Home for the Pandemic: Key Tax Considerations for Australian Expats Working for Overseas Employers During the Pandemic

Daniel Wilkie   |   15 Jun 2021   |   7 min read

If you’re an Australian expat who came home to ride out the pandemic then you may have found yourself in an unusual situation. Thanks to the advantages of technology, moving back to Australia doesn’t necessarily mean changing employment.

Living in Australia while continuing to work for an overseas employer could mean you face a range of complex tax issues. For this reason it is important to seek professional advice for your specific situation so that you can make appropriate plans and preparations.

Below is a brief overview of some of the considerations you will need to cover.

Tax Residency

The first issue is determining your tax residency.

While the standard residency tests still exist, the ATO has advised that individuals who returned to Australia for the pandemic may remain non-residents (continuing to be residents of their overseas home), provided they intend to return to the country they now call home as soon as possible. This means that if you are still actively planning to return to your overseas home as soon as possible you have some reassurance that you remain a non-resident in Australia.

However, your residency status still depends on your activities in Australian as well as your ties to your overseas home. The longer you stay in Australia, the more you settle down, the more difficult it gets to determine residency. Unfortunately the ATO’s guidelines are unclear about when exactly you would be expected to return to your overseas home and how you can clearly show that this is your intention. If your stay in Australia means you no longer qualify as a tax resident overseas then this may also complicate matters.

Since this is a particularly complicated and nuanced issue it is important to get specific tax advice for your situation as soon as possible. Note that your residency status can change if your actions and intentions change as well.

Non-Residents Working for an Overseas Employer

What happens if you have an overseas employer and you continue to be a non-resident while living in Australia? In simple terms this means you will only be required to lodge an Australian tax return for any Australian sourced income.

If your primary source of income is from your overseas employer, it may result in the income being exempt. However, any double tax treaty will require consultation to determine the ultimate taxing rights. Remaining a non-resident is also likely to keep things simpler as your tax issues will continue as if you were still living back in the country in which you are employed, and to which you intend to return.

Residents Working for an Overseas Employer

On the other hand, living in Australia for the duration of the pandemic could mean that you become an Australian tax resident. In this situation you will be required to include all of your income from worldwide sources in your Australian tax return.

This means that despite your primary source of income being derived from an overseas source, you will have to consider Australian taxes on top of the foreign taxes paid. Note that double taxation agreements typically ensure that you don’t pay more than the amount of tax required from the jurisdiction with the higher taxation rate.

Comparison of Tax Impact as a Resident/Non-Resident

For a basic comparison let’s assume the following:

You earn
– AUD $200,000 from your foreign employer
– AUD $5,000 from Australian interest income

As an Australian tax resident you would be required to pay Australian income taxes and medicare levy of $67,017.

To avoid double taxation you would typically get a tax credit for any foreign income tax paid on the foreign employment income. For example, if you paid foreign taxes of $40,000 on your foreign employment income, then you would only have to pay the difference of $27,017 in your Australian return.

Since Australia’s tax rates are amongst the highest in the world it is likely that you would have to pay some Australian tax on top of your foreign tax paid.

If the country you work for has higher overall tax rates than Australia, then you would effectively only have to pay taxes on the Australian sourced interest income. In this scenario this means you would end up paying $2,350 for the Australian interest income (on top of the foreign taxes paid).

On the other hand, if you remain a non-resident for Australian tax purposes then you would only be required to pay income taxes on the employment income at their source country (your country of residence). Since interest income is typically covered by double taxation agreements it is likely you would only have to pay $500 in Australian taxes on the Australian sourced income. (Though you may also have to pay any additional foreign taxes on this income in the country of residence).

Ultimately the exact amount of tax you would pay depends on where you are employed and where you are a resident. However, it is usually advantageous to be classed as a resident in the country from where you are earning your primary income.

Other Implications of Changing Residency

If you continue to remain a non-resident for Australian tax purposes there are no additional tax implications to consider. However, if you do become an Australian resident again then there are a few issues to consider and plan for. This includes capital gains and investment income.

             Capital Gains Considerations

One of the potential disadvantages of changing residency is capital gains. If you resume Australian residency then you will be required to value any foreign assets for capital gains purposes at the date you become a resident. These assets then become subject to Capital Gains Tax either when you sell them, or if you move back overseas and become a non-resident again.

Since some countries don’t have a capital gains tax, or they calculate capital gains taxes differently – returning to Australia as a resident, whether on a permanent basis or for a number of years, may have a significant tax consequence that you hadn’t planned for. 

             Investment Income

Investment income such as rent, interest and dividends, can be taxed very differently in different countries. Your residency status can also change how you are taxed on such income. Any double tax agreement between Australia and the country from which the investment income is derived, will further impact the overall way in which you pay taxes on such income.

