As we live in a more globalised economy, the chances of us being offered a job opportunity overseas is as high as ever. One could be forgiven if in the excitement of trying to climb the corporate ladder offshore, we embraced such change without too much thought about tax planning. At first glance the country offering the new role may even have lower tax rates. You need to carefully consider many factors regarding your tax residency. Decisions that are made as early on as negotiating the length of the job contract, could have lasting ramifications on one’s tax paying situation.
An easy misconception to make is that because one may spend the clear majority of the tax year in a different country with lower tax rates, they will enjoy the benefits of the lower tax environment? The rules are not always black and white. Whether one is considered an Australian or foreign resident for tax purposes can often come down to their intention and behaviours One of the tests used is the resides test.
What is the resides test?
The resides test is used to determine whether you reside in Australia according to the ordinary meaning of the word. There are several aspects to the resides test. Among many factors the ATO will consider in determining where you reside include:
- intention or purpose of presence
- family and business/employment ties
- maintenance and location of assets
- social and living arrangements
It is possible that you could spend more than a year working in different countries, yet your intentions and behaviour are deemed to still consider you an Australian resident for taxation purposes. It is even possible to have dual residency, and be considered a resident for taxation purposes in more than one country at the same time.
Why is it so important?
The determination of your tax residency can have a significant bearing on your after-tax income. Some workers will be better off by being able to keep their Australian tax residency whilst accepting certain job contracts overseas, and others better off by being able to be classified as a foreign resident.
Individual tax rates vary considerably depending on the ATO’s classification of an Australian resident or foreign resident. An Australian resident must also pay tax on foreign income. However, if you have paid tax overseas, you may be able to claim a foreign income tax offset for the tax already paidA foreign resident may potentially experience lower tax rates on their salary offshore, this could also apply to the rates on capital gains. Capital gains taxes are potentially an area that can deliver large one off bills, and the rules differ depending on your tax residency status. It is also possible that a tax offset may be available for this too.
All these factors mentioned above and many more, are reasons why specific financial and taxation advice for one’s own circumstances can be crucial before accepting an overseas job opportunity.