Understanding Foreign Resident Tax in Australia

Written by Julie Jung & Dylan Sinclair

Australia's tax system is structured to accommodate both its citizens and foreign residents. Understanding how foreign resident tax works in Australia is crucial for anyone living in the country temporarily or investing from abroad. This article provides an overview of the key aspects of the tax obligations and benefits that apply to foreign residents in Australia.

Who is Considered a Foreign Resident for Tax Purposes?

In Australia, the Australian Taxation Office (ATO) determines tax residency based on several factors, including physical presence, intention, and the duration of stay. Generally, you are considered an Australian resident for tax purposes if you live in Australia and your stay exceeds six months, whether continuously or with intermittently, although there are exceptions based on the specific circumstances of your stay.

Conversely, a foreign resident, or non-resident, is someone who resides outside of Australia or does not meet the residency criteria. This classification is vital as it dictates the tax rates and obligations that apply.

Tax Obligations for Foreign Residents

Foreign residents in Australia are subject to different tax rules compared to residents. Some of the main differences include:

1. Higher Tax Rates: Foreign residents do not benefit from the tax-free threshold that Australian residents enjoy. This means they pay tax on every dollar of income they earn in Australia, starting from the first dollar. The income tax rates for foreign residents are also higher than those for residents. Please see table below indicating the foreign resident tax rates for the 2024-25 financial year.

2. Taxable Income: Foreign residents are only taxed on their Australian-sourced income. This includes wages from employment, rental income from properties, and any Australian-based business income. Income earned outside of Australia is generally not subject to Australian tax.

3. Capital Gains Tax (CGT): Foreign residents are subject to capital gains tax on the sale of taxable Australian property. This includes:

  • Australian real property such as a house, apartment, commercial building, or land.

  • Indirect interest in Australian real property.

  • A business asset that you have used to carry on a business through a permanent establishment in Australia.

  • An option or right over any of the above (such as an off-the-plan contract)

However, Foreign Residents are not entitled to the 50% CGT discount that Australian residents can claim on assets held for more than 12 months.

4. Withholding Tax: For certain types of income, such as interest, dividends, and royalties, foreign residents are subject to withholding tax. The rate of withholding tax varies depending on the type of income and the country of residence of the taxpayer, as governed by Australia's tax treaties.

5. Superannuation: The law requires employers, who are Australia residents, to provide super guarantee/contributions for their employees regardless of their employees’ residency. When they leave Australia, they can claim their superannuation as a Departing Australia Superannuation Payment (DASP), which is taxed at a rate of 65%.

Benefits of Tax Treaties

Australia has tax treaties with many countries to avoid double taxation and prevent tax evasion. These treaties can benefit foreign residents by reducing the amount of tax they pay on certain types of income. For example, under some treaties, the withholding tax on dividends or interest may be reduced, making investments in Australia more attractive.

Foreign residents should check whether their country of residence has a tax treaty with Australia and understand the implications of this treaty on their tax obligations.

Tax Compliance for Foreign Residents

It’s essential for foreign residents to comply with Australian tax laws. This includes:

  • Filing a Tax Return: Foreign residents must lodge an annual tax return with the ATO if they have Australian-sourced income. The tax return will detail all income earned in Australia and the amount of tax paid or owed.

  • Keeping Records: Accurate record-keeping is essential for tax purposes, particularly for those earning rental or business income in Australia. Keeping track of income and expenses will help ensure accurate reporting and potentially reduce tax liability.

  • Seeking Professional Advice: Given the complexities of international tax law, foreign residents should consider seeking advice from a tax professional with experience in Australian taxation. This can help in maximising tax benefits and ensuring compliance with local regulations.

Recent Changes and Considerations

The Australian government periodically updates tax laws and regulations, which can affect foreign residents. Staying informed about these changes is crucial for maintaining compliance and optimising tax strategies.

Navigating the tax landscape as a foreign resident in Australia requires a solid understanding of the rules and regulations that apply to non-residents. While the tax obligations for foreign residents can be more stringent, understanding these rules, leveraging tax treaties, and seeking professional advice can help mitigate tax liability and ensure compliance. Whether you are working, investing, or living temporarily in Australia, being proactive about your tax responsibilities is essential for avoiding penalties and making the most of your financial situation. Contact our team of Accountants at Salt Financial Group, in order to ensure you stay compliant and up to date with your tax needs. 

Jenni Anderson