Australia
Understanding Australian tax affairs is extremely complex as they are forever changing. While understanding the rules for overseas pensions can be seen as even more confusing. We have put together this page to help Expats make the right financial decisions whilst living in Australia. The areas we will cover include:
- Defining an Australian tax resident
- Australian tax position for residents.
- Taxation of Foreign Income for Australian residents
- Australian tax position for non-residents.
- Other Taxed in Australia
- Non-concessional lifetime cap
- Taxation on UK pensions.
- Taxation on QROPS.
It is important to note that the information provided on this website is just a guide hence before making any decisions it is always advisable to talk to one of our recommended independent financial advisors to discuss your requirements in more detail.
Defining an Australian tax resident
It is important to note that the tax year in Australia starts 1st July and runt to the 30th June the following year.
The primary test for Australian tax residency is called ‘the resides test’. The resides test is a complex test that applies to anyone entering Australia as a migrant, student, tourist, pre-arranged employment contract and academic teacher. The ‘resides status’ will be determined based on your behaviour such as domestic and economic affairs. You may be considered an Australian resident if your day-to-day activities are the same as they were before entering Australia. Things taken into account will include; the reason you are coming to Australia; family/business ties; location of assets, and social and living arrangements.
If you don’t satisfy the resides test, you will be deemed tax resident if you satisfy one of the following statutory tests:
- Domicile test
- If you have been in Australia more than 183 days in the given tax year.
- Superannuation test
You should seek expert advice if you are concerned regarding your current Australian residency status.
Australian Income tax position for residents
Australian residents are subject to pay tax on worldwide assets. All income including investment income such as interest, dividends, rent, managed investments and capital gains is deemed as ‘earned income’ in Australia and therefore subject to the relevant income tax rates below.
2015-16 income tax bands are as follows for annual earnings between:
| $0 – $18,200 (Personal Allowance) | Nil tax |
| $18,201 – $37,000 | 19% |
| $37,001 – $80,000 | $3,572 plus 32.5% for every $1 over $37,001 |
| $80,001 – $180,000 | $17,547 plus 37% for every $1 over $80,001 |
| $180,001 and over | $54,547 plus 45% for every $1 over $180,001 |
- An additional 2% temporary budget repair levy is applied to any earnings over $180,000 up until July 2017.
- An additional 2% Medicare levy is applied to any earnings over $180,000.
Taxation on foreign income for Australian residents
All worldwide income is taxed as earned income in Australia at your marginal rate. The Australian resident will usually receive a return net of foreign tax as tax is usually paid on any investment overseas. The Australian law dictates that you need to declare the full (gross) amount in your annual tax return to prevent double taxation where a double taxation agreement applies.
You may claim foreign expenses in your annual tax returns subject to certain limits. You may also offset losses which may be carried forward indefinitely.
It is important to note that you must declare foreign income in your tax return regardless of whether it is remitted to Australia or not. This could impact the amount of tax you pay by the exchange rate that applies. If you remit the income back to Australia, the exchange rate will be used on the date that you remitted the money. If you choose to leave the money in a foreign bank account, the exchange rate at the end of the year is used.
Australian Income tax position for non-residents
Non-residents are only subject to Australian tax, not worldwide income, and receive no personal allowance.
2015-16 income tax bands are as follows for annual earnings between:
| $0 – $80,000 | 32.5% |
| $80,001 – $180,000 | $26,000 plus 37% for every $1 over $80,001 |
| $180,001 and over | $63,000 plus 45% for every $1 over $180,001 |
- An additional 2% temporary budget repair levy is applied to any earnings over $180,000 up until July 2017.
Other Taxes in Australia
Capital Gains Tax
Capital gains tax in Australia is taxed as earned income and therefore subject to income tax rates. Please refer the income tax table above.
Inheritance tax
There is no Inheritance tax in Australia. However, these assets may be subject to capital gains tax.
Company tax
Company tax rate is 30%.
5% for small businesses – less than $2 million in turnover annually.
Prior year losses can be offset against current year profits providing the company passes the same owner test.
Goods and Services Tax (VAT)
VAT is taxed at 10% on most goods and services
Taxation on UK Pensions
UK pension income is taxed as earned income for Australian residents plus the ‘Budget repair levy’ and ‘Medicare levy’ if the income is greater than $180,000 in any given year. Australia has a double taxation agreement (DTA) with the UK which states that UK annuities and pensions shall only be taxed in Australia. It is your job to reclaim the tax with HMRC every year.
Temporary residents and non-residents for tax purposes would not be taxed on foreign pension sourced income even if remitted to Australia.
