Income tax
Foreign resident
A foreign resident for tax purposes is someone who does not meet the Australian residency tests, and is generally taxed only on Australian-sourced income at different rates, with no tax-free threshold.
A foreign resident for tax purposes is a person who does not satisfy any of the residency tests. They may be a temporary visitor, someone who has left Australia permanently, or an Australian citizen who now lives overseas. The label depends on the tax tests and not on nationality, so an Australian citizen living abroad can be a foreign resident for tax.
The main differences from residents lie in how income is taxed. Foreign residents are generally taxed only on income sourced in Australia, whereas residents are taxed on worldwide income. They are taxed under a separate rate scale, which does not include a tax-free threshold, so tax applies from the first dollar of Australian income. They generally do not pay the Medicare levy.
Foreign residents also face restrictions on certain concessions. They generally cannot use the CGT discount on gains accrued while they were foreign residents, and have been limited in using the main residence exemption. Special rules also apply to Australian real property sales, where a withholding amount may be taken from the purchase price when a foreign resident sells.
Tax is often withheld at source. Payments such as dividends, interest and royalties paid to foreign residents may be subject to a final withholding tax, and Australian employers withhold from wages using foreign resident rates. In many cases the withholding is the final tax, and the person may not need to lodge a return, although they may choose to do so in some circumstances.
Becoming a foreign resident can trigger a CGT event on certain assets, because the law treats the person as having sold them at market value just before they leave, unless they choose to defer. This is a significant issue for people moving overseas with large share portfolios or other investments, and professional advice is often worthwhile before leaving.
Foreign residents can still register for GST if they carry on an enterprise in Australia, and non-resident businesses may have GST obligations separate from their income tax status. Do not mix up income tax residency with GST concepts. This is general information only, so confirm your status and obligations with the ATO or a registered tax professional.
Worked example
Claire, an Australian citizen, moves overseas permanently and becomes a foreign resident for tax. She keeps a rental property in Melbourne and earns $30,000 in rent in a year. The rent is Australian-sourced income, so it is taxable in Australia, but she uses the foreign resident rates with no tax-free threshold, so tax applies from the first dollar of that income.
Practical tips
- Check your tax residency before and after moving overseas, since citizenship does not decide it.
- Get advice before leaving if you own shares or other assets, as ceasing to be a resident can trigger a CGT event.
- Remember foreign residents have no tax-free threshold and generally lose access to the CGT discount for gains while non-resident.