Tax in Australia for Expats
If you are planning a move from the UK to Australia you have undoubtedly considered some of the key factors already, such as your visa, shipping, storage, residence and transportation. Your move may already be underway, along with all the stresses which go with it.
Equally important is to ensure you understand your tax commitments both in the UK and Australia. After all, the last thing you want to do is add to your moving stress by getting an unexpected tax bill.
We’ve created this brief guide to tax in Australia for expats to help ensure you understand the basics of the tax system as an expat living down under. We will also touch on the UK tax implications when leaving the UK as this will always be relevant in the tax year of departure and the subsequent tax year.
The information on this article is intended for guidance only. It is based upon our understanding of current legislation. No liability is accepted by us for actions taken in reliance upon information given and it is strongly recommended the appropriate advice should be taken.
Tax considerations for British Expats moving to Australia
It is very easy to assume that by leaving the UK you will suddenly be exempt from UK tax. Unfortunately, this is not the case and depending on your personal circumstances you may be subject to UK taxation (income tax, capital gains tax and inheritance tax) despite living in Australia.
UK tax residence status
Your exposure to UK taxation will depend on your tax status in the UK. If you are considered a tax resident in a specific tax year, you will still be subject to the tax rules of the UK in that year. For example, if you are UK resident and domiciled, you will be liable to income and capital gains tax on your worldwide income.
From 6 April 2013, the UK government introduced the Statutory Residence Test (“SRT”) which are a complex set of rules to be used to determine an individual’s residence status in the UK. The SRT is designed to give individuals greater certainty and clarity as to whether or not they are UK tax resident.
Normally, if you are resident in the UK for any part of a tax year you will be taxed as a UK resident for the whole of the tax year. However, there are special rules included in the SRT which may apply to you in the tax year you left the UK. These rules split the tax year into a UK part, when you are taxed as a UK resident and an overseas part when you are taxed as a non resident. However, there are strict conditions for meeting the criteria for claiming split year treatment. If you do not meet the split year treatment conditions, you may be taxed on your worldwide income during the entire tax year although you left the part way through the year.
UK Income Tax
Typically income you generate in the UK, such as from renting out a property, will potentially be subject to UK tax. At this time you may still benefit from the UK personal tax allowance which is currently £10,600 (tax year 2015/16). If your total UK arising income is within your tax free personal allowance, you may not have to pay UK tax at all, however you will still be required to declare it in your annual tax return.
Even if you are not tax resident in the UK, if you are temporary non resident and you subsequently return to the UK within five years of leaving, certain income previously untaxed in the UK will be taxable on your return.
UK Capital Gains Tax
While it may be true that as a non UK resident you are not subject to capital gains tax on gains made outside the UK. If your non-residence status is temporary (i.e. fewer than five years) you may still owe capital gains tax.
Similarly, even if you are a non-resident you may also be subject to capital gains tax in the
UK if the gains were made in the UK. For example, until April 2015, if you were to sell your UK residential property while non-resident you would not be subject to capital gains tax. However, this rule changed and non-residents are now subject to capital gains tax on gains made (from 6 April 2015) on disposal of only residential properties.
The amount of tax will vary dependent on the individual’s personal circumstances. The Capital gains tax rates are 18% and 28% and you may be entitled to the capital gains tax free allowance (£11,100 in 2015/16 tax year). You may also be entitled to claim other reliefs such as principal private residence if the property was used as your main residence at some point during the period of ownership. Letting relief will be available if the property was your main residence at some point during the period of ownership and it was rented.
UK Inheritance tax
As things currently stand, anybody who is a UK domicile is subject to UK inheritance tax on their worldwide estate.
Your domicile is not the same as your tax residence status. Domicile is a complex concept of general law and is based on case law. Your domicile is linked to your father’s domicile, which is usually the country where you father was born or considered as his permanent home when you were born. Changing your domicile is not straightforward and requires a significant amount of evidence to show that you have no intention of returning to the UK. For example you will need to cut all your UK ties including disposing of all your UK assets and establishing a permanent residence in the new country you immigrated to.
This means that, even as an Australian citizen who has left the UK, you may still be domiciled in the UK and therefore subject to UK inheritance tax.
UK tax returns
Not all people living in the UK have to complete a tax return. However, you are obliged to complete one if the HMRC sends you a tax return request form (SA100).
You are more likely to be required to complete a tax return if your tax affairs are more complicated. As an expat, your tax situation naturally gets a little more complicated. If you are a non-resident landlord, for example, by law you will be required to complete a tax return. The onus is on you to notify H M Revenue and Customs (“HMRC”) that you started to receive UK rental income. If you notify them late you may be liable for penalties.
As the tax affairs of non-residents are not straight forward, it is important that you do not try to submit a tax return yourself as it may lead to errors which may incur penalties. Instead you should seek assistance from a specialist accountancy firm who can assist with the process and ensure you are correctly completing your tax return – and on time. Furthermore, for example as a non resident landlord, an accountant will ensure you are claiming all the expenses you are entitled to claim which may in turn reduce your tax bill.
Tax in Australia as an Expat
It is also not necessarily the case that because you pay tax on your UK income that it is not also taxable in Australia.
The Australian tax system has two main types of residence status: Australian resident for tax purposes and foreign resident for tax purposes. Both are required to complete an Australian tax return.
An Australian tax resident’s worldwide income is subject to tax in Australia. Typically you are considered a tax resident of Australia if you have been in the country for a period of six months or more. The Australian Government Taxation Office have a useful online tool which will help you understand your tax residence status in Australia.
Foreign residents will only be required to declare income or capital gains tax on income/gains generated in Australia when submitting their Australian tax return.
It is also important to know that, like the UK, Australia does have a tax-free allowance, however if you are deemed to be a foreign resident in the tax year you will not be able to take advantage and any income or gains generated in Australia will be subject to tax.
While there is a double tax treaty between the UK and Australia, this is not automatically applied. If you are considered a tax resident in Australia, the Australian authorities will apply tax to your gross worldwide income first – and then consider or provide a credit for UK tax already paid on the same income, where you supply evidence of those UK tax payments.
This treatment also applies to any UK rental income you receive from property in the UK.
If you receive income from a UK pension, it may be beneficial to request that it is paid without UK tax deducted.
An alternative with a personal pension is to consider moving outside of the UK into a Recognised Overseas Pension Scheme. This will mean that it is not subject to UK tax, and may be able to provide other benefits as well. However, you should always seek independent advice before making a decision about your pension – especially in light of the recent pension reforms.
In this wonderful digital age we live in, finding the information about tax is a lot easier than a few years ago.
The UK government website is a great place to start for the facts relating to UK tax, although it can be a little technical and scary if you’re not familiar with tax and accountancy.
The Australian Government also has a number of resources available for people already tax resident, and those who could be deemed foreign resident.
Another website which provides easy to understand tax information for expats is Experts for Expats, whose network of advisers helped us put together this post (after all we’re experts in international relocation, but not accountancy). They even offer free expat tax advice from a qualified adviser if you’d like to speak to someone directly.
Remember, tax doesn’t have to be stressful. Make sure you understand the basics and seek the help of the experts who will help ensure that you’ve got no expensive shocks waiting round the corner.
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