You’ve unfolded the large, clumsy map of Los Angeles. Could have just googled it but, hey, there’s something about running your finger over the spaghetti like tangle of freeways and mythical boulevards – Santa Monica, Ventura, San Bernardino, Sunset, Hollywood – that sends a thrill though your bones.
You’ve angled the blinds just so. The Qantas ticket sits snug between the pages of your much thumbed copy of Raymond Chandler’s Collected Stories. Your E-3 visa is all set to go. The old-fashioned glass beams gold with bourbon.
Before you trade the land down under for La La Land and head for that plum job in America, you should consider your tax situation. Here are some important things you should pay attention to.
To be or not to be… an Australian resident
The first question you should ask yourself is the following. Will you remain an Australian resident for tax purposes during your time of your employment in LA or will you become a foreign resident instead?
The matter is more complicated that it may seem at first glance. The Australian Taxation Office has designed a four tiered test and built an extensive portfolio of possible scenarios to enable the determination of a person’s permanent dwelling place. Even then, some situations will ultimately require the assessment of the Commissioner.
If you are planning an extended stay in the US, say of two or more years, chances are you will no longer qualify as an Australian resident.
In the simplest of case, the move is permanent, the Melbourne house is sold, it is hooroo mates, and the individual becomes a non-resident for tax purposes. The outcome is then given: You will only need to lodge a return if you still have income from Australian sources.
Note that this excludes any income you may still earn from which the non-resident withholding tax has already been deducted, such as bank interest. And all dividends or royalties derived from Australian sources would be subject to withholding tax provisions and treated as a final tax. As a non-resident, you will also no longer be required to pay the Medicare levy.
More often though, the stay overseas is limited in duration, perhaps lasting just the time needed for you to decide that, crikey, you hate L.A. after all. In this case, you have remained a resident of Australia and must declare all of your US income, including both assessable income and exempt foreign employment income. You must do so even if you paid taxes to the US government on the money you made in America.
However, if you actually paid tax to the IRS, or are deemed to have done so, you may be entitled to the Australian foreign income tax offset. This offset is meant to alleviate some, if rarely all, of the financial hurt that comes with double taxation.
How the foreign income tax offset works
The key thing to understand about the foreign income tax offset is that it is subject to a limit above $1000 threshold of offset. This means that while the Government is perfectly willing to refund you the first $1000 of tax that you paid to a foreign taxation office, it gets stingy above that amount. In other words, if you forked out, say, $4000 in taxes to the IRS in the US you should not expect to get the entirety of that amount back once you’re back home.
Here’s how it works. The tax offset limit is derived from a comparison of your actual tax liability and the liability you would be left with if the foreign sourced income, along with any deductions you may have benefited from, were disregarded.
Therefore, let’s say the tax you owe on your total assessable income, combining both foreign and local earnings, is $4000. Now, assume the tax owed solely on the Australian part of your income is $2500. This means that your tax offset is limited to $1500, which the difference your overall tax and the tax on your local income. So, even if what you paid in taxes to the IRS is more than $1500 this is all you’ll get back from the ATO.
Note that any foreign tax paid based on your net income is grossed up, meaning that it is added back to the income so as to determine your effective assessable income. Furthermore, all foreign income is taxed at the regular marginal rates.
Other things to watch for
If your employer during your stay abroad was an Australian firm, it may have provided you with a Living Away From Home Allowance (LAFHA) to compensate you for the inconvenience or some of the extraneous costs from living and performing your duties in a foreign place. Some of these allowances are subject to fringe benefit tax. As such, the amount of the allowance is not included in your assessable income.
However, if you were paid a lump sum payment by your employer on termination of your overseas work or contract, this payment may be subject to tax. And even if it isn’t, the ATO may choose to consider when figuring out the tax you owe.
Finally, to avoid having to make payments both to super in Australia and to social security in the foreign country where you will be employed, make sure to check and see if Australia and the country in question are subject to a bilateral agreement.
What if your residency status changes
Were you become a foreign resident in the middle of a given financial year, you should still answer “yes’ to the question inquiring as to your Australian residence status for tax purposes. This is because you would benefit from being taxed at the resident rate. Under the circumstances, your tax free threshold would be adjusted and your tax liability prorated to reflect the time you were an Australian resident.
You should also consider the fact that there is a substantial taxation advantage to leaving Australia for overseas work with more than 90 days left on the financial year’s calendar but less than 6 months.
This is just a cursory look at the many issues involved. Each individual picture is subtly different. Well before you jump on that plane, we urge you to seek the advice of a tax professional to go other your particular situation. Think about it: you’ll be able to enjoy that gimlet with your mind at ease.
