Well, its that time of the year again to start to consider preparing and lodging your 2020 Australian tax return. For Australian expats, preparing an Australian tax return is often more complex and there are several issues to consider depending on your situation.
We have outlined below some of the tax issues to consider in preparing your 2020 Australian tax return. As always, please do not hesitate to get in touch with us if you have any questions and we would more than happy to assist you.
Australian expats who have relocated overseas
Tax Residency Position
The first key issue to consider for an Australian expat who relocates overseas is whether they are in fact a resident or non-resident of Australia for tax purposes.
This is often a grey area, particularly for expats that relocate overseas on a temporary basis and on temporary work visas. Further advice should be obtained.
A non-resident of Australia will not be subject to Australian tax on their overseas employment income. They will only be subject to Australian tax on their Australian source income (see below).
In contrast, Australian tax residents will remain liable to Australian tax on their worldwide income and employment income. In this case, it will be important to carefully look at the relevant Double Tax Treaty (if applicable) to determine which country has taxing rights and if overseas employment income is in fact required to be reported on an Australian tax return.
Australian Source Income
Non-residents of Australia will broadly only be subject to Australian tax on their Australian source income. This would include Australian dividends, interest and rental income.
Australian source income subject to final withholding tax may be excluded from the Australian return in certain circumstances.
Capital Gains Tax Election
At the time of ceasing to be an Australian tax resident, an individual will be required to either pay the ‘exit tax’ in respect of their CGT assets (that are not Taxable Australian Property), or elect to defer the CGT.
Non-residents of Australia only include capital gains/losses in respect of CGT assets that are Taxable Australian Property.
If you have a HECS liability and reside overseas, it is important to consider the HECS reporting obligations, including:
Australian expats returning home
At the time of commencing Australian tax residency, an individual will be liable to Australian tax on their worldwide income from the date of commencing Australian tax residency. This would include worldwide employment income and investment income, for example overseas shares and rental income.
The applicable Double Tax Treaty will also need to be considered and double tax relief may be available in Australia for any overseas tax paid on that income.
At the time of commencing Australian tax residency, an individual will be deemed to acquire their non-Taxable Australian Property CGT assets for their market value. It will be necessary to determine what assets are Taxable Australian Property, and also consider what valuations may be required.
Tax advice should be considered in respect of any cash transfers to Australia from overseas bank accounts.
The Australian tax treatment of a foreign pension will also need to be considered to determine if it satisfies the definition of ‘superannuation’ for Australian tax purposes.
A lump sum withdrawal made within 6 months of commencing Australian tax residency would not be subject to Australian tax where the fund qualified as a ‘Foreign Superannuation Fund’.
Where a lump sum withdrawal from a foreign superannuation fund is made more than six months after commencing Australian tax residency, broadly, it will be subject to Australian tax on the growth of the pension only in respect of the period after commencing Australian tax residency.
Where the foreign pension does not qualify as superannuation for Australian tax purposes, it is likely that a portion of the lump sum will be subject to income tax in Australia.
Expats temporarily in Australia due to Covid-19
Australian expats who are in Australia on a temporary basis due to Covid-19 will need to carefully consider their Australian tax obligations. While this is an area of uncertainty at the moment, the ATO have released some guidelines to assist taxpayers.
Whether or not you are a tax resident of Australia is a question of fact that requires consideration of your circumstances. If you are in Australia temporarily for some weeks or months because of COVID-19 then you should not become an Australian tax resident as long as you usually live overseas permanently and you intend to return there as soon as you are able to.
However, you may be considered a tax resident of Australia if you end up staying in Australia for a lengthy period and do not return to your home country as soon as you are able to.
You will be considered a tax resident of Australia where you spend 183 days or more in Australia during an income year.
Further, although you may not be considered an Australian tax resident while in Australia on a temporary basis, your employment income will be taxable in Australia if it has an Australian source. Given COVID-19, the ATO have stated that if you are performing employment in Australia temporarily due to COVID-19 for a period of three months or less, then employment income earned in that 3 month period will not be subject to Australian tax.
However, where you are in Australia for longer than 3 months, all of the facts and circumstances will need to be considered to determine if your employment income is ‘connected to Australia’ and therefore has an Australian source. This would include factors like: