Double Tax Agreements or DTAs are agreements signed between two jurisdictions aiming to prevent the double taxation of the income made by individuals and businesses operating overseas. A Double Tax Agreement is used to simplify the fair collaboration of Tax laws of Australia and other international tax authorities.
As of now, Australia has Double Tax Agreements with over 40 countries, which means that as an Australian expat, you need to know which country Australia does or does not have DTA with.
Why? Simply because the ATO will consider you a tax resident if you stay in Australia, which will subject you to income tax, and you might also be a tax resident for another country. The lack of a Double Tax Agreement, in this case, can be disadvantageous for you.
When does the Double Tax Agreement apply?
A double tax agreement becomes applicable when an individual meets the tax residency rules in not only Australia but their foreign country as well. It could also mean that a DTA applies when you are a resident for tax purposes in both Australia and another country.
As per the Double Tax Agreement, a single person should not be a tax resident of both countries. As a result, the Double Tax Agreement gets revoked with the purpose of determining which country the person should be considered a tax resident of through a Residence Article to avoid double taxation.
Due to this, an Australian expat is always suggested to know the tax residency rules of the overseas country and check if they are a resident there.
Along with this, every country has its own tax residency rules when it comes to determining residence and usually requires a person to spend a specific number of days in the country during the income year.
If I am already an Australian resident, does it make me a tax resident as well?
Although it may sound surprising to some people, a person’s tax status is actually separated from the immigration status or the citizenship status in a country.
So if you are an Australian resident for immigration purposes, it is not necessary for you to be a tax resident as well or vice versa.
The Australian Taxation Office and the Department of Home Affairs have different rules to determine the tax residency and immigration status of a person.
Importance of Double Tax Agreements
When individuals fulfil the tax residency rules of Australia and a DTA country (the nation with which Australia has a DTA), they are offered transparency when it comes to their tax obligations.
What’s more, such individuals are given tax relief since an individual can only be considered a resident in only one of the two DTA countries.
In the majority of cases, Australian expats seek to discontinue their Australian resident tax status, or they will be subject to paying tax on their worldwide income (Australian and foreign income) by Australia. The expats already living in a DTA country are considered a resident in their overseas country.
Tiebreaker rules
The ‘Residence’ Article within the Double Tax Agreement, along with the tiebreaker rules, helps to determine the country for which the individual is a tax resident. The tiebreaker rules in a DTA typically follow a set of tests to determine tax residency.
It’s important to note that the specific tiebreaker rules can vary between different Double Tax agreements. The agreement between Australia and another country will specify the exact rules that apply in cases of dual residency.
Generally, the location of an individual’s permanent home, the location of their economic as well as personal relations and the location of their habitual abode are considered with regard to tiebreaker rules. If you can provide evidence to support these factors in your foreign country, you shall be a tax resident in that country only.
It is worth noting that Australian tax residence rules (current or proposed) don’t impact the DTAs. The reason behind this is that Double Tax Agreements will take precedence over these Australian tax residency laws.
What if there is no Double Tax Agreement in place?
The lack of a DTA can be really detrimental for an Australian expat. The tax implications due to the lack of DTA will become complicated as the person will be deemed a tax resident not only in Australia but also in other countries.
So you might be subject to paying both the Australian tax and the foreign tax as well (or what we call double taxation). An Australian expat living in a non-DTA country has to be cautious of (unintentionally) triggering tax residency when they decide to return to Australia.
Determining tax residency status can be quite tricky, which is why it is recommended to go to a tax accountant who can simplify things for you. With Clear Tax Accountants, you will not be worried about figuring out these things and also learn about your tax obligations. We are a team of professional accountants in Melbourne who provide expert accounting and taxation services to the small business community.
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