What are the Tax Implications for Non-residents in Australia?
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With the world slowly returning to normal and international borders relaxing, it’s worth considering the tax implications of entering or leaving Australia. Unfortunately, moving overseas isn’t as simple as booking a plane ticket. Australia’s non-resident tax system is relatively straightforward – once you know your tax residency status, that is.
Our guide will help you understand the tax implications for non-residents in Australia. From your tax residency to capital gains tax, we’ll answer all your questions.
How Is Investment Income Taxed?
Australia uses a marginal tax rate for residents and non-residents alike. It’s pretty straightforward:
- Add all your taxable income.
- Subtract every tax deduction.
- Pay your income tax based on your bracket.
The Australian Taxation Office will tell you the exact amount you owe within about two weeks when you lodge your tax return.
Tax brackets are different for non-residents. Unlike tax residents, non-residents aren’t eligible for the tax-free threshold.
Your assessable income includes:
- Interest payments
- Dividends
- Investment property rent
- Managed funds distributions
- Capital gains from property, shares, and other investment income
As a foreign resident, you must only pay tax on your Australian income. Seek professional advice from a registered tax agent to understand how your residency affects tax returns.
Tax Residency Status
Understanding your tax residency status is one of the most important things you should do as an Aussie expat. However, many Australians find the definitions of residents and non-residents confusing. The rules aren’t exact. The Australian Taxation Office judges each situation on an individual basis.
You should note that an Australian resident for tax purposes is different from an Australian citizen. It doesn’t matter whether you’re born and bred in Australia. You can cease your tax residency if you live overseas.
To determine if you’re a resident, the ATO has a primary test followed by several secondary tests. The resides test considers your physical presence in the country. The other tests include:
- The domicile test
- The 183-day test
- The Commonwealth Super Funds test
What Is a Non-resident for Tax Purposes?
So, why does it matter whether you’re a resident or not? Well, there are a few differences when it comes to tax. Australian residents must pay income tax on their earnings, even if it’s in a foreign country. For example, if you own a property in Hong Kong, you must pay Australian capital gains tax if you sell.
However, a non-resident must only pay tax on their Australian sourced income. For example, if you live and work in Singapore, you don’t need to pay Australian tax on your foreign income. Yet, if you have an investment property in Australia, you must continue to pay tax on your rental income.
Yet, becoming a non-resident for tax purposes is not as advantageous as it seems. If you’re a tax resident, you benefit from the tax-free threshold. Non-residents do not. Moreover, non-residents must pay higher tax rates.
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Proposed Rule Changes
We mentioned the residency tests above – however, there are a few proposed changes to the rules. To avoid ambiguity, the ATO suggests using the 183-day test as the primary condition of tax residency. Essentially, if you spend 183 days or more (half the income year) in Australia, you’re a tax resident.
The secondary tests – the 45-day and factors tests – depending on your living situation. Those spending less than 45 days in the country are non-residents. Those paying more than 45 days move on to the factors test. If you meet two or more of the following and spend half the year in Oz, you’re a tax resident:
- If you have the right to reside in Australia permanently
- If you have Australian accommodation
- If you have an Australian family (spouse and children)
- If you have economic interests in Australia
These rules are not law yet. However, if passed, they could significantly change tax implications for expats.
7 Tax Implications
How do Australia’s taxation laws differ for expats and non-residents? Everything from capital gains tax to exemption rules might vary for non-residents. Let’s look at each of the implications.
1. Capital Gains
A capital gain is the lump sum earned from selling an asset, such as property, shares, or dividends. Yet, it is not the total amount received upon selling. It’s the profit. So, if you buy a house for $500,000 and sell it for $700,000, you have a capital gain of $200,000.
Many people don’t realise that capital gains tax is not separate. Instead, your capital gains are added to your net ordinary income on your tax return. Say you earn $100,000 in a typical tax year. If you make a capital gain from selling a property, this could push you into the next tax bracket.
Accordingly, capital gains tax is costly for most Australians. Imagine paying 45% tax on $200,000. Australian tax residents can use the main residence exemption if they live in their property for a minimum of 12 months. However, non-residents cannot avoid capital gains tax on any Australian properties.
2. Land Tax
Land tax is one of those expenses that often slips under the radar. Not everyone has to pay it – it depends on the state and land value. Most states have a tax-free threshold for land. However, if your property is over the threshold, you must pay land tax at a marginal rate.
For example, in New South Wales, if your land value is above $822,000, you must pay land tax at a rate of 1.6%. In Victoria, land tax for values between $300,000 and $600,000 is $375 plus 0.2% of the amount below $300,000.
Foreign nationals (regardless of whether you’re a tax resident or not) must also pay a land tax surcharge in many states, called a foreign ownership surcharge. Again, it’s different in every state. New South Wales charges a 2% foreign ownership surcharge.
3. Stamp Duty
Homebuyers pay stamp duty tax when purchasing a property. Stamp duty is around 4% to 5% of the property price in most states. If you’re a first-time buyer, you typically won’t have to pay stamp duty – or at least pay a discounted rate.
As with land tax, many states impose a stamp duty surcharge. If you’re a foreign national, you must pay a surcharge of between 7% to 8%. Australian expats aren’t foreign buyers. However, if you’re married to a foreigner, you might have to pay the surcharge. Consider whether it’s worth leaving a foreign spouse off the mortgage to avoid the stamp duty surcharge tax.
Note that the foreign buyer’s stamp duty does not apply to property purchases in the Northern Territory, the ACT, or Tasmania.
4. Capital Losses
If capital gains are profits, capital losses are the opposite. Although we like to think that every investment will result in capital growth, it’s not always the case. Sometimes we make a capital loss. This is called negative gearing.
Many Australians implement negative gearing strategies to reduce their tax bill. The more expenses you deduct from your assessable income, the less tax payable. The long term goal is to sell the property for a higher market value to make the venture worthwhile. However, the strategy has its risks.
Expats and non-residents can negatively gear property. It might be an excellent strategy to avoid paying excessively high foreign resident tax rates. Furthermore, taxpayers can carry forward capital losses to offset capital gains in the following income year.
If you plan to negatively gear property, it’s best to speak to an expert about your investment options and tax consequences.
5. Tax Deductions
The best way to reduce your tax payments is to deduct all work-related expenses – known as a cost base. If your primary source of income is through investment property, ensure you deduct all your investment costs.
Working out deductions is simple. Add together your net assessable income. Subtract your net expenses. You’ll need to evidence all your deductions on your tax return, such as with receipts.
What can you deduct from your assessable income on your tax return?
For investment properties, you can generally claim:
- Stamp duty
- Land tax
- Property management fees
- Repairs and maintenance
- Pest control
- Tenant advertising costs
- Insurance
- Home loan interest
- Other bank fees and charges
- Property and asset depreciation
Other expenses for small businesses, employment or investment income:
- Travel expenses
- Tools, equipment, and other assets
- Gifts and donations
- Working from home expenses
You cannot claim expenses for private purposes, such as school fees.
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6. Tax Exemptions and Offsets
Unfortunately, non-residents are not eligible for any tax offsets and exemptions. We already mentioned that foreign residents could not use the CGT main residence exemption. Other exemptions and offsets non-residents cannot claim:
- Low and middle-income tax offset
- Private health insurance rebate and offset
- A tax-free threshold of $18,200
The one crucial offset is the foreign income tax offset. You won’t need this offset if you’re a non-resident for tax purposes. However, if you’re an expat who is still a tax resident, you may have to pay double tax in Australia and your new country. Fortunately, Australia has tax treaties with more than forty countries, including Singapore.
If you pay double tax, you should apply for the foreign income tax offset to receive a full or partial tax refund.
7. Depreciation Deductions and Investment Properties
Depreciation deductions are one of the best ways to save money on your tax payments. As your property gets older, it’s subject to wear and tear.
There are two types of depreciation deductions:
- Plant and equipment: carpets, blinds, and whitegoods
- Capital works: windows, brickwork, and doors
Many Australians skip over depreciation deductions as they might seem a hassle to calculate. Plant and equipment depreciation rates vary. Property (capital works) tend to depreciate at around 2.5% per year. New properties have higher depreciation rates, yet you can still deduct depreciation from older homes.
To make the best use of depreciation deductions, it’s best to seek professional advice from a quantity surveyor. They will conduct an assessment to determine exactly how much to deduct from your taxable income. Moreover, you can backdate deductions.
