Managing Dual Tax Residency as an Expat

Daniel Wilkie   |   11 Jul 2023   |   10 min read

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. 

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What You Need to Know if You Have a Trust and are Moving Abroad

John Marcarian   |   3 Apr 2023   |   8 min read

Many private clients heading to abroad may already have a trust in their home country or a 3rd Country.

Historically trusts have been attractive vehicles because they offer people the potential of protecting their wealth from external attacks, but it can also help lower the burden of taxation on a family group.

For those who do not have a trust as yet but who are considering establishing a trust, a great deal of thought and planning needs to go into it.

We make sure our clients understand the four golden rules of setting up a trust:

  1. Ensure the bank or financial advisory firm managing your money does not own the trustee company that will be the trustee of your trust. This prevents a conflict of interest.
  2. Understand how you can unwind the trust arrangement.
  3. Recognise that long-term solutions require tax contingency planning before you sign on the dotted line. As your residency can change, so can your tax position.
  4. Make sure you understand how you can access trust income and/or capital to pay taxes that may become due on the gains of the trust.

Before delving into some further issues associated with trust management, I will cover just a few central points about how trusts work for those who may not have worked with trusts.

How Trusts Work

A trust is an arrangement whereby a trustee has a fiduciary obligation to deal with property over which they have control for the benefit of one or more beneficiaries who are able to enforce such an obligation.

Beneficiaries may be individuals, corporations, or indeed other trusts (such as a charitable trust).

All trusts have a trust deed. 

At a high level, this is a document that outlines the rules that the trustee must follow in relation to the property they control.

Common objectives for utilising trusts are to protect assets and ensure that beneficiaries are deable to benefit financially from the trust in a manner that suits the family group and in accordance with the wishes of the settlor of the trust.

The discretionary trust is the most common trust used by business owners and investors. 

They are generally set up to hold family and/or business assets for the benefit of providing asset protection and tax-planning benefits for family members.

The Trust Deed: Its Importance

The trust deed is the most important document of a trust as it establishes and defines terms and conditions upon which the trust must be operated and managed.

More specifically, the trust deed sets out the beneficiaries of the trust, as well as the end date of the trust and the conditions upon which the trustee holds the property for the beneficiaries.

Actions undertaken outside the provisions set out in the trust deed can be deemed by a court of appropriate jurisdiction to be null and void. 

The implications of an action being null, and void can reach further than the act simply being treated as if it did not occur.

An invalid act of a trustee can result in unwanted taxation implications for the trustee, and a breach of the trustee’s duties can lead to personal liability for damages or alternatively unwanted consequences for beneficiaries.

The best approach in dealing with trust management and planning is to treat every trust deed as unique and therefore refer to the provisions in the deed prior to taking any action.

How Are Trusts Taxed?

While a trust is regarded as a taxpayer in some countries (e.g., Australia), in other countries this is not the case. 

In some countries, the beneficiary is taxed on gains accruing in the trust; in others, it is the original settlor who suffers the tax burden.

Changing Residency With a Trust

One aspect of trust management and planning to get right when you have a trust is to ensure that assets are not unwittingly ‘exported’ into certain tax jurisdictions when you change your tax residency status.

If you want to set up a trust, then before you move to a particular country it is important to understand how a trust determines its residency status under the laws of that country.

In Australia, a trust is regarded as a tax resident of Australia if one of the trustees is a tax resident of Australia. 

However, in other jurisdictions, the concept of central management and control of the trust is used to determine the residency status of the trust.

It is important to work through all the residency aspects likely to impact your trust when you move around with an existing trust.

The key point to note is that it can be a useful exercise to transfer assets from an individual to a trust prior to changing residency and heading overseas. 

However, like most things, this strategy has its pros and cons.

Trusts Heading Overseas: Residency Determination

In the Australian context, where an individual trustee of an Australian trust changes residence, then, often, the trust will also change its residence.

