Working overseas

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Leaving Australia |  If you remain an Australian tax resident |  If you cease Australian tax residency |  Working overseas, and working in Australia |  Serving in the Australian Defence Force |  Living Away from Home

If your business expands overseas, or you have an office or factory in a foreign country, your employees who head offshore will need to consider the tax situation of working in another country.

Every year thousands of Australians head overseas in search of adventure, and many of them have the opportunity to work and live in a foreign country, although not all would understand the Australian tax implications of working internationally.

Questions commonly asked are 'As an Australian, do I still have to lodge a yearly tax return if I'm living and earning in a foreign country?' and 'I spend part of the year working overseas and part of the year working in Australia – how do I calculate my earnings for tax?'

Before these questions can be answered, you need to determine whether you are an Australian resident for tax purposes. Find out if you are by doing the test.

Being an Australian resident for tax purposes is different to being a citizen or holding an Australian passport. There are actually four different tests under the tax law to determine your residency status – you need to pass only one of them to be classified as an Australian resident (see the differences here). It is important to decide which category you fall into, as non-residents for tax purposes pay tax at a higher rate than residents for tax purposes.

A good rule of thumb is: If you earn income in Australia (apart from that which comes from bank interest, dividends and royalties) then you are required to lodge a return.

Leaving Australia?
If you leave Australia during an income year and become a non-resident for the rest of the year, then you'll still need to answer 'yes' to the question 'Are you an Australian resident?' on your tax return. This ensures that you are taxed at resident rates (which are lower than non-resident rates) for the part of the tax year during which you were still a resident. The tax return will also require disclosure of the date you ceased Australian tax residency, so that you are taxed at non-resident rates for that part of the year.

Just be aware that some electronic tax return software would just automatically pro-rata all your income between the residency and non-residency periods. So if you report income that is not evenly distributed – for example, employment income from a job that you held only during the part of the year in which you were a resident – then it would be prudent to attach to the tax return some additional notes explaining the circumstances so that all of the employment income would be taxed at the correct rates.

Alison is 21. In January 2012 she decides to book a ticket to London to live and work there for a couple of years. She will also sell all of her Australian assets, close her local bank account and cancel other memberships (and registrations) before she leaves.

Her flight leaves at the end of October, so she works right up until she leaves to save as much money as possible. This means she works for almost four months of the new tax year, which starts on July 1, so she will have to lodge a return for the year ended June 30, 2011, to report and pay tax on the income she earned in that period she worked in Australia.

Even though she leaves Australia and for the rest of the tax year lives elsewhere, for tax purposes she is considered a 'resident' for those first few months of the year until she leaves.

The fact that Alison is a non-resident of Australia for part of the financial year gets taken into account by a reduction in her tax free threshold. You are entitled to a pro-rata tax-free threshold in proportion to the number of months you are an Australian resident (non-residents have no tax-free threshold).

"I'm an Aussie living abroad - should I have to pay the taxes of the country I live in?"

The answer to this question first depends on whether or not you are still an Australian tax resident during your time overseas. If you are not an Australian resident, then you are entirely subject to the local tax laws of the other country. Each country will have its own laws to determine whether you are a tax resident of that country, and how your local earnings are taxed.

And if you do remain an Australian resident, you are still subject to local laws but you must first consider the impact of any 'double tax agreement' that Australia has with that other country. Basically, a double tax agreement sets out which country has the rights to tax each type of income that you may earn – to minimise the chances of you being taxed in Australia because you are a resident, but also being taxed in the other country under their laws on the same income.

The rules in these agreements take precedence over the local tax laws of each country. Where the agreement gives the other country the right to tax you, then you are subject to the laws of that country. It is important that you educate yourself on the tax laws, including the double tax agreements, of the country you are working in.

On the date you stop being an Australian resident for tax purposes, there is no need to disclose your foreign income in your tax return.