How Does Non-resident Tax Affect My Mortgage?
If you’re a non-resident applying for an Australian mortgage, you may face some challenges. Australia’s tax laws impact expat mortgage applications and borrowing power.
Australian banks impose Australian tax rates on foreign income to account for fluctuating exchange rates and differing taxation laws. Banks simply don’t have the capacity to calculate foreign income tax rates for every single country expats reside in. Unfortunately, Australian taxation rates are some of the highest in the world.
For example, an expat working in Singapore has to pay 11.5% on an annual salary of $100,000. An Australian lender would impose the Aussie tax rate of 37%. Therefore, the expat’s borrowing power would only be $63,000 rather than the $88,500 they have to spare.
Of course, it’s slightly more complex when you factor in necessary expenses, credit scores, and deposits – but you get a general idea.
Foreign Resident Tax Rates
Income Thresholds | Tax Rate | Tax Payable for this income Bracket |
0 – $120,000 | 32.5% | 32.5c for each $1 |
$120,001 – $180,000 | 37% | $39,000 plus 37c for each $1 over $120,000 |
$180,001 and over | 45% | $61,200 plus 45c for each $1 over $180,000 |
What Should I Include in My Australian Tax Return?
Your tax return should include all your Australian based income. When tax time rolls around between July and October each year, you should declare all earnings and expense deductions. You should also detail:
- Australian bank account details in case of tax refunds
- Evidence of all your income
- Receipts for all your expenses
- Whether you’re an Australian taxpayer resident or not
Tax returns are due by October 31st after the tax year. So, the 2021-2022 income year tax return deadline is October 31st 2022. If the 31st falls on a weekend, the deadline is the next business day. You must submit any tax payable by November 21st.
ATO will calculate how much you owe within a few weeks of submitting your return – or if you’re due a refund, they’ll pay it directly.
Expats can lodge their tax returns online via their MyGov account – you need a tax file number (TFN). You might want to enlist the support of an accountant to ensure you manage your taxes correctly.
Conclusion
Tax implications for Aussie expats and non-residents are not too varied from those Australian residents face. The most important consideration is determining your tax residency status. If you’re a tax resident, you benefit from lower tax rates but have to pay tax on global income. If you’re a non-resident, you pay higher tax rates and lose certain exemptions.
Remember, if you’re purchasing property with a foreign spouse, watch out for land tax and stamp duty surcharges. Moreover, consider how lenders treat foreign income if you want to buy property.
Get a free Australian mortgage assessment today.
Frequently Asked Questions
What Is the Meaning of Tax Implication?
Tax implications are consequences based on decisions a taxpayer makes. For example, an expat will face specific tax implications because they live overseas. Deductions, income, exemptions, and offsets all impact the amount of tax you pay.
What Are Business Tax Implications?
Business decisions impact the amount of tax paid. A sole trader will pay different tax amounts to a larger corporation.
What Are Tax Implications in Mutual Funds?
Any investment income from mutual funds or property is added to your total income on your tax return. You pay income tax on the total amount earned in that tax year. If you sell shares or other assets, add the lump sum capital gain to your assessable income.
What Are Tax Implications of Selling a House?
When you sell a house, you have to pay capital gains tax. You might get the main resident exemption if you’re an Australian resident. However, non-residents must pay the total capital gains tax. To reduce your capital gains, deduct all property-related expenses from your total assessable income.
Do I Pay Tax in Australia if I Am a Non-resident?
Non-residents must only pay tax on their Australian income. If you’re an expat with no Australian income, you don’t need to pay tax in Australia. However, if you have an investment property in Australia, you will need to pay tax on your rental income and CGT when you sell the property.
How Much Are Foreigners Taxed in Australia?
Non-residents and foreigners pay higher marginal tax rates in Australia. Firstly, they don’t benefit from the $18,200 tax-free threshold. Secondly, non-residents must pay 32.5% on all income between $0 and $120,000. Any income over $120,000 is taxed at the same rate as resident tax.
What Will Be Taxable for a Non-resident?
Non-residents must pay tax on all their Australian income. You don’t have to pay Australian tax on any earnings outside the country. Australian foreign resident tax rates are higher than for those residing in Australia.
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