In these cases, you need to make sure that when the trustee changes its residence, the tax consequences are identified.

Before you depart you need to consider whether it is beneficial to you and your family for the trust to stay a resident in your home country where it was established or if it makes sense for the trust to move with you to your new country.

If the immediate and ongoing tax consequences of keeping the trust in its particular form are not advantageous to you then we can discuss alternative strategies with you.

Such strategies may include replacing the trustee of the trust with a company that is domiciled in the jurisdiction to which you are moving and make the trust subject to the laws of that jurisdiction. 

In other situations, it may be more appropriate for a replacement trustee to be appointed in a third jurisdiction and have the trust reside in a 3rd country.

The purpose of the discussion here is to highlight the fact that planning for a departing trust is very important.

Our approach to this area is to recognise that trusts are long-term family vehicles, and just because a client may move to a new country, it does not mean that they should have to wind up their trust and forgo all the benefits that it has provided them.

Given our international tax and trust knowledge, we will be able to help our client make important decisions such as this.

Trusts Arriving Abroad

Moving around the world while being in control of trusts is complicated and should not be done lightly.

Arriving in another country with a trust and no plan is a recipe for disaster.

Where a new individual client has changed their residence and they are the trustee of a foreign trust, it is clear that this trust is also likely to become a resident of the arrival country.

In other cases, even if the client ceases being the trustee before they change their residence specific jurisdictions tax income on ‘pre-migration transfer of assets’ to foreign trusts. 

It is also likely that the trust deed may need a review as some of its definitions and terms may have no meaning in the new country the trust is being exported to.

Even if the trust is residing in a 3rd country, a review of the trust deed from the perspective of the laws of the new country is warranted.

Other concepts, which might be recognised abroad, such as ‘community title’, might be used in the trust deed, but these concepts might have no application in the arrival country.

The arriving trust may still have reporting obligations in the country in which it was established. 

It may also be the case that there are foreign protectors or other people who have an ongoing role in the management of the trust.

You should consider how they are affected in terms of reporting based on the country you are moving to.

This is particularly important if the arriving trust has a business or significant assets.

Often, the cost base of trust assets must be understood on the day the trust first enters a new country.

Usually this will be the market value of the assets on the day of the trust’s arrival, but not always.

While your move abroad is an exciting time for most people and full of challenges and new opportunities, considering the tax issues of how your trust would be affected by your move is essential.

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Key tax issues you need to consider when arriving in a new country

John Marcarian   |   20 Feb 2023   |   3 min read

Similar to the need for you to plan your departing tax issues on the way out of your home country there is a major need to plan what your tax profile will be when you arrive in your new country. 

Sometimes, however, it is easy to assume that arriving in another country has no tax consequences and that can make things difficult.

A recent client example springs to mind.

David Smith (not his real name), an expat relocating from Singapore to the US (upon his retirement), decided to access his Australian superannuation fund.

What a mistake that was.

In Australia, pension payments for those over 60 years of age are tax free.

This is, however, not the case in the US.

David had worked out that he and his wife could afford to live in the US the way they envisaged, based on paying no US federal or state tax.

They were quite shocked when we told them that the US would tax David’s Australian-sourced pension stream.

It was not a great conversation.

Key Items To Consider

Set out below are some of the key things you need to consider ahead of your arrival:

  • Complying with the requirements of more than one tax jurisdiction (are tax credits available for any foreign tax paid?)
  • Accounting for a new tax and legal system (are you moving to a country that has a civil law regime or a common law regime?)
  • Understanding the tax issues associated with moving to the arrival country (does the country you are moving to have a general anti avoidance regime that targets tax planning?)
  • Considering how foreign assets are accounted for (is foreign income exempt or is it non-taxable there is a big difference between the two)
  • Locating other professional service providers to work with (do not assume your foreign tax advisor has international tax experience as this is often not the case)

How Will Your Assets Be Treated?