This may be as simple as needing to advise banks, property managers, and investors that your country of residence has changed. This way they can withhold the appropriate amount of taxes required to cover the foreign tax obligations. Or it may require more complex considerations such as the requirements of being a Director, laws around owning controlling interests in a foreign company, and even residency status of a foreign company that you manage. 

Understanding your Tax Situation

The pandemic has created a situation where many Australians are either returning home as unintended residents, or are left uncertain as to their tax residency status. Since this can have a dramatic impact on your finances it is important to get professional, expert advice, sooner rather than later. 

The longer you continue to stay in Australia, the more important it is to assess your tax residency status and understand the potential tax implications of this.

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Matthew Marcarian   |   3 Mar 2020   |   4 min read

Burton’s case [Burton v Commissioner of Taxation [2019] FCAFC 141] has set an interesting precedent for claiming foreign tax credits on capital gains made from the sale of overseas investments in the United States.

In simple terms, if you own a capital asset in the USA, and you are taxed in the US the capital gain, then you may not be able to claim all the US tax paid as credit in Australia.

The reason for this is because the ATO will only allow you to claim the foreign tax offset that relates to the portion of taxable discounted capital gain being declared in your Australian tax return. The Australia-US Double Taxation Agreement will not assist you in this regard.

Since Burton’s application to appeal the decision was denied on 14 February 2020, the position under the law has been clarified in a situation where an Australian taxpayer makes a capital gains on US real estate (or other assets which are considered effectively connected with the USA).

While some articles claim that this case means the ATO is clawing back the 50% discount on Australian residents with foreign held assets, this isn’t strictly true. It’s actually that not all of the US tax paid would be creditable here.

Example – Comparing the net tax effect on an Australian tax resident selling capital assets owned under different tax regimes. 

To understand the situation let’s consider the example of Jack, an Australian taxpayer who sells a long-term capital asset held in the US, NZ and Australia.

The US taxes capital gains in full, however they tax the capital gain at a different tax rate. NZ does not tax capital gains. Including NZ as a comparison makes it clear that the ruling from Burton does not claw back the discounted 50% capital gain.

For our purposes Jack is an Australian tax resident.

Let’s assume:

  • For ease of calculations Jack makes a capital gain of $1,000,000 on the sale of each of the following assets.
  • Jack’s first $1,000,000 capital gain is on an asset that he held in the US for more than 12 months. While the US taxes capital gains, it applies a concessional tax rate for assets held over 12 months. For ease of calculations we will assume the top concessional rate of 20% applies.
  • The second $1,000,000 gain is on an investment that was held in NZ for more than 12 months. NZ does not tax domestic capital gains.
  • Finally, Jack also sells $1,000,000 investment in Australia, which he has also held for over 12 months. Accordingly, Jack will only be taxed on 50% of the Australian capital gain. For ease of calculations we will assume the flat top marginal rate and Medicare levy applies, 47%.
  • Jack sells all 3 investments in the same financial year for a capital gain of AUD$1,000,000 each.
  • For ease of calculations Jack has no capital losses to apply and he is able to apply the 50% CGT discount in full when preparing his Australian tax return. 
    US owned Asset (AUD$) NZ owned Asset (AUD$)Australian owned Asset (AUD$)
 Capital Gain $1,000,000$1,000,000$1,000,000
a.Foreign Taxable gain after applying any discounts for assessing tax on capital gains$1,000,000 0
b.Foreign tax paid
US 20%
NZ NA on capital gains
$200,000 0
c.Australian Capital Gain$1,000,000$1,000,000$1,000,000
d.Portion of capital gain eligible for discount in Australian assessment$500,000$500,000$500,000
e.Net taxable Australian gain to be taxed (c – d)$500,000$500,000$500,000
f.Australian tax at $47% (including Medicare levy)$235,000$235,000$235,000
g.Net foreign tax paid that is eligible to be claimed as an offset against the Australian taxable portion of the capital gain US: b x 50%
All others: b
$100,0000
h.Australian net tax payable (f – g)$135,000$235,000$235,000
Total foreign & Australian tax (b + h)$335,000$235,000$235,000
Global Tax Paid33.5%23.5%23.5%

As you can see from this example, Jack ends up paying more tax on the US asset. This is because the US taxes the full gain at a discounted rate. Australia then taxes half of the gain at the Australian tax rate and only allows the 50% portion of the foreign income tax credits to be applied.

Conclusion

The net impact of applying this precedent is that Australian taxpayers will end up paying up to 33.5% income tax on capital gains made on US investments that are held for more than 12 months. This is in contrast to the 23.5% income tax that they will pay on capital gains that are limited to only paying Australian income tax.

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