A UK resident must pay tax on worldwide income, subject to relief for foreign tax paid. This means that if a UK resident earns foreign income this may be subject to tax in both the UK and the country in which the income is earned. Although relief is available for foreign tax paid there may be considerable time costs of compliance with tax matters and claiming the relief for foreign tax paid. It is therefore essential to establish the UK and foreign residence position when going to live abroad.
Australians going to low tax jurisdictions to work will often wish to ensure they are no longer a resident of Australia for tax purposes. This is understandable AND ACCEPTABLE. There are things you can do to maximise the probability of that outcome. Some of those are listed below.
Australia uses four statutory ‘tests’ to determine the residence of an individual. An individual that satisfies the conditions in any one of the four test is an Australian resident. An individual that does not satisfy the conditions in any of the tests is a non-resident. An individual does not have to be a resident of another country in order to be a non-resident in Australia. Being a resident of another country (as determined by the tax law of that country) does not mean that person cannot be a resident of Australia as well.
Let’s explore that most important of questions now. A general warning is appropriate here. This can get tricky and a lot of things will come into play. The ATO will routinely consider up to 37 factors when determining the residency status of a person. Before you even start you will need to have some idea about:
· how long you will be outside Australia
· whether you will return to Australia during this time and, if so, how frequently
· the type(s) of accommodation that you will live in while away from Australia
You’re offshore. You’re out of sight. Out of sight is out mind? Unlikely.
They will know when you left and where you have been via customs reports. Australia has comprehensive tax treaties with 44 countries. Australia has signed 34 tax information exchange agreements with countries that it doesn’t have a comprehensive treaty with. You will never really know exactly what the ATO does know about you but you can be pretty sure they know more about you than you think they do.
How will they catch you? In a phrase: data matching.
Australian law gives the ATO authority to ask for any information it wants from any organisation. It is authorised to demand it if necessary. Australian law also allows for those organisations to provide it (unlike the law in many tax haven countries which makes it an offense for organisations to give up information). They routinely obtain information from:
You can breathe again! You won’t be assessed for any unpaid tax or penalties. On your overseas earnings anyway. Don’t celebrate too quickly though. Have you accounted for the capital gains tax that may be payable on assets you owned when you left?
You will be assessed by Australia on your worldwide income for the relevant period. That means all earnings, dividends, rent from Australian and overseas properties, interest from Australian and overseas bank accounts, etc.
If you haven’t declared foreign source income on your Australian tax return (or not lodged a tax return) you will owe the ATO money. The table below gives you an idea of the tax bill you could get if you failed to declare earnings of AUD $200,000 per year earned in a selection of countries. This is the raw tax amount. Penalties and interest are discussed further into this article.
Under Australian tax law residents are assessed on their income from all sources whether in or out of Australia. Non-residents are assessed on their income from Australian sources only. It seems so simple. However it’s a conundrum in a riddle. What is income? What is the source of the income? But first and foremost, is the person in question a resident or non-resident? That’s why we are here.
The ATO are actively targeting Australian expats – both while they are working overseas and when they return to Australia. Especially those working in low tax jurisdictions like Asia and the Middle East. In most cases by far the greatest amount of income for expats whilst overseas will be their earnings from work. In nearly all cases, those earnings will have a foreign source and will not be assessable in Australia if the expat is a non-resident of Australia for tax purposes. They will, however, be fully assessable if the expat remains a resident and therefore tax residency will probably be the single most important factor in the analysis.
4 steps to happiness
Estimate your taxes as resident and non-resident
Review your current and preferred residency status
Map the steps to your ideal outcome
Lock it in with the tax authorities
It can save you a fortune
"Getting a private ruling from the ATO about my residency saved me almost 40% of my earnings. Thanks guys."