In some jurisdictions the moment you arrive in the country you are treated as having bought all your foreign assets at the market value of the date you became a tax resident.

This means that a ‘cost base’ has been established for your foreign assets.

Then when you sell those assets in future – a gain or loss can be worked out in relation to those assets. Australia is one such jurisdiction that treats your assets this way.

Other jurisdictions such as the US – do not give you this ‘step up’ in value.

This is a serious problem as you can end up paying a lot of tax to the Internal Revenue Service – based on the original cost of your assets which may have been many years ago.

This is grossly unfair, as most of any gain will have happened while you were a US non-resident – particularly if you sell the asset shortly after you arrive in the US (you may want to sell foreign assets to buy a house in the US for example!)

Your arrival must be carefully planned as the ramifications of an ill-prepared arrival can be costly. 

If you undertake a proper tax planning exercise before you leave, then the thrill of arriving in your new country is not shaken up by the bad news of unintended tax issues. 

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Key tax issues you need to consider before (not after) you move abroad

John Marcarian   |   24 Jan 2023   |   4 min read

Moving abroad is one of the most challenging things that many of us will do.

My move to Singapore in March 2004 was a completely foreign experience in so many respects. There are so many logistical challenges to deal with that often tax planning is left until you arrive.

This of course is way too late.

This article covers some issues to address ahead of time.

Exit Taxes

An example of an issue that frequently arises is the issue of ‘exit tax’; that is, the act of leaving one country may trigger the deemed sale of all your assets held in your home country. 

Hence, it pays to know if the country you are leaving has an ‘exit tax’ as this can have quite serious consequences for you.

Tax Elections

It is also worth considering whether you can exercise any ‘tax elections’ as to how you may be able to obtain concessional tax treatment as you depart your home country.

For example, in Australia, one of the things to consider depending upon the particular asset, is whether you choose to be treated for tax purposes as ‘retaining some of your assets’.

Though you may move abroad, that does not mean that all your assets need to go with you.

Lodging an election to retain some of your assets for tax purposes in your home country, may give you a bit more flexibility as to the tax treatment available when you decide to sell them.

Creating a Trust in a 3rd Country

For a number of reasons, including tax planning, asset protection and risk mitigation, many people wish to hold their assets in a third country, through some type of trust.

Part of the planning you may choose to do before your move to a new country, is considering whether you should establish a pre migration trust in a 3rd country before you move to the country where you will work.

Often this will lead to a better tax outcome than ‘taking all your assets’ with you.

Many countries do not have tax regimes which tax foreign trusts, and therefore, income accumulating therein is not taxable in the country of your tax residence.

Tax Regime For Expats

In the planning phase of where you might go to work overseas, one important consideration is to consider whether the country you are moving to has a ‘concessional’ or ‘modified’ tax regime for expats.

Some countries, have particularly favourable tax regimes for expats.

As an example, some concessional tax regimes e.g., Japan, Belgium, Korea to name a few, may only tax expats on income arising in their country during the first five years of the expat’s tax residence in the country. 

These transitional rules are generally designed to provide an incentive to work in their country.

Other countries, such as the US, tax expats living in the US on passive income accruing in their home country structures.

Unique Residency Status

Another factor for you to consider when planning your move abroad, is the type of residency that you, the ‘departing expat’, will be taking up in your new country.

In some countries, there are unique residency statuses that can have different tax implications for you. 

An example of this includes the ‘temporary resident’ status in Australia.

This type of residence status imposes a different tax outcome as compared to general residence, and they can provide some additional flexibility in your tax position upon arrival.

Restructuring Your Existing Company or Trusts

It is vital to understand how your existing tax structures may have to be ‘restructured’ before you leave the country.

In some cases, a restructure may only involve changes to the office holders of a company or trustee of a trust.

For example, the residency of the trustee determines the residency status of a trust in Australia. 

If the intention is to keep the trust a tax resident of Australia, then this may be achieved simply with the resignation of the current trustee (the departing expat) and the appointment of another individual who will remain in Australia.

