Thinking of migration to Australia? It’s a beautiful country, but have you considered the potential tax implications of migrating to Australia?

The purpose of this article is to provide you with an overview of the Australian tax system as it consists of a mixture of direct and indirect taxes levied by both the Commonwealth/Federal and State/Territory governments, depending on the type of tax.

Commonwealth/Federal taxes

Compared to Hong Kong, Australia’s tax laws are more complex and are also backed up by strong enforcement by the Australian Taxation Office (ATO). The ATO will apply large penalties for those who do not comply with their obligations in accordance with the Australian tax laws.

Unlike Hong Kong, the Federal Government has jurisdiction to tax Australian residents on income from worldwide sources and non-residents on only Australian sourced income. That being said, the Federal Government will not require you to pay Australian tax on most of your foreign income if you are regarded as a temporary resident.

In essence, temporary and non-residents only pay tax on their Australian sourced income and capital gains on assets that are taxable Australian property but with different tax rates applying to each classification.

When we refer to the term resident, we are referring to the concept of resident for tax purpose instead of the concept of resident for migration purpose.

Australian Tax Residency

Let’s take a look at the differences between the three tax residence classifications.

Under the Australian tax law, an individual who meets at least one of the following tests is considered as an Australian tax resident:

Resides test

This is the primary test of tax residency. If you reside in Australia, you are considered an Australian resident for tax purpose and you do not need to apply the remaining three residency tests.

On the other hand, if you do not satisfy the resides test, you will still be considered as an Australian resident if you satisfy one of the other three residency tests.

Some of the factors that the ATO will consider include:

• physical presence
• intention and purpose
• family
• business or employment ties
• maintenance and location of assets
• social and living arrangements

Domicile test

The domicile test is the second test to apply in ascertaining your tax residency. You are considered an Australian resident if your domicile (i.e. the place that is your permanent home) is in Australia, unless the ATO is satisfied that your permanent place of abode is outside of Australia.  A domicile can be by origin or by choice.

183-day test

If you failed to meet either the resides test or the domicile test, the ATO will apply this 183-day test. You will be considered as a resident under this test if you are actually present in Australia for more than half the income year, whether continuously or with breaks.

Superannuation test

For the sake of completeness, we will briefly mention this test but please note that this test only applies to Australian Government employees working at Australian posts overseas.

Who is considered a Temporary Tax Resident?

After the migration to Australia, it is most likely that you will easily satisfy the resides test, the domicile test or the 183-day test.

That being said, you may be treated as a temporary resident for tax purpose even if you are an Australian resident, provided that you satisfy the requirements of being a temporary resident.

You are considered to be a temporary resident if:

• You hold a temporary visa granted under the Migration Act 1958 (Cth)
• You are not an Australian resident within the meaning of the Social Security Act 1991 (Cth)
• Your spouse (if applicable) is not an Australian resident within the meaning of the Social Security Act 1991 (Cth)

Taxes on income and capital gains

Individuals are taxed on their taxable income by applying the progressive tax rates up to 45%. The formula for calculating the taxable income is:

Taxable income = Assessable income – Allowable Deductions

Assessable income is comprised of ordinary income (e.g. salary and wages, rental income and dividend income) and statutory income (e.g. net capital gains)

Allowable deductions are, broadly speaking, expenses that are incurred in earning the assessable income

Some of you may have noticed that we used the term net capital gains instead of just capital gains. This is because capital gains are required to be calculated separately according to the relevant capital gains rules before including in the assessable income.

The formula for calculating net capital gains is:

• Net capital gains = Capital gains – capital losses (if any) – CGT discount (if any)
• Capital gains is equal to the capital proceed less the cost base
• Capital losses are, generally, losses carried forward from previous years
• Capital gains tax (CGT) discount is a discount of 50% for Australian individuals who own an asset for 12 months or more

Other Types of Taxes in Australia

Goods and Services Tax (GST)

GST is a consumption tax imposed on the sale of most goods and services in Australia and those imported into Australia at a flat rate of 10%.

Fringe Benefits Tax (FBT)

FBT is imposed on the value of non-cash benefits provided by the employers to the employees. Please note that the FBT is levied on the employer at a flat rate of 47%.

The FBT is a tax on the employer and not taxable in the hand of the employee. However, if you are employed as an employee and receive FBT, you are required to include the reportable fringe benefits amount in your individual tax return in determining whether you are eligible to any government benefits and concessions.

Medicare Levy and Medicare Levy Surcharge

Medicare is Australia’s public health insurance scheme, and it operates by receiving contributions through the Medicare Levy and the Medicare Levy Surcharge at a flat rate of 1.5% and 1 to 1.5% respectively, which are imposed on residents’ taxable income.

You may avoid paying the Medicare Levy if you hold a temporary visa and you had not applied for a permanent residency. In terms of the Medicare Levy Surcharge, you may avoid paying this surcharge by taking out the appropriate level of private patient hospital cover for yourself, your spouse and all your dependants.

Superannuation tax

Similar to the concept of MPF contributions in Hong Kong, which is used for accumulating savings for retirement, Australia has a similar system in place called the Superannuation. However, unlike MPF Contcibutions, depending on the type of superannuation contributions you made, it may be taxable:

• Concessional contributions

Concessional contributions are made from before-tax income and are taxed at 15% in your super fund. However, if your concessional contributions exceed the contributions cap, you will be liable to pay extra tax. The current concessional contributions cap is AUD 27,500 per year.

• Non-concessional contributions

Non-concessional contributions are made from after-tax income and are not taxed in your super fund. Similar to concessional contributions, if your non-concessional contributions exceed the contributions cap, you will be liable to pay extra tax. The current non-concessional contributions cap is AUD 111,000 per year.

State and Territory taxes

Each State/Territory in Australia generally has jurisdiction to impose tax on various state-based transactions. You may have to check how these may affect you depending of to which territory you might consider moving to.

Stamp duty

The assets that attract stamp duty varies between the States/Territories in which they are located and some of the assets that may be dutiable are:

• land and buildings
• items fixed to land
• motor vehicle registration and transfer

The dutiable rate varies between States/Territories.

Land tax

Individuals and other entities who own land in Australia over a prescribed value are liable to pay land tax annually on the combined value of all taxable land owned.

Again, the rate payable varies between States/Territories, while some states exempt certain classes of land such as the principal place of residence.

Tax Planning Before Migration to Australia

If you will be considered a tax resident when you arrive or are moving from being a temporary resident to a resident, it is important for you to undertake careful tax planning in relation to the assets that you currently own.

Furthermore, it is important to be aware that each State/Territory has its own law on its taxes and duties, therefore, it is important to consider the relevant laws that correspond to the State/Territory that you are planning to move to.

In view of the complexity of Australian tax law, we would strongly recommend that anyone considering to migrate to Australia to seek independent tax advice on their tax status before leaving their home country.