Each year, thousands of Australians leave the country to start a new life somewhere else.
In some cases, they leave never intending to return. In others, they leave – often to take up employment overseas – with a view ultimately to returning to Australia after a period of time. Each case is different and in each case, the circumstances that they leave behind in Australia will be different.
In many cases, people assume that as soon as they leave Australia, they will cease to be resident here and will not need to account for tax on their overseas earnings. That view is often simplistic and wrong.
The ATO has applied the residency rules to a number of the common scenarios for those leaving Australia and their verdict is set out in the table below:
you are generally:
leave Australia temporarily and do not set up a permanent home in another country
an Australian resident for tax purposes
leave Australia permanently
treated as a foreign resident for tax purposes from the date of your departure
The examples provided above by the ATO are very black-and-white. In a straightforward case, where you leave the country for good and intend never to return, you will indeed become non-resident as soon as you leave. Henceforth, you will only be taxable in Australia on any Australian sourced income or gains. This kind of clear cut scenario is probably the exception rather than the rule.
So, when determining if you have become non-resident you need to take into account:
whether you intend to return permanently to Australia or not
the roots you put down in your new country, such as buying a home or marrying
the duration and frequency of any visits to Australia
continuing family connections with Australia, particularly the presence of spouses and children
continuing financial, social and emotional ties to Australia, for instance maintaining assets such as a family home or car, keeping children in an Australian school or getting income paid into an Australian bank account.
As such, it often isn’t enough to simply get a job overseas, hop onto the plane and tick the box on your tax return that you aren’t resident.
What does being non-resident mean for your taxes?
If you become foreign resident, your assessable income for the purposes of Australian tax only includes income with an Australian source. Income which arises from overseas sources is no longer taxable in Australia. So, if you get a job overseas, your wage or salary from your job won’t be taxable here and neither will any foreign investment income, from overseas bank savings for instance. Australian sourced income, such as Australian bank interest or income from investment properties, will still be taxable here but may be subject to special withholding taxes.
TIP: Because income from an Australian investment property is still taxable, even when you are non-resident, you can still utilise losses arising from negative gearing, either against other Australian sourced income arising in the same year or carried forward to use against Australian income in the future.
If you leave Australia permanently, you’ll cease to be tax resident from the date you leave. You’ll be entitled to a partial tax free threshold for the year, depending on when you leave. The full tax-free threshold ($18,200) consists of two elements:
a flat amount of $13,464 which you’ll get in full
an additional $4,736, apportioned for the number of months you were in Australia during the income year, including the month you departed.
Non-residents are taxed on their Australian income at different rates to residents. The most obvious difference is that non-residents don’t get the tax-free threshold or the lower 19% tax rate. From the first dollar earned, the 32.5% tax rate applies.
Capital gains tax
When you leave Australia, you are deemed to have disposed of all your CGT assets which are not Taxable Australian Property (the most obvious examples of which are Australian land and buildings, including your home and any investment properties) at their market value. Accordingly, you will have a capital gain (or loss) to report equal to the difference between the market value of the assets at your date of departure and the acquisition cost of the assets. You will then suffer no further Australian CGT when you actually dispose of those assets, whenever that may be.
Needless to say, for many departing residents with assets such as share portfolios, triggering a capital gains tax bill can be undesirable. As an alternative therefore, the ATO allows you to elect to disregard this deemed disposal. The result of making that election is that no CGT event arises on departure and instead the assets remain within the Australian tax system and will be subject to CGT in the usual way when you finally dispose of the assets (worked out as the difference between sale proceeds and original cost). If you make the election, it will cover all of your CGT assets; you can’t pick and choose which ones to include in the election.
The way in which you complete your tax return for the period of departure is taken to be evidence of whether or not you have made the election. If you don’t include the deemed disposal, the election is regarded as made.
TIP: Though nobody wants to trigger an unwanted tax bill, there can be advantages in choosing the deemed disposal route if you expect that the value of your assets will increase in future, since that increase will be protected from Australian tax
The CGT discount
Non-residents are no longer eligible for the 50% CGT discount. That means that if you become non-resident and subsequently dispose of an asset which is subject to CGT, you’ll need to do a calculation to apportion the 50% discount based on the number of days you owned the asset where you were non-resident, compared to the total ownership days. The intent is that you get the 50% discount for the ownership period that you were Australian resident but don’t get it for the non-resident period.
The family home
Your family home will be regarded as Taxable Australian Property and therefore won’t be subject to the deemed disposal rules. That means you won’t trigger a CGT event in relation to your home when you go overseas.
From 1 July 2019, if you become non-resident and subsequently sell your home (and you had purchased the home before 7:30PM on 9th May 2017), you won’t be entitled to the main residence exemption, which otherwise excludes any capital gain on your house from being taxed. If you’re moving permanently overseas, you should give serious thought to disposing of your home before you leave in order to qualify for the main residence exemption. If you purchased your home after 7:30PM on 9th May 2017, you don’t even have until 1 July 2019 before the new rules apply to you – you’re already within the new regime and need to think carefully about the timing of going overseas and selling your home.
Mark Chapman is the Director of Tax Communications at H&R Block