Australia tax residency
When you move overseas for an extended period you can usually choose whether you remain an Australian tax resident or become a non-Australian tax resident.
To become a non-tax resident, the Australian Tax Office (ATO) will use several rules in conjunction with your specific set of circumstances in determining your tax residency status. As a very general rule, if you are planning to mover overseas for the long term (greater than 12 months), have established a home overseas (even if only rented) and have rented out your home in Australia (or you do not have a home in Australia) then you generally can become a non-tax resident of Australia.
However, just because you can become a non-tax resident of Australia does not mean that you should. In my experience, many Australian’s that retire overseas should not give up their Australian tax residency for financial reasons. This will be dependent on the type of assets you own and where, the types of income that you will receive and even the anticipated capital growth of those assets.
The below table is a general guide for how various assets and incomes are taxed in Australia whether you are a tax resident or a non-tax resident of Australia:
| Tax Resident | Non-Tax Resident | |
|---|---|---|
| Foreign Income | Taxed in Australia. If taxed also overseas you will receive a tax credit for that amount in Australia | Not taxed in Australia |
| Listed shares and managed funds | Income: Taxed at Australia marginal tax rates as per usual Capital gains: Taxed at Australia marginal tax rates as per usual. Full 50% CGT discount applies | Income: Not taxable. Withholding tax applied at source Capital gains: Asset deemed to be disposed when become a non-resident. Capital gains tax (CGT) applicable at that time. However, can elect to postpone CGT until disposal of asset. CGT then paid at non-resident tax rates when asset is sold. If you choose this option, no 50% CGT discount will apply from the time you become a non-resident. Example: Asset purchased for $100, valued at $200 when became non-tax resident and eventually sold for $400. Taxable income is $250 at non-resident tax rates (50% of first $100 when tax resident, plus full $200 gains while non-tax resident) If you choose to pay CGT when becoming a non-tax resident, no further CGT will be paid on capital growth after becoming a non-tax resident. |
| Family home | Income: Taxed at Australia marginal tax rates as per usual Capital gains: CGT free if rented for up to 6 years. If rented more than 6 years CGT will apply on a pro-rated basis for those years above the 6-year mark. Example: Home ownership total 12 years, rented out last 9 years. Capital gain is $100,000. Capital gain is number of years over the 6-year exemption period divided by length of ownership times full capital gains (3/12 x $100,000) = $25,000 taxable gain. Taxed as per usual at Australia marginal tax rates with 50% CGT discount ($12,500 taxable) | Income: Taxed at non-resident tax rates Capital Gains: CGT free if rented for up to 6 years. If rented more than 6 years CGT will apply on a pro-rated basis for those years above the 6-year mark. Example: Home ownership total 12 years, rented out last 9 years. Capital gain is $100,000. Capital gain is number of years over the 6-year exemption period divided by length of ownership times full capital gains (3/12 x $100,000) = $25,000 taxable gain. No 50% CGT discount applies during period where family home was rented out when a non-tax resident (full $25,000 taxable) Taxed at non-resident tax rates |
| Direct property investments | Income: Taxed at Australia marginal tax rates as per usual Capital Gains: Taxed at Australia marginal tax rates as per usual. Full 50% CGT discount applies | Income: Taxed at non-residents tax rates Capital Gains: Asset NOT deemed disposed when become a non-tax resident as direct property ruled apply No 50% CGT discount will apply from the time you become a non-tax resident Example: Asset purchased for $100, 000, valued at $300,000 when became a non-tax resident and eventually sold for $400,000. Taxable income is $200,000 at non-tax resident tax rates (50% of first $200,000 when tax resident, plus full $100,000 gains while non-tax resident) [note: taxable income would be $150,000 at Australia resident tax rates if retained Australia tax-residency as 50% CGT discount would apply on the growth portion after moving overseas) |
| Superannuation | Age less than 60 years: Taxable portion taxed at Australia marginal tax rates as per usual [less 15% rebate] Age 60 years plus: No tax payable on any portion of income received | Age less than 60 years: Taxable portion taxed at non-tax resident rates [less 15% rebate] Age 60 years plus: No tax payable on any portion of income received |
| Age Pension | Taxed at Australia marginal tax rates as per usual | Taxed at non-residents tax rates |
| Tax rates for Australian tax residents 2016-2017
| Tax rates for non-Australian tax residents 2016-2017
| ||
|---|---|---|---|
| Taxable Income | Tax on this income* | Taxable Income | Tax on this income^ |
| 0 – $18,200 | Nil | 0 – $87,000 | 32.5c for each $1 |
| $18,201 – $37,000 | 19c for each $1 over $18,200 | $87,001 – $180,000 | $28,275 plus 37c for each $1 over $87,000 |
| $37,001 – $87,000 | $3,572 plus 32.5c for each $1 over $37,000 | $180,000 and over | $62,685 plus 45c for each $1 over $180,000 |
| $87,001 – $180,000 | $19,822 plus 37c for each $1 over $87,000 | ||
| $180,001 and over | $54,232 plus 45c for each $1 over $180,000 | ||
*The rates above do not include the 2% Medicare levy or 1% Medicare levy surcharge
^Foreign tax-residents are not required to pay the Medicare levy or surcharge
General outcome
The tax status you choose will usually have a large bearing on the level of tax that you may pay both now and into the future.
Generally, if you predominantly derive your income from Australian direct property and/or the Age Pension, or you feel that your direct property (including family home) will have substantial capital growth during the time you are living overseas, ‘typically’ you will be in front by retaining your Australian tax residency.
If you derive your income from managed investments and shares, including capital gains on those assets or foreign income then it may be beneficial to become a non-Australian tax resident.
Please note that the above is very general in nature and you should seek advice to understand what is right for you.
Seeking advice
We understand that this can be a complicated area for most people. Our main point here is to seek help if you need to understand what’s best for you.
Although this may seem like a complicated issue, it’s not in most cases. Professionals, like the team at Retire to Asia that have the experience and extensive knowledge in this area will be able to quickly point you in the right direction as to what is best for your unique set of circumstances.