In other cases, it may be possible to issue or transfer shares to a family member to ensure that the company you have in your home country is not caught by the controlled foreign corporation rules when you arrive in your new country.

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Planning what happens with your Pension Fund or Superannuation when moving abroad should be a top priority

John Marcarian   |   27 Oct 2022   |   4 min read

Most expats moving overseas will have some form of pension or superannuation plan.

In my experience changing one’s tax residence does not of itself impact how that pension plan is treated in most jurisdictions. However, some particular complex jurisdictions, like the United States of America, have egregious tax laws that often cause unintended consequences for arriving expatriates.

A US Example

One of my clients moving to the US was adversely affected by the international tax rules of the US with respect to foreign pensions. My client, Peter, had built up a sizeable superannuation (pension fund) balance in Australia. It was the product of 30 years working in the film and entertainment business. Over the previous ten years, Peter had been a senior executive working for a chain of movie theatres in Singapore. As such, international tax had not crossed his mind much. Peter and his wife, Helen, had grandchildren living in Santa Monica. They were keen to retire and enjoy the good life in a new location. Peter had calculated that he would be able to fund his future Santa Monica lifestyle through a combination of personal savings and by accessing his Australian pension. Everything was set.

Pension payments in Australia were tax free, so Peter thought that Uncle Sam would also not tax them. Unfortunately, that was not the case. In the US, such income streams are taxable if you are a US tax resident. We stopped Peter sending his pension to the US in the nick of time. We collapsed Peter’s Australian pension and enabled Peter to take his capital to the US and invest it in the US tax efficiently. Disaster averted.

This case study highlights why, in order to enjoy your pension, you must consider the impact of foreign tax laws when you are changing jurisdiction

Countries have different rules

In delivering service to clients, we consider the impact of any overseas move on their home country pension. The underlying motivation for establishing a pension fund is typically based on a desire to save funds for retirement so that there is no reliance on government pensions. 

Thus, it means that having the maximum amount available in the pension plan that is not eroded by taxation, is a primary objective. It is folly to think that a tax-advantaged regime in one country with respect to pension funds will axiomatically apply in another country. That is rarely the case.

Moving your Pension Plan

We have extensive knowledge of the taxation issues relevant to pensions and superannuation. 

This enables us to assist clients with compliance and planning in relation to this important area of their lives. When expats leave their home country to move abroad, there are many aspects of tax that need to be considered prior to departure and pension fund planning is often a priority.

For those expats that have their pension fund in the UK, it may actually be worthwhile moving their pension with them. There are particular rules to address this. A Qualifying Recognised Overseas Pension Scheme (QROPS) is an overseas pension scheme that meets certain requirements set by Her Majesty’s Revenue and Customs (HMRC). A QROPS can receive transfers of UK pension benefits without incurring an unauthorised payment and scheme sanction charge.

In Australia, for example, pension funds are only considered to be complying under the governing legislation if they remain within the Australian tax jurisdiction. This means, that the trustee must remain an Australian resident. Therefore, in the case of an expat, relocation can inadvertently trigger a tax liability. Steps need to be taken prior to departure.

Complying in multiple countries

Similarly, many expats arrive in a new country with their home country pension fund in place.  Therefore, they must adhere to the rules in their home country and their arrival country in relation to this pension fund. One of the specialist skills we possess is in advising clients how foreign pension plans will be treated as they move around the globe. We can assist clients on QROPS and other similar regimes.

Moving abroad is an exciting time for most people. If you undertake proper planning with respect to your pension plan before you leave, then the thrill of arriving in your new country is not shaken up by the bad news that you have created unintended tax issues by leaving your home country in an unplanned way.

