Residency and aussie tax while working overseas

[alexlee]

Just my thoughts (and practice) on oz tax when working overseas. Even though I work and live overseas, I declare myself to be an aussie tax resident on my Australian tax returns. This is NOT a tax ruling or anything, not is it advice: just my own tax situation and my legal backup. Italics are from the ATO site, non-italics are my comments:

1) RESIDENCY
http://www.ato.gov.au/print.asp?doc=/content/36263.htm

Residency – the domicile test

The domicile test is the first statutory test. You are a resident of Australia if your domicile is in Australia, unless we are satisfied that your permanent place of abode is outside Australia.

Note:

In practice, if you are a resident who has always lived in Australia you will retain a domicile here when you are absent overseas, unless you choose to permanently migrate to another country.

It's more a 'you are a tax resident unless you can prove otherwise' kind of regime. Which makes sense, since in general the ATO gets more tax from you if you're resident (CGT, interest, etc). i.e. the ATO doesn't mind if you might qualify as a non-resident but declare yourself an Aussie tax resident anyway.


2) FOREIGN EMPLOYMENT INCOME
http://www.ato.gov.au/individuals/content.asp?doc=/content/28908.htm

Is my foreign employment income exempt from tax?
Your foreign employment income is exempt from tax if:

you are a resident of Australia

you are engaged in continuous foreign service as an employee for 91 days or more, and

your foreign earnings are not excluded from exemption by the following non-exemption conditions.

The main condition being the country you work in must have a double tax treaty with oz. I'm not sure about tax havens but the main expat countries such as most of Western Europe, Japan, the UK, Singapore, the US, China (which I assume includes Hong Kong) have double-tax treaties with Oz (there's a list on the ATO website). So employment income from working in these places are NOT double taxed in Oz.

So, taking these together, if you have negatively geared property in Oz and work overseas (and you intend to go back to Oz) there's no need to declare tax non-residency.

In practice:
Foreign investment income will have to be declared. Not an issue for me since all my investments are in Oz.

You have to declare your foreign earnings on your aussie tax return. They take this into account when calculating your marginal rate. However, in a net Australian tax LOSS situation, your effective rate is zero until your aussie income becomes positive.

So, if your properties are -ve geared effectively means your tax rate is zero, no matter what your foreign employment income is. Imputation credits from franked dividends are REFUNDED (I was really happy when they changed that! Before you used to just lose the credits if you didn't use them). So Telstra 3, for example, gives me a tax free 14% + the imputation credit is refunded. After tax return in the high teens.

Losses are accumulated (not indexed, so you lose to inflation) and carried forward until you have Australian income to offset it. In most cases this will happen when you come back to oz to work, unless you build up enough interest and dividends to offset your tax losses (some of which, of course, will be non-cash depreciation). However, you are probably making more money overseas than you would in Oz, so that evens out.

Just something to consider when you think about going overseas. It would be beneficial, for example, to have more shares with franked dividends. I stress that this is NOT advice, just how my accountant said I can do it. Talk to your own accountants and read the tax law to make your own conclusions.
Alex

 

[alexlee]

Super - UK and Japan

Just as a side note (information is current for the UK and based on 2005 actions in Japan):

UK: You can 'opt out' of your National Insurance payments. Which means instead of paying it into the government pool and giving up the right to an old style defined benefit style pension from the UK govt, you put your National Insurance (super) contributions into your own private account (same as the aussie super fund). You lose the right to a UK pension, which you can't get unless you work a number of years in the UK anyway (and assuming the UK govt can pay you at that time).

You can, for only ONCE in your lifetime, transfer your UK opt out pension balance into an eligible fund, which includes Australian super funds. i.e. you can transfer the UK balance into your Australian super fund when you leave the UK. However, my research says you can only do this ONCE, so if you plan to return to the UK in the future to work, don't transfer it yet.

Japan: You pay a certain amount into the govt pension fund every month (big pool, defined benefit fund, not your individual account) as part of your pay. However, as a foreigner when you leave Japan you can claim back your contributions in cash (on the condition that you give up the right to a Japanese pension). You can get a form from your local kuyakusho and mail it after you leave the country together with various documents like a copy of the exit stamp on your passport. You also have to given up your gaijin card to immigration when you leave Japan.

