Australia levies income tax on taxable income. Taxable income is arrived at via a very simple mathematical equation. Taxable income is equal to assessable income less allowable deductions. That’s where the simplicity ends unfortunately.
For an Australian resident, assessable income includes income derived directly or indirectly from all sources, whether in or out of Australia during the income year. To make it easy, people will often say something like “an Australian resident is taxed on world-wide income”.
The first point to note is the time difference. Not the three hours between Sydney and Bangkok or four when daylight savings comes into effect. It’s the different “income year”. The Australian tax year is from 1 July to 30 June. The Thai tax year is from 1 January to 31 December. This can sometimes cause difficulty in matching up Thai tax payments for tax credit purposes in Australia. More on tax credits a little later. However it is a difficulty that is relatively easy to overcome. We think the major point here is that without prompting, it might be easy to miss the filing deadline for an Australian tax return. Especially if you
aren’t odd enough to have “liked” the ATO Facebook page and get the alerts. That deadline is 31 October each year. However, if by that time you are “put on” the client list of a registered tax agent then you will get an extension till the 31st of March. Almost always, that deadline is further extended to the middle of May. To get “put on” that list is a straightforward process undertaken by the tax agent via the secure tax agent portal. Some details are entered and the button ‘add to client list’ clicked.
The mechanics of preparing a tax return, if you remain a resident, are the same as you will have been doing for all the years leading up to you leaving. There will be some technical issues. Income earned overseas will have to be translated into Australian dollars. There are some concessions in this regard where average rates can be used to make it easier (although not necessarily more favourable) for a taxpayer.
The major ticket item for expats, especially in the relatively low tax regions, is salary and wages. For residents, salary earned overseas is included as assessable income, translated into Australian dollars. It can be translated at rates on the date paid or average monthly rates can be used in some circumstances.
One difference from the ‘old days’ is that salary will appear on the tax return as foreign source income rather than in the salary and wages box. However the practical effect will be the same in nearly all respects. That is, you will pay tax on it to the ATO.
A tax credit, in almost all cases, will be given by Australia for any tax paid in the country where the salary is earned. Therefore it is advisable to keep accurate records of income taxes paid in the country of employment to substantiate (prove) a claim for foreign tax credits. In fact, even if you do not consider yourself a resident and don’t include salary in an Australian tax return each year you will be well advised to keep those records if possible. Remember there is always the chance that the ATO takes a different view on your residency status and assesses you at a later stage on your salary. If you can substantiate a claim for foreign tax credits in those circumstances, you will go a long way toward dulling the blow.
You will also be able to claim deductions for expenses you incur “in” gaining or producing your salary. We highlight the word “in” because in tax talk that is an absolutely critical word and there are chapters in books written about it. You don’t have to read them, thankfully. You can ask someone who has. What you should do is maintain records of the expenses that you incur which you think you wouldn’t incur were you not doing the job that you are doing. Let your tax agent (if you are using one) know about them and allow the tax agent to explore further to make sure of deductibility.
For an expat, the kinds of things that will be tax deductible are: professional memberships, courses for CPE, travel to those courses, accommodation at those courses, food at those courses if an overnight stay is required, depreciation on computers (less the extent of private use), depreciation on mobile phones (less the extent of private use), business phone calls, donations to Australian charities, books, journal subscriptions, fees paid to a registered tax agent for preparing a tax return or obtaining tax advice in relation to your changing circumstances. Bear in mind that the ATO is alive to the fact that many things, like courses, will be paid for by an employer in which case they can’t be claimed. There must also be a very strong and direct relationship between the expenses and the employment activity. But the positive in all this is that you will already be familiar with these issues from your time in Australia and the same rules will apply. Don’t forget you can claim a deduction for income protection insurance premiums as well.
There is an interesting difference to note here between the Australian and the Thai tax systems and it is worth keeping in mind. The Thai tax system only allows you to claim a standard deduction against salary income. The deduction is 40% of gross income but limited to 60,000 baht. For any salary over 150,000 baht per year then the maximum deduction of 60,000 will apply. For expats whose salary is above that amount it would be tempting not to bother to keep records and receipts of actual expenses incurred because they can’t be claimed in Thailand.
