If you’re like me and think you should be more educated on your finances then this is the post for you. I invited Craig Joslin along to talk about four steps for Aussie Expats to sort out their Australian finances & taxes.
Craig is the founder of The Australian Expat Investor – dedicated to educating Aussie Expats to build their wealth while living abroad. Check out his blog or get his free ebook (9 Painful Surprises For Australian Expats That Could Cost Thousands of Dollars) at www.austexpatinvestor.com.
Over to you Craig …
Four steps for Aussie Expats to sort out their Australian finances & taxes
Moving overseas is an exciting time in anyone’s life. For some people it means adventure, for others it’s about experiencing a new culture, or perhaps it is a career opportunity. Whatever the reason, it is important to keep an eye on your financial and tax arrangements in Australia. With a little bit of planning, and simply being aware of some of the tax and other financial implications of moving abroad, you could save yourself a lot of money and heartache in the long run.
In this article we provide a quick overview of 4 important steps for Aussie expats in the USA to help you sort out your finances and taxes when moving abroad.
Step 1 : Understand the Difference Between Being a Resident and Non-Resident For Tax Purposes
Your tax residency has the potential to significantly impact your overall tax liabilities, and the most important questions an Aussie expat should ask themselves is Am I An Australian Resident for Australian tax purposes?
If you are deemed to be an Australian resident for Australian tax purposes, then you will need to declare your worldwide income to the Australian government. Whereas if you are deemed to be a non-resident for Australian tax purposes, then the Australian government will only be interested in your Australian sourced income.
Step 2 : Determine Whether You Will Be Considered A Resident Or Non Resident For Australian Tax Purposes
The Australian Tax Office use a number of different tests to determine whether you are a resident or non resident for Australian tax purposes. There are however no conclusive rules, and your residency will be based on the facts of your specific personal situation.
For most Aussie expats, the most relevant test is the domicile and permanent place of abode test. Under this test, to be considered a non-resident for Australian tax purposes, you need to demonstrate you have established a permanent place of abode overseas. This will, among other things, require you to demonstrate that you have severed your social and economic ties with Australia, plan to live overseas for at least two years, establish a permanent home overseas, and abandon your residence in Australia (ie. selling or renting out your house).
It is possible, however, that under USA law you could be considered a USA tax resident, and under Australian law you could be considered an Australian tax resident. As a result, Australia and the USA have a tax treaty (also known as a double taxation agreement) include tie-breaker tests for tax residency. These tie-breaker tests ensure that it is only possible for you to be considered a tax resident of one country. The tax treaty also details taxing rights of each country over different sources of your income.
Managing your international tax affairs can be complicated and confusing. It is important to get your tax residency determination right, so you should discuss your tax residency with your Australian tax advisor.
Step 3 : Determine Whether You Need To Lodge a Tax Return in Australia
If you are deemed to be an Australian resident for Australian tax purposes then you will be obligated to continue submitting an Australian tax return each year.
If you are deemed to be a non-resident for Australian tax purposes, then you may still need to complete an Australian tax return. Generally speaking if you have any Australian sourced income, (eg. rental income from property in Australia, employment income, or in some circumstances dividend income) you will need to complete an Australian tax return.
Completing a tax return does not, in itself, mean you need to pay tax. In fact, many Aussie expats living abroad with negatively geared investment properties have negative taxable income in Australia. In these circumstances, you can generally accumulate these tax losses until the day you return to Australia and so reduce your tax liabilities at that point in time.
Step 4 : Review Your Investments
Moving overseas can result in significant changes in the tax treatment of your share and property investments, and so it is important to review your investment portfolio when moving abroad. I cover this in quite some detail in my special report on Australian Tax Implications for Aussie Expats. As a result, you should review the tax implications on your investments with your Australian financial advisor to ensure the arrangements you have in place remain appropriate.
Two areas that have the most complications for Aussie expats are in relation to Self Managed Super Funds and share investments.
Self Managed Superannuation Funds (SMSF)
If you have a SMSF, compliance with government legislation becomes increasingly difficult and non-compliance can be a costly mistake as your SMSF will be taxed at the highest marginal tax rate. You should review your arrangements with your financial advisor to ensure your SMSF remains compliant with government requirements, and you may need to consider suspending all contributions to the fund whilst you are overseas, appointing a new trustee, or possibly shutting down the SMSF.
If you are a non-resident for Australian tax purposes, then the tax treatment of your Australian share portfolio can change quite dramatically. Some of the issues to note if you are a non-resident for Australian tax purposes are :
- Your shares will be deemed to be sold at the market value on the day you become a non-resident for Australian tax purposes and you will be liable for capital gains tax on the deemed capital gain. The flip side however, is that as a non-resident for tax purposes, any further capital gain is not taxed in Australia. (Note, you can elect that your shares are not sold, however any further capital gains will be taxed in Australia)
- You will need to pay non-resident withholding tax on your unfranked dividends, and your franked dividends will generally not be taxed in Australia.
- If you have borrowed any money to invest in the sharemarket (eg. a margin loan) any interest costs will no longer be tax deductible in Australia.
In summary, moving overseas is a big step. It is easy to get distracted by the urgent tasks of finding a new home, kids schooling, and a multitude of government forms and paperwork. However, it is important to also make time to understand the taxation implications of moving overseas. Educate yourself about the implications of moving abroad, understand how it may impact you, and then speak to your taxation or financial advisor.
Disclaimer : This information is for educational purposes only and does not constitute financial or taxation advice. As this information is not advice and has been prepared without taking into account your objectives, financial situation or needs you should, before acting on this information, consider its appropriateness for your circumstances. Independent advice should be obtained from an Australian financial services licensee before making investment decisions, and a registered (tax) financial advisor/accountant in relation to taxation decisions.