In todays’ world, it’s becoming easier and more relevant to cross international borders for work. From permanent positions to working holiday makers, all employment, whether an employer is based in Australia or overseas, will incur tax obligations. There is often confusion when it comes to the tax implications when working overseas, which our short report will outline.
To understand how you’ll be taxed, you need to work out if you’re an Australian resident for taxation purposes, or a foreign or temporary resident for tax purposes. These definitions are different for the Australian Taxation Office (ATO) than becoming an Australian citizen.
If you’re trying to work out if you’re an Australian resident for taxation purposes, there are four residency tests that can be used:
- Resides test – this is the primary test. If you reside in Australia in a physical presence, for an intention and purpose, for a family, for a business or employment ties and maintain a residence and location of assets and have social and living arrangements, you’ve satisfied this level of assessment. You won’t need to satisfy and of the other tests. However, if you’re unsure, move to the ‘domicile text’.
- Domicile test – if you have a residence that is your permanent home is in Australia. This may be where you were born or choose to live. If you satisfy this test, you won’t need to move to the next test, however if you’re still unsure, move to the ‘183 day test’.
- 183 day test – this test applies to those arriving in Australia for more than half of the income year. This can be continually, or with breaks. Move to the next test if you don’t satisfy this test.
- The Commonwealth superannuation test – this test applies to Australian Government employees working at Australian posts overseas who are member of the CSS or PSS schemes.
Pro Tax Tip: If you work overseas and fail to cut ties with Australia, you’ll be treated as an Australian resident for taxation purposes which will result in tax implications.
What happens if your residency changes during the year?
If you begin work overseas during the income year, you’ll need to let your tax agent know to mark ‘yes’ to the question ‘Are you and Australian resident?’ when you lodge your tax return. You’ll be taxed at resident rates on a pro-rata tax-free threshold based on the number of months you were an Australian resident and residing in the Country.
Pro Tax Tip: Foreign residents will not be obligated to pay the Medicare levy. When you lodge your tax return, you’ll be able to claim the number of days in the year you were not an Australian resident as exempt days.
Going To Work Overseas?
If you’re an Australian resident going to work overseas temporarily, you’ll still need to lodge a tax return. All foreign income should be declared as well as any exempt income even if tax was withheld in the country in which you worked.
You’ll need to pay tax on the foreign income you receive as an Australian resident both in Australia and the country from which you receive it, however it’s not all doom and gloom. You may be entitled to a foreign income tax offset if you pay tax on foreign income in another country.
There are 40 countries that Australian has tax treaties with which minimises the risk of being double taxed. Rules in these agreements take precedence over the local laws of each country. It pays to have a conversation with your tax agent so you understand how you’ll be taxed and what you’ll need to do in order to minimise your tax if you work overseas.
If you remain an Australian resident and work overseas, any income you earn — wages, salary, commissions, bonuses and allowances — are considered to be foreign income and is taxed in Australia.
Foreign Income Tax Offset
The ‘foreign income tax offset’ may come as welcome relief to those working and paying tax in another country. The offset reduces tax payable. To be eligible, you must have paid an amount of income tax on your foreign assessable income and been taxed by a foreign country. The offset applies to direct taxes on income as well as profits or gains (this can include capital gains). All foreign income and taxes paid should be converted into Australian dollars.
Pro Tax Tip: You can only claim the offset after you pay the foreign tax.
If you go to work overseas, or are a permanent resident temporarily leaving our shores, your superannuation remains subject to the same rules as if you’re working in Australia. You won’t be able to access your super until you reach your preservation age, or retire and satisfy another rule of release.
Pro Tax Tip: Even if you’re working overseas, it pays to make sure that you combine accounts you no longer need into one super fund that can follow you between employers.
Even if you work overseas, you’ll still be obligated to pay the 2% Medicare Levy. If you exceed the threshold of $90,000 for a single or $180,000 for couples, you’ll also be obligated to pay the Medicare Levy Surcharge (MLS) unless you have private health insurance with Hospital cover.
Pro Tax Tip: Even if your foreign employer may have health insurance, it will not qualify as Australian health insurance, and you may incur the MLS. Most foreign health funds are not registered health funds under the Private Health Insurance Act 2007. ‘Extras’ cover is also not considered to be eligible private health insurance. You’ll need to make sure your health insurance includes hospital cover to be valid.
Tax may get a little more complicated if you do work overseas but there is always an expert at hand to help you understand your obligation. Every year, ITP Accounting Professionals help over 300,000 Australian’s save their money on their income tax no matter if they’re working domestically or on foreign soil. Chat with a friendly professional and seek advice before you start your overseas employment.