Australia doesn’t limit the amount of deductions that can be claimed against salary income so long as the expense meets the primary test of deductibility and doesn’t fall into one of the categories for which a deduction is denied. The general categories of expenses which are denied deductibility are those that are private in nature (like medical expenses or housing costs) and capital items which are, basically, ‘big’ things like equipment and investments. So if you are a member of two or three professional bodies, attend two or three CPE courses that are directly related to your work, buy a book or two and you are not reimbursed for any of it by your employer then you will be over the 60,000 baht limit for Thai tax purposes. But you can still claim them on your Australian tax return and you should because that might reduce any tax liability that you have back there.
The treatment of investment income – for example, from bank accounts, shares or investment properties – will continue to be treated in the same way as they were before. Franking credits from shares will still be included in assessable income and allowed as a credit against any ultimate tax liability and be refundable to you if the credits are greater than the ultimate tax liability. Interest on any bank accounts will still be assessable on your return including any interest you may receive from the local bank into which your salary is paid.
If you are part of the ‘negative gearing fraternity’, where the total of your deductible expenses such as loan interest is greater than the income from your investments like shares or property, then your negative gearing losses are still available to you as a deduction to reduce the ultimate tax liability that you would have on your salary. That’s a benefit of being from the ‘lucky country’ by the way. Australia, Japan and New Zealand are the only countries that allow an investment rental property loss to be deducted against other income at a personal level. Thailand, for example, does not. The UK uses a ‘carry the loss forward until you have profits to offset it against’ approach.
However, there is quite a substantial change that will occur for you here. Residents who have had PAYG tax withheld from their salary will often have had more PAYG withheld than their ultimate tax liability. That is because the PAYG withholding rates usually do not take account of the negative gearing loss on a property. An application can be made to reduce the PAYG withholding however many people don’t make that application because they see it as a forced saving and enjoy getting the refund when they lodge their tax return. But an excess of foreign withholding tax credits over the ultimate tax liability is not refundable. Put it this way, Australia is not going to refund you money that you have paid to the Thai Revenue Department. In some cases it won’t matter because the generally lower tax rate in Thailand will mean you will still have a tax liability in Australia even with the negative gearing losses taken into account. It all depends on your situation. The higher your salary, the more likely you are to still have tax to pay and the greater the tax benefit of the losses will be. The tax rates in Australia at high salary levels are higher than they are in Thailand. And certainly higher than if you are somewhere like Hong Kong or Singapore. Be very careful if you are in Hong Kong by the way. Australia does not have a Double Taxation Agreement with Hong Kong which means there is no tie breaker test to help in the situations where both Australia and Hong Kong considers you to be a tax resident of their country.
Renting out your previous home
If you weren’t part of the negative fraternity before you left, you might be now. Did you own the home you lived in while in Australia? Do you still own it? Is it rented out? Do you have a mortgage? Is the rental income more than the total of: interest on the mortgage, council rates, body corporate fees if it was an apartment, repairs, agent fees and insurance? No? You are part of the negative gearing fraternity. Yes? Congratulations. You have an investment that makes you money rather than loses you money. Bottom line is that you will have to work out the “net rent” from your old home and include it in the tax return. By the way, about 1.8 million tax returns are lodged showing investment property income. Of those, about two thirds show losses. Hopefully they will be made up with a combination of tax breaks and concessionally taxed capital gains at some time in the future.
Point of note here. One thing you should do if you are now the owner of an “investment property” is get a quantity surveyor to go out and give you a report on all the items in the property that would qualify for depreciation deductions. For a one off, relatively small and fully tax deductible fee, you could save quite a bit of tax each year. In fact, if you search hard enough on the web, you will find companies that do QS reports and won’t even charge you for it unless the value of the depreciation deductions in the first year is greater than their fee.
As a resident you will be assessed on all capital gains that you make. In general terms you make a capital gain when you sell an investment for more than you paid for it, whether it be from selling real estate, shares, possibly artwork, fancy cars or almost all other investments.
The positive thing about being a resident with respect to capital gains is that the 50% discount still applies to you. That means that if you have owned the asset for more than 12 months (actually 12 months and two days cause the day of purchase and the day of sale are disregarded) then you only include 50% of the gain for tax purposes. So make sure you have your records in order to show what you paid for your assets including associated costs like brokerage fees for share purchases. Property purchases tend to have more associated costs than share purchases. The phrase in the law is actually ‘incidental costs’. They must be in relation to either buying the property or, indeed, selling it. There are actually nine categories of incidental costs. They include payments for services from a lawyer, surveyor, valuer and agent. They also include stamp duty paid on purchase, advertising expenses to find a buyer (or seller), search fees, loan application fees and mortgage discharge fees.