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Australians Moving to the UK: A Brief Comparison of the Australian and UK Tax System

Daniel Wilkie   |   16 Mar 2021   |   8 min read

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:

Australian SystemUK Tax System
Assessable IncomeProgressive rates of tax applied to taxable income.Progressive rates of tax applied to taxable income- but different rates apply to capital gains and different types of income have allowances deducted before taxes are assessed.
Tax Free componentStandard tax free threshold applies to all taxpayers on the first $18,200 of their income, regardless of the source of this income.A personal allowance is deducted from the taxpayer’s income before tax is assessed. This allowance is increased for married taxpayers and blind taxpayers, but is reduced for high income earners. Additional allowances are separately applied to different types of income, such as capital gains and investment income. 
Public HealthFlat rate of medicare levy applies to all taxpayers unless they are exempt. Variable rate of health insurance taxes applies, depending on income type and amount of income. This is paid by both the employer and the employee. 
Personal benefits provided by an employerPersonal benefits are taxed to the employer as fringe benefits. There are a range of concessions and exemptions that may be applied. Personal benefits are taxed to the employee, at the value of the benefit. There are some benefits that are exempt. 
Residency An individual who resides in Australia, or an Australian citizen who doesn’t setup a permanent home outside of AustraliaPhysically present in the UK for a specified period of time during the tax year
Individual Taxpayer’s Tax year1 July to 30 June6 April to 5 April
PAYG SystemPAYGW (Pay As You Go Withholding) means employers withhold some of an employee’s wage to be paid to the tax office. This helps cover the individual taxpayer’s annual tax assessment. Any excess PAYGW becomes a tax refund. PAYE (Pay As You Earn) is similar to Australia’s PAYGW system. When too much PAYE has been withheld then an individual can apply for a tax rebate (tax refund) for the excess. 
Who is Required to Lodge a Tax ReturnAll Australian residents and any non-residents with any Australian sourced income are required to lodge a tax return (some exclusions apply for residents who earn under the tax free threshold and have no PAYGW to claim, and for non-residents who only earn certain types of income, such as interest income covered by PAYGW under the DTA). Most employees’ taxes are covered by their company’s payroll system, meaning they don’t need to lodge a tax return. Tax returns may need to be lodged where:

– Income other than employment income is earned (above the allowance)
– Foreign income was earned
– You are a higher rate taxpayer (annual income over 100,000 pounds)
– You need to claim a tax rebate for excess PAYE

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.

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Australian Moving to the UK: How Do I Treat Non-UK Sourced Income?

Daniel Wilkie   |   15 Sep 2020   |   6 min read

One of the top questions we are asked by Australians who are moving to the UK, is “how am I taxed on my non-UK sourced income in the UK?”

Since a UK non-resident would only be taxed on any UK sourced income, this question is predicated on the basis that the Australian is moving to the UK on a permanent basis. A permanent move means that they are ceasing to be an Australian tax resident and instead will be considered a UK tax resident.

In general, just like Australia, the UK taxes residents on their worldwide income. This means that UK tax residents have to pay tax on any income they earn, regardless of where the income is sourced. However, there is a clause for what they consider “non-domiciled” residents, whereby taxes are instead paid on a remittance basis. Since many Australians moving to the UK would fall into the definition of a “non-domiciled” resident, this is an important question. We cover what this means below. 

Australian Tax Rules on Non-Australian Sourced Income

For comparison, let’s consider the Australian rules on residency. Most people are aware that as an Australian tax resident you are required to pay Australian income tax on income you receive, regardless of where it is sourced. However there are certain exceptions for individuals who are temporary residents. Once you cease to be an Australian resident you are only required to pay Australian income tax on income that has an Australian source.

The UK operates on a similar basis, however their exemption for “temporary” residents is measured and treated differently than Australia’s exemption.

UK Residency Rules

In general, tax residents of the UK are liable for income tax in the UK, on their worldwide income. This means that it doesn’t matter where the income is sourced, it is included in the resident’s tax return.

