the progressive rates of tax applying at higher levels of taxable income, but as the UK also has much higher medical contribution taxes than Australia, the UK taxpayer may end up with a higher overall tax burden.

In Australia, income tax is assessed on the taxable income of a taxpayer which is assessable income less allowable deductions while in the UK specific “allowances” may reduce the different types of income before that income is taxed. 

Australian resident taxpayers have a standard tax free threshold, regardless of the type of income or income level, while UK taxpayers have access to different allowances (tax free amounts) that can vary based on income level and the type of income they are earning.

Foreign sourced income is also treated quite differently in the UK, with a threshold applying before tax is imposed.

The following table highlights some fundamental differences between the two tax systems:

Residency

Australian residency is generally dependent on whether an individual actually resides in Australia, however Australian citizens may continue to be Australian tax residents while temporarily residing overseas. There are a number of tests that can be used to help determine residency.

UK residency is based on the number of days an individual is physically present in the UK during the tax year. For more complex situations that do not meet the automatic test, other factors may apply.

Tax Rates

Both Australia and the UK apply progressive rates of tax ranging from 0% to 45%.

However, while Australia has a standard initial tax free threshold for all taxpayers, the UK utilises a system of allowances that taxpayers deduct from their income before tax is assessed. The amount of allowance changes depending on a range of factors, and different allowances are applied for different types of income, such as employment income, investment income and capital gains.

Medicare/ NHS

Australians pay a flat rate of medicare (2%), unless they are exempt. High tax payers pay an additional medicare levy surcharge of up to 1.5%, unless they pay for private hospital health insurance. 

In the UK both the employer and the employee are required to pay a contribution towards national health insurance, at rates varying from 0% up to 13.8%.

Capital Gains

Both Australian and the UK impose a capital gains tax.

In Australia capital gains are simply added to an individual taxpayer’s assessable income and taxed at the marginal rate at which the income falls. Assets that have been owned for more than 1 year can be discounted by 50% before being included as assessable income. Other exemptions may also be applied to reduce or rollover capital gains.

The UK tax system gives taxpayers an annual allowance for capital gains. Any capital gains up to the allowance each year are tax free. Like Australia, there are also other exemptions that may be applied to reduce or rollover certain capital gains. 

In the UK, capital gains are taxed at a different rate to other income, and residential property is taxed at different rates to other assets. Higher/additional rate taxpayers pay 28% on residential property and 20% on other chargeable assets. Basic rate taxpayers will pay either 10% or 20% on capital gains, unless it is on residential property, in which case the rate is either 18% or 28% (depending on the size of the gain and the taxable income of the taxpayer.

Both countries have an exemption for the sale of an individuals’ main residence.

Inheritance tax

Australia does not have an inheritance tax.

Neither inheritances nor deceased estates attract any specific form of tax. Any property or investments that are inherited will attract taxes in the same way as any property or investments that were acquired personally and subsequently sold. (There are some provisions for inheriting a main residence that allow the main residence exemption to be carried over).

The UK has a standard inheritance tax rate of 40% above the tax free threshold (the standard tax free threshold is currently 325,000 pounds).

Where everything is left to a spouse, civil partner, charity or community amateur sports club, there is normally no inheritance tax to pay. When your home is given to your children (including adopted, step, and foster children), the threshold can increase to 500,000 pounds.

If an individual who is married (or in a civil partnership) passes away with an estate that is worth less than their threshold, then the unused portion of their threshold can be added to their partner’s threshold for when they die.

The inheritance tax may be reduced to 36% on certain assets if at least 10% of the net value of the estate is left to charity in the will. There are some other reliefs and exemptions to help reduce inheritance taxes on gifts donated prior to death, business relief, and agricultural relief.

Australian and UK Tax Systems

Each tax system has a range of complexities that are unique to the respective country.

In some ways the basic Australian tax return is more straightforward for the individual taxpayer.

On the other hand, the UK system’s use of deductible allowances for different types of income, provides for a range of tax planning avenues that are not available to Australians.

Since the tax systems between each country are so different, and residency changes can trigger complex tax issues, it is important to seek expert advice in both countries when making a move between Australia and the UK.