You get the amount back in cash to a nominated foreign bank account. The amount is approximately 4% of your salary (for full time employees, that's about 2 weeks pay) per year of work. I think the cap is 3 months pay (i.e. after 6 years your refund is capped). If you work for 2 years you get a month's pay back, so it's definitely worth getting. Takes about 3 months to process.
Alex

 

[Trogdor]

Just as a side note (information is current for the UK and based on 2005 actions in Japan):

UK: You can 'opt out' of your National Insurance payments. Which means instead of paying it into the government pool and giving up the right to an old style defined benefit style pension from the UK govt, you put your National Insurance (super) contributions into your own private account (same as the aussie super fund). You lose the right to a UK pension, which you can't get unless you work a number of years in the UK anyway (and assuming the UK govt can pay you at that time).

You can, for only ONCE in your lifetime, transfer your UK opt out pension balance into an eligible fund, which includes Australian super funds. i.e. you can transfer the UK balance into your Australian super fund when you leave the UK. However, my research says you can only do this ONCE, so if you plan to return to the UK in the future to work, don't transfer it yet.

Japan: You pay a certain amount into the govt pension fund every month (big pool, defined benefit fund, not your individual account) as part of your pay. However, as a foreigner when you leave Japan you can claim back your contributions in cash (on the condition that you give up the right to a Japanese pension). You can get a form from your local kuyakusho and mail it after you leave the country together with various documents like a copy of the exit stamp on your passport. You also have to given up your gaijin card to immigration when you leave Japan.

You get the amount back in cash to a nominated foreign bank account. The amount is approximately 4% of your salary (for full time employees, that's about 2 weeks pay) per year of work. I think the cap is 3 months pay (i.e. after 6 years your refund is capped). If you work for 2 years you get a month's pay back, so it's definitely worth getting. Takes about 3 months to process.
Alex

Hi Alex - any links to the UK opt out of N.I. scheme?

Wonder if it would be too late for me to opt out as I've been here & working for 5 or so months now....???

 

[alexlee]

Hi Alex - any links to the UK opt out of N.I. scheme?

Wonder if it would be too late for me to opt out as I've been here & working for 5 or so months now....???

http://www.directgov.gov.uk/en/MoneyTaxAndBenefits/PensionsAndRetirement/PersonalPensions/DG_4017726

Section under "Opting out of the additional State Pension". I just found this on a web search so I don't know how current this is.

When I did it I just called the pension group at my employer and asked them. They sent me some Inland Revenue forms to sign.

I think you can opt out whenever you want. However, it means your contributions for the last 5 months cannot be transferred to your personal account.
Alex

 

[Trogdor]

http://www.directgov.gov.uk/en/MoneyTaxAndBenefits/PensionsAndRetirement/PersonalPensions/DG_4017726

Section under "Opting out of the additional State Pension". I just found this on a web search so I don't know how current this is.

When I did it I just called the pension group at my employer and asked them. They sent me some Inland Revenue forms to sign.

I think you can opt out whenever you want. However, it means your contributions for the last 5 months cannot be transferred to your personal account.
Alex

Thanks! Do you know if all, or some of the NI one can opt-out of? If its some, what %?

I assume only some of the NI is referable to the pension?

 

[FrankGrimes]

Alex, many thanks for taking the time to post this. It is very helpful. I'm assuming Ireland has some sort of pension fund as well?

 

[Trogdor]

Yes Alex - thanks for taking the time out to post - its very helpful indeed!

 

[alexlee]

Thanks! Do you know if all, or some of the NI one can opt-out of? If its some, what %?

I assume only some of the NI is referable to the pension?

That I'm not sure about. Haven't really read my statements in much detail. I have to admit I don't really care about pensions or super that much, since it won't be there when I need it, and by the time I have access to it I won't care. That's why I love the Japanese pension refund system.
Alex

 

[alexlee]

Working overseas while investing is an interesting combination that can be even more profitable (other than double to triple pay overseas) for those who plan to do it, if you plan it properly.

When you live in Australia, you are guaranteed to be a tax resident. If you are not living in Australia, the ATO STILL wants you to be a tax resident because they can get their hands on your foreign income as well as levying higher tax on your divs and interest. However, salary income is generally exempted from this (depends on the country), though it's used to calculate your aussie marginal rate.

The advantage of a tax non-resident over a tax resident with regards to aussie tax is that they can, for example, pay just the withholding tax on interest (10%, I think) and not pay anything further. Non-resident tax rates do not apply. On unfranked divs it's the same. Franked divs are different because they don't get the franking credits refunded. As a tax resident, you pay full tax on interest and divs but get franking credits refunded.

