For many Aussies, going overseas for work or business is often an exciting opportunity. It is not just the wanderlust aspect of it; working overseas is also an opportunity to discover new cultures, experience new ideas, meet people from all walks of life and in some countries, get very attractive salary perks. With very few exceptions, it is often a journey worth taking.
Away from the all the rich tapestry of expat lifestyle, you still to have pay a tax for the income earned while working overseas. However, taxation on overseas income is generally a fairly complex terrain. It is easy enough if you will be working for a large corporation that knows how to structure out the salary packages for their expat staff. However, if you are working for a relatively small company, much of the initiative on managing your taxes will have to come from you. In case you are weighing on an overseas secondment, it is imperative that you understand how tax regimes work, particularly in the major job markets for Aussies such as Hong Kong, Singapore, Taiwan, Malaysia, Thailand, China, New Zealand, the EU, US and UK.
Are you an Australian citizen for tax purposes?
This is the key Australian Taxation Office consideration in its treatment of the income of an overseas worker or resident. If you are an Aussie resident for tax purposes, then your employment earnings will be taxable in Australia. As an Australian resident, the income that you earn while working overseas is classified as the foreign employment income. The taxes paid in the jurisdiction where you are working will be treated as a foreign income tax offset.
In case there is a shortfall between the tax rate in the host country and the tax rate in Australia, the expat employee will pay the difference in Australia. Suppose you are working in a country where the tax rate for your income bracket is 35% and your tax rate in Australia is 45%, you will pay the difference of 10% in Australia when you lodge your tax returns.
Non-resident for tax purposes
If you are not an Australian citizen for tax purposes, then you will only need to pay taxes on the portion of your income that is sourced from Australia.
Who is an Australian citizen for tax purposes?
The Australian Taxation Office uses various techniques to determine if an individual is an Australian citizen for tax purposes. These include the following:-
- The reside test: You live in Australia. In this case, you will be considered an Australian resident for tax purposes.
- The domicile test: In case you are domiciled in Australia, the Australian Taxation Office will regard you as an Australian resident for tax purposes unless you can prove that you have a permanent home in another country.
- The 183-Day Test: This applies if you live in Australia for more than half of the income year. This is applicable whether the duration is broken or note. In other words, those days can be fragmented (not consecutive) but as long as they add up to half of the income year, you will be considered as an Australian citizen for tax purposes.
- The superannuation test: This applies to the government staff that is working overseas. These are treated by the ATO as local tax residents.
Who is a Non-Resident for Tax Purposes?
An individual will be regarded as a non-resident for tax purposes if they are planning to leave the country indefinitely; they are planning to establish a home in a foreign country; or they are planning to be away from Australia for at least two years.
What Foreign Income Do You Need to Declare in Your Tax Returns?
There are various kinds of foreign incomes that you should declare in your tax returns. These include:-
- All the wages that you have earned overseas
- Foreign pensions
- Interest that you have earned in foreign bank accounts
- Capital gains you have gotten from the disposal of foreign assets such as your investment properties.
- The employee share schemes earnings from foreign countries
- Rent that you have derived from your foreign investment properties
How Your Foreign Income Information is Received by the Australian Taxation Office
ATO utilizes various mechanisms to access the income information of Aussies working overseas. This can either be through tax authorities abroad or electronically via third parties based in Australia such as banks. They also access this information in the form of wage summaries from employers and pension payments. Through its AUTRAC system, the Australian government closely monitors the movement of funds in and out of Australia and shares this information with the Australian Taxation Office. The ATO subsequently compares the information it obtains from the various sources against your declared tax returns to ensure there are no discrepancies. In case your declared income does not match ATO’s data, you may be subjected to a tax audit.
Penalties for Failing to Declare Your Foreign Income
Depending on your degree of culpability in failing to declare your income to the ATO, the tax authority may impose penalties on you ranging from 25% to 90% of the avoided tax. ATO will also impose a 9% interest on avoided tax which covers the period during which the tax was not declared.
In case you have paid taxes overseas and you are an Australian resident for tax purposes, you still need to file your tax returns in Australia and then claim a tax offset for the foreign tax that you’ve already paid. This will help you avoid a double-taxation.
Working as an expat abroad and need help with your foreign income declarations or filing of tax returns? Hire an accounting firm Melbourne today to take you through the complexities of your income declarations.