Lump Sums are treated differently in Australia. People have the misconception that because 25% pension commencement lump sums are tax-free from the UK, it´s treated the same in Australia. The lump sum will be paid tax-free if paid within 6 months of becoming a resident in Australia. If you have been tax resident for longer than 6 months then the 25% lump sum will be taxed at your marginal rate.
QROPS Australia
All 1,650 Australian QROPS were delisted in April 2015 apart from one remaining government QROPS that is open for public service pensions, such as armed forces. The reason for this is the difference in pension rules between HMRC and ATO. In Australia, you can access your pension before the age of 55 if you’re in financial hardship whereas in the UK you can’t. This meant a lot of people were accessing their UK pension in Australia before the age of 55 which doesn’t comply with QROPS requirements.
Since the rules changed, there have been a few public QROPS schemes that have come to market with the most popular solution being a self-managed-super-fund (SMSF). SMSF may not be suitable for everybody as it requires you to manage the investments yourself. You also need to request a trust deed from HMRC to gain ROPS status along with potentially high set up fees including accounting, auditing, transactional and annual fees. The implications of an SMSF are as follows:
- Can only transfer into an SMSF if you’re over 55.
- You can only transfer $100,000 of non-concessional contributions per annum. It is possible for a member under the age of 65 to bring forward up to 3 year’s worth of non-concessional contributions in one year – allowing a contribution of up to $300,000.
- From age 65 – 74 you can contribute if you meet the work test. The ‘work test’ requires a person to have been gainfully employed for at least 40 hours in a period of not more than 30 consecutive days in a financial year. Gainfully employed means employed or self-employed for gain or reward in any business, trade or profession.
- Lifetime allowance of $1.6m
- Taxed annually at 15% until the age of 60.
- Tax-free growth and withdrawals over the age of 60.
- Can incur high costs
Non-Australian SIPP
Apart from Australia and New Zealand, most other countries worldwide use SIPPs that are based in the UK but available to international expats. We recommend independent financial advisers who can advise over 105 different countries that use the jurisdictions mentioned above. The benefits of a SIPP are as follows:
- Can transfer between the ages of 18 to 75.
- Lifetime allowance of £1m which does not affect the lifetime allowance in Australia.
- Funds grow tax-free.
- Taxed at a marginal rate in Australia.
- You will be entitled to a 25% lump sum from the age of 55.
- You will be able to withdraw from your pension via drawdown or Flexi-access.
- You can withdraw 100% of your pension from age 55.
- Much greater investment choice.
- Have your pension denominated in any major worldwide currency.
- You will be subject to any UK pension legislation changes.
- UK pension death tax applies to UK pensions regardless of where you are resident. This means if you die after the age of 75, your pension will be taxed at your beneficiary’s marginal rate on receipt up to 45%. This may also be claimed back from HMRC.
Income tax for SIPPs is taxed the same way as UK pensions, although certain SIPP providers will allow you to transfer your funds to Australia in the future which means you can withdraw your funds free of tax providing you are over 60 and retired.
Transfers affected by the overseas transfer charge
It is important to note that not all QROPS pension transfers will be subject to the new overseas transfer charge.
However, if you request a transfer on or after the 9th March 2017 AND any of the following criteria apply to you, you will be required to pay 25% of the value of the transfer in advance:
- You (the member) have not provided all the required information before the transfer is complete
- If you requested your pension transfer before 9th March 2017, but not completed and the funds are then sent to a different QROPS which was not the scheme included in the original request.
- When the transfer was requested you were either transferring your pension to a QROPS in your country of residence, or you were a tax resident in the EEA and transferring to a QROPS also in the EEA, however, within five years of the transfer your circumstances change such that you no longer meet the above criteria. For example, if you move outside the EEA or transfer your QROPS funds away from your country of residence.
Transfers not affected by the overseas transfer charges
If the following criteria apply to you, you will not be subject to the overseas transfer charge:
- Your pension transfer is to a QROPS in the EEA and you are a tax resident in Australia.
- Your pension transfer is to a pension scheme in your country of residence (eg. if you are a tax resident in Australia and you transfer your pension to an Australian QROPS)
- Transfers which are subject to unauthorised payments because they are not recognised transfers
- You are a former employee of an international organisation that has set up a QROPS specifically to provide benefits for former employees
- You are transferring to a QROPS which is an overseas public service pension scheme you are employed by an organisation participating in that pension scheme.
- You are an employee of an organisation sponsoring an occupational pension which qualifies as a QROPS
*Please note: The information provided is general information based on our understanding of the current Australian tax legislation as of June 2016. Should any of the information be inaccurate or misleading, we take no responsibility for any reliance placed on it. We recommend that individuals always seek specialist advice before making any decisions.
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