Now, foreign employment income, though not further taxed in Oz, is used to calculate your marginal tax rate. So for example, say you make $1k interest and $150k in the UK, while you don't pay any extra tax on the $150k you pay 10% on the interest.

However, as property investors we are in the more unique (especially as some of our deductions are non-cash depreciation, which you don't get with shares) situation of having a tax loss from investments. Noting that Australian income is first offset by losses, our marginal rate to the extent of the tax losses is ZERO.

So, taken in aggregate:
1) Your foreign salary must be disclosed (which can be used, BTW, as proof of income to banks as well)
2) As long as you're still negatively geared (now -ve gearing from cash expenses is bad, -ve gearing from depreciation is good because it's not cash) your Australian income will be tax free
3) You get imputation credits back as a refund, so CBA, for example, with 5% dividends fully franked means around 7% AFTER TAX yield for you. Telstra 3 gives you something like a 17 or 18% AFTER tax yield.

4) Changing from tax res to tax non-res, in some cases, have CGT implications. I don't know the rules, I'm just aware they exist. By continuing to call myself a tax res, I don't have this issue at all.

5) When coming back, you can just set up shop again and use up those losses carried forward. You can carry forward losses indefinitely (this is a relatively new rule - used to be just 7 years) BUT you lose to inflation because the loss is not indexed.

Therefore, if you do plan to go overseas for a few years but plan to come back (as I do) then one way to plan your tax affairs if you have -ve geared property is to claim tax-residency, avoid foreign investment income and invest in Australian shares paying high franked dividends.

If you plan on investing overseas, it's better if you're a non-tax-resident of Australia. However, remember this is all self-assessment, so just because the ATO processes your tax return doesn't mean they agree with it. They can still come back and audit you. If they then deem you a tax resident because you planned to come back to Oz......

For me, there is an additional dimension: I know the Australian market, especially for property. I know nothing about how to buy a property in the UK. I'd rather focus on markets that I know, and with a bit of advance planning it's not that hard to buy Australian property even when you're living overseas. Note if you are a citizen (hold a passport) your tax residency doesn't matter for FIRB purposes. You can still buy whatever property you want.

This is NOT advice. This is merely what I have been doing and how it benefits me. Talk to your own accountant and fit this to your own objectives.
Alex

 

[cendrillon]

Indeed this a complex issue, and worth reading into in detail. The main determining factor seems to be the intention of the party living outside of Australia. If it is intended that the stay be indefinite, with no fixed date of return, then you're usually non-resident.

If there is a clear fixed date of return then you're resident.

Other factors come into play like establishing a permanent home overseas (e.g. renting an appartment and filling it with furniture), having an open-ended job contract, opening bank accounts and making investments overseas, having children educated overseas and so on.

Also, renting out your residence in Australia also helps. If you leave your residence in Australia furnished and don't rent it out then it's probably going to lean you towards being resident.

In general I think if you stay for longer than 2 years overseas, with the intention of staying indefinately then you can safely claim non-residency, although you'd be best seeking the advice of a professional and looking into this for yourself.

For more details, and previous rulings see:

http://law.ato.gov.au/atolaw/view.htm?docid=ITR/IT2650/NAT/ATO/00001

 

[alexlee]

Approaching the issue of residency from another way, I started on the basis that I would want to return to Australia to live for the long term.

If this is your assumption, then you can plan your affairs accordingly. I'm not saying the points below are the best choice in terms of returns, but I think they give a decent balance between long term management and tax advantages. Note all this assumes you plan to return in Australia for the long term after a stint working overseas in a country that has a double-tax agreement with Oz:

1) Continue to claim tax residency
2) Do not invest in overseas shares. Stick to Australian shares, especially ones with franked dividends
3) Do not buy overseas property, buy in Oz instead
4) Work in a country with a higher salary and/or lower tax than Oz.

If you do the above, being tax non-resident doesn't benefit you at all, and you get all the benefits of being a tax resident. You also don't have the risk (however small) of the ATO auditing you and deciding you're acutally a resident and hitting you for back taxes.

Buying assets overseas means more complex tax issues if you continue to be a tax resident (you have to declare it on your aussie return). There's no reason why you can't invest in foreign countries via Australia-based managed funds. Also, I think management of overseas properties is something I don't want to try. Interstate I have no problems with.

An interesting thing I've been thinking about, though, is investing in blue-chip US shares. I'm thinking from an FX point of view. If you think the Australian dollar is pretty high at the moment, then buying US shares in USD might be a good invesment. Just a thought: certainly not advice.
Alex

 

[geoffw]

I had a potential problem returning to Australia after 2 1/2 years in England. I was asked to prove that I should have been regarded as a non resident for that period.