In the UK you are automatically considered a tax resident when either one of of the following applies:

  • You spend over 183 days in the UK during the tax year.
  • Your only home was in the UK (owned, rented or lived in for at least 91 days, with at least 30 days spent there in the tax year).

Conversely you are automatically considered a non-resident if either of the following applies:

  • You spent under 16 days in the UK (or 46 if you haven’t been classed as a UK resident for the previous 3 tax years). 
  • You worked on average 35 hours a week abroad, and spent less than 91 days in the UK, of which less than 31 days you were working in the UK.

Keep in mind that in instances where an individual would be considered dual tax residents of Australia and the UK, then the tie breaker rules in the Double Tax Agreement require consideration to determine which country has taxing rights on the different sources of income.

However, while the general rule is that tax residents are assessed on their worldwide income, there is, as indicated previously, an exception. This exception is for tax residents whom the UK considers to be “non-domiciled residents”.

Non-domiciled UK Residents

Non-domiciled residents are individuals, including Australian citizens, who are only living in the UK for the short to medium term.

A UK resident who has a permanent home outside of the UK is considered to have a domicile in that other country. This doesn’t necessarily have to be a specific, physical house, but more so that the ties to their home country mean that this country is considered to be their ‘permanent’ home. When an individual has a permanent home outside of the UK they are considered to be a “non-domiciled” tax resident of the UK.

In the UK a ‘domicile’ is typically the country in which your father permanently resided when you were born. For instance, the country in which you are a citizen by descent. However, this may not be the case if you have legitimately and permanently moved to another country, with no intention of returning to your original home country. This would mean that your ‘domicile’ changes to the new country in which you begin to permanently reside.

“Remittance” Rules on Taxes on Non-UK Sourced Income for Non-domiciled Residents

For non-domiciled residents, non-UK sourced income is treated differently depending on the total amount of the non-Uk sourced income. 

Under 2,000 Pounds

If you are a “non-domiciled” UK resident then you ignore all foreign income and gains if that income is under 2,000 pounds for the tax year and you do not bring that income into the UK. You must have a bank account in your home country, and the funds from that income must stay back in the home country instead of being transferred into the UK. If this is the case then you don’t have to do anything about your foreign income when lodging a tax return.

However, if the income you earn from overseas sources exceeds 2,000 Pounds, or you bring any income into the UK, then you must report that income in a self-assessed tax return.

Over 2,000 Pounds

When the non-UK sourced income exceeds 2,000 pounds (or the income is brought into the UK), the income can’t just be ignored. The rules under which foreign income is taxed in the UK, for non-domiciled residents, is the ‘remittance basis’. This essentially means that you have a choice on how you treat the reported income.

Choice of how UK Taxes are Sorted Out

Choice 1: You can Simply Choose to Pay UK Taxes on the Income. 

If you choose this option then you will be assessed for income tax on your foreign income. If tax is paid on the Australian sourced income (or may be taxed elsewhere if it is income relating to another country), there are a number of rules that ensure you are not taxed twice on this income. In some cases this will result in a reduction to your UK taxes. 

Choice 2: You can Claim the ‘Remittance Basis’.

If you choose to be taxed on the remittance basis, then you only have to pay tax on any of the income that you actually bring into the UK.

However, in a trade off for this consideration, you will lose any tax-free allowances for income tax and capital gains. You will also be required to pay an annual charge if your residency in the UK exceeds a certain timeframe. This annual charge is 30,000 pounds if you have resided in the UK for at least 7 of the past 9 years, or 60,000 pounds if you have resided in the UK for at least 12 of the past 14 years.

The remittance basis may be a great option if you are living in the UK for less than 7 years, however, beyond this you would need to assess your situation to determine your optimal position.

Seek Appropriate Advice for your Situation

Since the remittance basis can get complicated it is best to talk to a UK tax adviser for specific advice. You need to consider your own position, your long term intentions, and where you hold your investments, including rental properties, that are generating taxable income.

See here for a brief comparison of the Australian and UK tax system.

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