The record keeping requirements to substantiate a capital gain calculation are actually extremely onerous. More onerous than the ordinary tax record keeping requirements. Keeping these records can be difficult especially if you are moving around. An option here is to maintain a CGT asset register. Creating and maintaining a CGT asset register relieves this burden substantially. The register must be created using the original CGT records and be certified by an approved person such as registered tax agent.
If the asset in question was your main residence when you left then you have some interesting opportunities. The first is that if you haven’t rented it out then you can sell it and not pay any tax on any capital gain. You need to be careful here because if you take that option then you can’t claim any other property as the main residence for the same period. If you have been renting whilst overseas, as most of us do, then that restriction isn’t relevant. If you have rented your old home out then you can sell it within six years and still not pay any tax on any capital gain. Again, you can’t claim any other property to be your main residence over the same period. These options are definitely worth considering. The Australian Government recently removed the 50% CGT concession for non-residents. More on that next month but if you become a non-resident in the future, and you sell the property after that time and it is not exempt under one of the options described above, then the 50% CGT discount will not apply. Tax issues should never drive an investment decision. Neither on the buy side nor the sell side. However, selling an asset tax free as opposed to when it becomes fully taxable is a legitimate consideration in any investment decision. Just don’t get caught selling an asset you think is tax free asset when it is actually taxable. Or vice versa.
Given that you can’t know in advance what will happen with your old home if you do still own it, one thing you should do is get some valuations. Not by the bank. By registered valuers. A reputable real estate agent at a minimum. The reason for that is that any capital gain on your main residence that might be subject to tax will be calculated using a cost that will equal the MARKET VALUE of the property at the time it stopped being your main residence. That way, any gain between when you actually moved in and moved out is quarantined as tax free. Only the gain that accrues from after you moved out will be captured as possibly taxable. Clear as mud? Call in for a coffee and let us scribble on paper and draw some timelines and we can work it out for you. If you get more than one valuation and they are all ‘reasonable’ then you will be entitled to use the highest one which will minimise any taxable gain.
Residency is fluid
Don’t forget that your residency status can change. The longer you stay away the more likely you are to become a foreign resident. It is less likely that you will be considered to be ordinarily residing in Australia and more likely that your new place of abode will be seen as permanent. Remember, the ATO has a rule of thumb two year period for which you have to be away in order to be considered for foreign residency status. But there are several cases where people who stayed away for much longer remained Australian residents for tax purposes. And one or two who stayed away for less were considered non-residents. So residency is not ‘set and forget’. It should continually be monitored, at least until that point in time where you can consider yourself a foreign resident.
Next month we will discuss why, from a capital gains tax perspective, the exact date of change is quite critical and it could be good if it falls on a day when your ASX listed share portfolio is down in value.
If you remain a resident of Australia for tax purposes during your time working overseas then you will have undoubted tax obligations back in Australia. They might be pretty simple or they might be quite complicated. The more complicated they are, the more you are likely to benefit from advice from an Australian registered tax agent. Even expats with simple tax affairs can benefit from using an Australian registered tax agent to handle their tax return lodgement for them. Firstly, you get an extension of time to sort things out. Secondly, your only other option is to download eTax to your computer and try and work your way through that. I myself did that for a couple of years and even I will admit I found myself thinking “Man this is complicated. And I have a Masters degree in tax. How does the average punter get around this program?” Maybe it’s a computer literacy thing rather than a tax literacy thing. Whatever it is, if you don’t want to bother with it and you want some advice to make sure you are not overpaying the Australian government then feel free to contact us. Or call in for a coffee.
Stephen is an Australian registered tax agent with electronic lodgement service privileges with the ATO. As one of the few Australian tax agent based in the region, he is uniquely positioned, and very well qualified to provide expert taxation advice to Australian expats in Thailand and other countries in the region.
RSM Advisory (Thailand) Limited can advise clients on any Australian residency issues that they may be faced with and we welcome you to make on appointment and to call in for a coffee
Stephen Lawrence CA (Australia) TEP
BA MA(Psych) MCom MappTax