If you remain an Australian tax resident
Any income that comes from working outside Australia – including salary, wages, commissions, bonuses and allowances – is regarded as foreign employment income. It may be paid by a foreign or Australian employer. As an Australian resident, this foreign employment income is in the vast majority of cases taxable in Australia and has to be included in your Australian tax return.

However, if you have paid tax on that employment income overseas, you should be able to claim some or all of the foreign tax as a credit against the Australian tax liability, so that you are not double-taxed. Certain aid workers, Australian Defence Force personnel, and employees of certain tax-exempt Australian institutions, may be entitled to a full tax exemption on their foreign employment income if they worked overseas for at least 91 days.

If you cease Australian tax residency
As a non-resident you will only need to submit an income tax return if you have any Australian sourced income, such as from rental income or the sale of an Australian property. You do not need to lodge an Australian income tax return if the only Australian-source income you receive is interest, dividends or royalties that has had the correct amount of non-resident withholding tax taken from it.

All Australian sourced interest, dividends and royalties derived after you ceased to be an Australian resident are subject to the non-resident withholding tax provisions. Basically, the payer of the income has to withhold tax (at varying rates) on your behalf and you receive the income net of the withholding tax. As the withholding tax is a final tax, the income should not be included in your tax return.

For more information see 'Investing in Australia'.

As a non-resident, if you dispose of assets, you would only be subject to Australian CGT if the asset qualifies as 'taxable Australian property'. This includes Australian real property and certain holdings of shares in companies that hold a lot of Australian real property. Further, when you become a non-resident, you are deemed to have sold all your CGT assets that aren't taxable Australian property for market value at that time. So you may actually pay the tax before you sell the asset, although you can generally choose to defer the tax until you actually sell the asset or become an Australian resident again.

Medicare
Non-residents of Australia are not required to pay the Medicare levy, so you can claim the number of days that you are not an Australian resident during a tax year as exempt days in your tax return.

Spouse
In order to claim a tax offset for a dependent spouse, you must both be Australian residents for tax purposes. You will need to reduce your claim to take into account the period you were both non-residents of Australia.

Working in Australia, AND overseas
What if you're heading overseas for work but, due to your particular circumstances, you will still be earning income from working in Australia during a tax year?

As to how you'll be taxed on your Australian and overseas employment income, once again it all depends on whether you are an Australian tax resident or not and whether there is a double tax treaty between Australia and the other country.

Marcus is an Australian artist who has been commissioned to provide a hotel in Japan with art for all of its luxury suites. The work takes two months, after which Marcus returns to Sydney to begin a separate commission for a restaurant in Manly. Marcus remained an Autralian tax resident for the whole of the tax year.

At the end of the tax year, Marcus needs to declare the income from both Japan and Australia. Due to the provisions of the tax treaty with Japan, Marcus will not be taxed on his earnings in Japan and again in Australia on his Japanese earnings – he will only be taxed in Australia.  Marcus should also read 'Doing business overseas' for more information for small businesses.

If you are required to disclose any foreign income in your Australian tax return, you will need to convert all foreign income, deductions and foreign tax paid to Australian dollars, although there are some regulations regarding this – see the Tax Office's Converting foreign income to Australian dollars.

Are you serving in the Australian Defence Force overseas
If you are serving overseas with the Australian Defence Force, your pay and allowances may be exempt from Australian income tax in certain circumstances. Check with the Department of Defence to find out if your service meets requirements, and see the Tax Office's guide here.

Living away from home?
Some jobs require you to live and work abroad for your Australian employer. Allowances that exist for living away from home may be subject to fringe benefits tax (FBT), which is payable by employers, so check with your Australian employer if that is the case:

• if your allowance is subject to FBT, it isn't included in your assessable income
• if the allowance is not subject to FBT, then the allowance is likely to be included in your assessable income as foreign employment income (unless it falls under an exemption), although in some cases it could still be considered Australian-sourced income. Either way, it is taxable to an Australian resident
• if your salary is exempt foreign employment income (in the case of certain aid workers and Australian Defence Force personnel), the allowance forms part of the exempt foreign income.

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