My reasons, which I provded to ATO, and which apparently were satisfactory, were that:
.I was married after leaving Australia and livingin in England (1988)
.We bought a house in England- proving intent to stay
.I had never owned a house in Australia
.The only reason for returning was an economic downturn in England, where I could not get another job.

All reasons were legit. No correspondence was entered into.

 

[alexlee]

I had a potential problem returning to Australia after 2 1/2 years in England. I was asked to prove that I should have been regarded as a non resident for that period.

My reasons, which I provded to ATO, and which apparently were satisfactory, were that:
.I was married after leaving Australia and livingin in England (1988)
.We bought a house in England- proving intent to stay
.I had never owned a house in Australia
.The only reason for returning was an economic downturn in England, where I could not get another job.

This is precisely the issue that would be avoided by continuing to claim yourself a tax resident. Re above, if you rent overseas and own property in Australia (as many of us who started buying IPs before going overseas do), then it's much harder to justify that you should have been a non-resident.

Of course, if you really don't intend to come back to Australia, there might be advantages of being a non-resident. If you do plan to go back, then it might be easier if you just never claim tax non-residency.
Alex

 

[geoffw]

Alex

This was not a problem to me. It was many years before I purchased a property in Australia.

At that stage, there were advantages being a non resident- for me, in my situation, then. I don't know about now.

I'm just trying to show what residency vs non residency can entail.

 

[TheCamel]

hmm.

I'm still not quite getting my head around this, but i'll just keep going over it.


However.. what if your properties are owned by a trust, and you are a non-resident for tax purposes.. ?

 

[Mry]

Losses are accumulated (not indexed, so you lose to inflation) and carried forward until you have Australian income to offset it. In most cases this will happen when you come back to oz to work, unless you build up enough interest and dividends to offset your tax losses (some of which, of course, will be non-cash depreciation). However, you are probably making more money overseas than you would in Oz, so that evens out.

If you remain a resident of Australia while earning exempt foreign employment income, the losses are offset by your exempt income, meaning that you can't accumulate losses. You are better off to be a non-resident in that instance.

 

[alexlee]

Hmm. That seems to invalidate everything I've said. That's a problem. Everyone ignore me until I look into this further.
Alex

 

[MattR]

Hmm. That seems to invalidate everything I've said. That's a problem. Everyone ignore me until I look into this further.
Alex

Sorry, did you say something

 

[Ralph]

Carried Forward Loss issue wrt Residency Status and Foreign Income

Thanks Alexee for an interesting post. I'm in the process of having my status changed (and resubmitting 4 years of returns) from res to non-res as I've been overseas for around 6 years and based on advice from PWC, non-resid is the right classification for me.

Without going into the detail of the above, which was a less clear cut process than I would have imagined.........PWC gave me one piece of advice which had surprised me, and is worth keeping in mind if you have a negatively geared (cashflow negative) property portfolio.

___________________________________________________
Advice below from PWC:

......Additionally, where you have revenue losses (such as the rental property), those losses are first offset against taxable income [in Australia]. If the losses are not fully utilized against the taxable income, they are then offset against the foreign exempt income [i.e. foreign salary not taxed in Australia]. As such, you would not have a revenue loss to carry forward for any of the years [under review] if classed as a tax resident of Australia. As a non-resident, the foreign salary income would not be included and the rental property loss would be able to be carried forward.
__________________________________________________________

This was big news to me and meant that my previous accountants had missed this. PWC said they felt it was a common mistake.

 

[ggumpshots]

___________________________________________________
Advice below from PWC:

......Additionally, where you have revenue losses (such as the rental property), those losses are first offset against taxable income [in Australia]. If the losses are not fully utilized against the taxable income, they are then offset against the foreign exempt income [i.e. foreign salary not taxed in Australia]. As such, you would not have a revenue loss to carry forward for any of the years [under review] if classed as a tax resident of Australia. As a non-resident, the foreign salary income would not be included and the rental property loss would be able to be carried forward.
__________________________________________________________

This was big news to me and meant that my previous accountants had missed this. PWC said they felt it was a common mistake.

Ralph if you were a non resident of Australia are you saying in your case you were living in Australia,earning a salary in Australia , but not taxable by the aussie Govt , because your salary was being taxed by a foreign govt.

On what basis did you claim non residency? note my location.