A Guide to the Withholding Tax Rules for Australian Expats

As an Australian expat living abroad, an important aspect of managing your financial affairs is understanding your tax obligations back home. If you're classified as a non-resident for tax purposes, you are subject to specific withholding tax rules in Australia. These rules primarily apply to passive income, such as interest and dividends. Knowing how these taxes work can help you avoid unexpected liabilities and ensure you're complying with Australian tax laws.

Who Is Considered a Non-Resident for Tax Purposes?

Before diving into the withholding tax rules for Australian expats, it's crucial to clarify your residency status. The Australian Taxation Office (ATO) determines tax residency based on several factors, including the purpose and length of your stay overseas, ties to Australia, and intention to reside abroad. Our blog here discusses tax residency in greater detail.

If the ATO considers you a non-resident for tax purposes, the withholding tax rules will apply to you.

Overview of Withholding Tax

Non-residents are not required to lodge a tax return for certain types of Australian income if the correct amount of withholding tax has already been deducted by the payer. This system allows the ATO to collect tax at the source, particularly on income such as:

• Interest

• Dividends

• Royalties (not discussed here)

Let’s break down how the withholding tax rules for Australian expats apply to each of these income types.

Interest Income

If you're earning interest income from Australian bank accounts or investments as a non-resident, it’s subject to withholding tax at a standard rate of 10%, provided you notify the payer of your non-resident status. You may also need to supply your financial institution with your overseas Tax Identification Number (TIN), or the relevant exemption reason where you haven’t been issued a TIN.

Key points:

• The payer (usually the bank) withholds 10% tax and remits it to the ATO.

• No further tax is payable, and generally no tax return is required for this income.

• If the correct withholding rate is applied, you're considered tax compliant in Australia for this income.

Dividends

For dividends, the withholding tax rules for Australian expats depend on whether the dividends are franked or unfranked:

Fully franked dividends: No withholding tax applies. This is because company tax has already been paid on this income.

Unfranked or partially franked dividends: A withholding tax of 30% generally applies, though this may be reduced if a tax treaty exists between Australia and your country of residence.

Keep in mind:

• You cannot claim franking credits as a non-resident.

• It's important to inform your share registries of your non-resident status to ensure the correct withholding tax is applied.

Conduit Foreign Income (CFI)

Conduit Foreign Income (CFI) refers to foreign income that flows through an Australian entity and is paid to a non-resident investor. The goal of the CFI rules is to ensure Australia doesn't tax income that has no connection to the country, even if it's distributed by an Australian company.

How this affects Australian expats:

• Income considered conduit foreign income by an Australian entity and paid to a non-resident is exempt from withholding tax.

Australian Expats may receive conduit foreign income when investing in Australian entities such as Exchange-Traded Fund (ETFs) or managed funds, where the underlying holdings in that fund are located overseas. Any foreign income received by the fund that is declared foreign conduit income is exempt from Australian taxation.

This makes certain Australian entities attractive investment vehicles for non-resident investors, including expats, when CFI is involved.

Treaty Considerations

Australia has double taxation agreements (DTAs) with many countries, which may reduce the withholding tax rates. These treaties often:

• Lower the rate on unfranked dividends (e.g. from 30% to 15% or less),

• Confirm the 10% rate on interest, and

• Address which country has taxing rights on different income types.

Always review the relevant treaty or consult a tax adviser to understand your entitlements and obligations under these agreements.

Investment Considerations for Australian Expats

Not all financial institutions in Australia allow non-resident investors to use their investment services. Australians Expat may use investment services without disclosing their non-resident status, often unknowingly. This means an incorrect or no withholding tax rate is being applied to the income they receive. This can be problematic for Australian tax purposes, as you will be required to file a tax return for the income and need to determine the correct taxation rate to apply, which can be burdensome.

Australian Expats should choose an Australian investment service that supports their non-resident tax status, allowing them to manage their share and ETF investments in a tax-compliant manner, without experiencing any disruption.

Conclusion

Understanding the withholding tax rules for Australian expats is essential for staying compliant with Australian tax law and minimising your tax liability. As a non-resident, your interest, dividends, and any conduit foreign income are treated differently under the law, often with simplified reporting and capped withholding rates.

If you’re unsure about your tax residency status or how the withholding tax applies to your specific situation, it’s wise to consult a tax professional who specialises in expat tax.

Runway Wealth Management is the trusted Financial Adviser to the Australian Expat community. Our tailored advice is backed by expertise, education and experience, which allows us to be at the forefront of Australian Expat Financial Planning.

If you would like to speak to one of our Expat Financial Advisers about this blog or if you have other queries, we would be more than happy to speak with you. Feel free to send us an enquiry through the ‘Contact Us’ tab provided in the below link:

Contact Us

General Advice Disclaimer: The information contained herein is of a general nature only and does not constitute personal advice. You should not act on any recommendation without considering your personal needs, circumstances, and objectives. We recommend you obtain professional financial advice specific to your circumstances.