Tax residency status

The main issue for Australians working overseas (expatriates) is their Australian tax residency status. That is, will the expatriate remain a tax resident or will they cease becoming a tax resident, thus becoming a non-resident?

The tax residency status of an expatriate is vital as the tax issues facing expatriates who remain tax residents are very different to those facing expatriates who become non-residents on the commencement of their overseas assignments.

There are many factors that need to be examined in determining an expatriate's tax residency status whilst on an overseas assignment.

Remaining a tax resident

Expatriates remaining as tax residents will continue to be subject to Australian tax on their worldwide income. However, there is a specific exemption from Australian tax in respect of earnings from employment in a foreign in certain circumstances. The length of continous employment and the particular country in which the employment is performed will determine whether the exemption will be available.

Even where the exemption of overseas employment earnings is available to the expatriate, there are implications on the level of tax payable by the expatriate on their other income. Further, the exemption of overseas employment earnings may have an adverse effect on negatively-geared investments (real estate, share portfolios etc) that the expatriate may have in Australia.

Becoming a non resident

Non residents are only subject to Australian tax on their Australian sourced income. Generally, salary and other earnings paid to employees are sourced on the basis of the location in which the employee's services are performed. Accordingly, unless non resident expatriates are required to perform some service in Australia for their overseas employers, their employment earnings should not be subject to Australian tax.

The taxation of Australian sourced interest and dividend income as well as negatively geared investments (real estate, share portfolios etc) will also be impacted. Further, capital gains tax issues may also arise with the rental of the expatriate's principal residence and in respect of assets held by the expatriate on leaving Australia.

Expert advice required

Expert tax advice is strongly recommended for all expatriates prior to accepting an overseas position in order to maximise the benefits of the assignment.

The above information was kindly proved by Mr. Gavin Seto of HighFlyer Taxation Services, Australia www.highflyer-tax.com.au