LAFHA Australia - Going to live and work overseas?
Going overseas to make your fortune? Are you classified as a resident or a non resident? If you are a resident you’ll still have to pay tax here – even if you’re paying there. If you are a non resident you only pay tax over there. So what makes you a resident or a non resident for tax purposes?
Whether you are a resident or not is a big issue especially if you are going overseas to make your fortune and you think it could be severely diminished by your income being taxed in two jurisdictions. Read what happens for Australians who go overseas and are classified as residents and those who go overseas and are classified as non residents.
If you are classified as a resident of Australia while you are overseas you have to pay tax on all income earned no matter where it comes from even if this income has been taxed by another country. The ATO expects you to lodge your tax return annually just like anybody else living in Australia. If you have paid tax in another country you are entitled to a credit for income tax that you have paid in other jurisdictions with which Australia has a double taxation agreement. Check out countries with double tax agreements.
What happens to your Australian investments while you are away?
If they earn income then you have to declare the income along with any other income you make from investments anywhere.
This raises the question of a capital gain. The same taxation rules apply whether you sell a property that you own in Timbuktu and make a capital gain or if you make a capital gain on a property you’ve sold in Bondi. So make sure you keep all the details of all income, all losses and of course all expenses incurred when you sell anything and make a capital gain.
Of course you need to know the conversion rate into Australian dollars. If the money has gone through your credit card or been transferred to an Australia bank that is the rate applicable for your tax return. If however you don’t know the rate to apply, the ATO has rates available on their web site.
Tax Management of Living Away From Home Allowances
Australian expats who are transferred by companies to another country are entitled to a “living away from home allowance”. A foreign company can also pay this wonderful “LAFHA” to Australians they transfer overseas.
What is LAFHA? How much is LAFHA? And what can it do for you?
LAFHA is an allowance intended to bring you up to the standard of living you would have had at home,
Here’s how it works. Currently the Australian Taxation Office allows $206 for food for an adult. While this might not seem much, the tax system also allows a ‘reasonable’ allowance for rent for those who have relocated.
The question is - what is reasonable?
The Australian Taxation Office does not stipulate what is reasonable but it is an allowance which would provide an equivalent standard to the accommodation the expat would have at home.
Provided the employer takes off $42 from the food allowance per week and gives the employee $164 instead of $206 for food, and provides a rental allowance that is ‘reasonable’, the living away from home allowance is not taxed when given to the employee and, importantly, costs your employer nothing extra.
In other words no fringe benefits tax for the employer.
This is a real plus. You get the money weekly from LAFHA in your pay packet without it being taxed. So unless the amount for rent is ‘unreasonable’ there would be no tax to pay by an employer if the employer is Australian.
This makes LAFHA a win/win both for the employer and the employee. If you are going overseas and remaining an Australian resident why wouldn’t you ask your employer to go that route and give you LAFHA?
If you need assistance with LAFHA or your employer does not understand how to implement LAFHA contact support@easytax.com.au and we will be delighted to help.
Am I a resident for tax purposes?
The big question for Australians going overseas is “Am I a resident for tax purposes?” Expats often say “I’m not there any more. I don’t cost the country any money now so why should I pay tax?” So if you are one of those people who are leaving Australia “permanently” or “semi permanently” and who are then considered non residents there is no tax to pay on you overseas earnings outside of Australia in any Australian Tax return.
I can understand why people who go to live elsewhere in such places as Hong Kong, where income tax has dropped to 15% might prefer to pay Hong Kong tax and become non residents of Australia.
Legislation brought in on 12th December, 2006 means you have to watch out about one thing, going overseas permanently and declaring yourself a non resident will crystallize a capital gain on Australian shares but very fortunately the act of becoming an ex-patriot does not trigger a capital gain on your real estate.
I should say this again because it is so important. Becoming a non resident for income tax purposes does not trigger a capital gain on your home or other property (real estate) held in Australia. If you sell an investment property of course it triggers a capital gain but here we are only talking about changing your residency status. If you’re confused about this and worried about your home being taxed and subject to capital gains contact us and we can explain it better for you.
For the non resident, interest earned on money left in Australia is taxed at source at 10% and dividends are taxed also at source at 15%. As you probably know company tax is 30% so that means that tax on dividends for non residents is half.
I have often been asked if Australian ex-patriots who are non residents need to lodge a tax return and the answer is “yes” if you earn income from any source in Australia other than interest and shares you need to lodge a tax return.
Ex-patriots who are classed as non residents need to declare income earned from any business or investment activity in Australia. Naturally this includes real estate. If you own real estate which you rent out in Australia you have to continue to lodge an annual tax return.
Make sure you let your bank know that you are going overseas so they take off 10% for tax on interest earned. That is certainly better than being taxed at the top marginal rate of tax if you don’t provide your tax file number! Same with dividends - I would suggest you provide the company who pays you dividends with your overseas address so that you are only taxed at 15% and not 30%.
Even though the ATO has set out how a person is classified as a resident or non resident for income tax purposes it is still a contentious issue and subject to much litigation.
Whether you are a resident for Australian Taxation purposes or not at Easy Tax we can help you do your Australian taxation returns.
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Take advantage of our free* initial accounting and tax consultation during which we will help you to refine your needs and consider an accounting and taxation plan for you or your small business going forward… make an online enquiry today or call us on +61 2 9419 5322 and let us help you solve your accounting or tax problems .