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Investment Taxation for Expats in Australia

Submitted: April 2014

Taxable income in this category includes:

  • interest from bank and building society deposits
  • interest from government and corporate stocks (bonds)
  • rental income from properties both in Australia and abroad
  • dividends
  • capital gains, and
  • pensions.

Interest

Interest income in Australia is taxed with all your other income at the marginal rate. No tax is deducted at source, provided you have supplied the bank with your Tax File Number (TFN). If you do not provide them with your TFN they will automatically deduct tax at the highest marginal rate (currently 45%). For information on how to obtain a TFN see Taxation - Employment Taxation for Expats in Australia. If you are a resident you will also have to pay tax on interest from outside Australia, and may be subject to withholding taxes in the country of origin; though these may be reduced by a relevant tax treaty. 

Rental income

Rental income is taxed as income and must be reported on your tax return. The taxable amount of rental income is calculated after deducting expenses/costs from the gross rental income. The range of expenses/costs that can be deducted is very generous in Australia; a full list can be found here. If you are a resident you will also have to pay tax on rental income from outside Australia and may be subject to withholding taxes in the country of origin; though these may be reduced by a relevant tax treaty. 

Dividends

Dividends are paid out of corporate earnings that may already have been taxed at the company level. To stop company earnings being taxed twice in Australia, most dividends have a franking credit attached to them. This reflects the amount of tax the company has already paid, these are called franked dividends. If a company pays dividends without a franking credit (unfranked dividends), it means that the earnings were not taxed at company level, so shareholders are liable for tax on that amount.

For tax residents, any franking credits are reported in the annual tax return, together with the actual amounts of dividends received, (so it makes the amount of the dividends larger), then you pay income tax on the larger amount. Unfranked dividends are taxed at your marginal rate. It is important that the company paying the dividends has your TFN, otherwise they will deduct tax at the highest marginal rate (currently 45%).

For non-residents, there is no income or withholding tax payable on franked dividends, but you cannot use the franking credits against other Australian income. So you do not include franked dividends or franking credits on your tax return. Withholding tax is deducted by companies on unfranked dividends for non-residents at a rate of 30% unless your home country has a suitable tax treaty with Australia, in which case the rate is generally reduced to 15%. However some Australian companies pay part of their dividends out of profits earned overseas, in which case the company will not apply withholding tax to that proportion of the dividend.

As an expat investing in shares for income purposes, it is important to be aware of these differences as they can alter the actual yield you will receive on your shareholding. There is more information regarding tax on dividends for residents and non-residents here.   

Capital gains

Capital gains are taxed as income and must be reported on your tax return.

For Australian tax residents, if you hold a taxable asset for longer than 12 months you will only pay tax on 50% of the gain. When you become a resident, the cost of assets bought prior to residency is recalculated to the current market value on that date. This does not apply to real estate.

For non-residents capital gains tax is only payable on Australian property acquired after 19 September 1985. Taxable property is mainly real property (houses, land etc), but includes mining and quarrying property and prospecting rights. Non-residents are no longer entitled to the 50% discount, unless the property was valued as at 7 May 2012, in which case they are entitled to the discount on the gain up to that date only.

If you stop being a resident, you are deemed to have disposed of your assets at the current market value at that date, and may be liable for capital gains tax. The rules are complex, and different rules apply depending on your residency status at the time; there is more information available here and here.

Pensions

Pension payments are taxed as income, and must be reported on your tax return. If you are a non-resident, you will only be liable for tax on a non-Australian pension in the country of origin. You can transfer a pension fund of up to $450,000 into Australia without paying any tax, though there are conditions. If you are a resident claiming a foreign state pension, and there is there is a suitable tax treaty between Australia and the country in which your pension is situated, you may only have to pay tax in Australia on your foreign pension income.

 

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