As Benjamin Franklin famously wrote: “in this world, nothing can be said to be certain except death and taxes.”
If you’re an Australian living in the UK, your tax position can be complicated. Not only will you have to navigate rules concerning domicile and residency in the UK, but you may also have to deal with these issues back in Australia as well.
Getting it wrong can be extremely costly, which is why it’s so important to get professional help if you’re moving between the two countries.
To help you, here are some of the basics about how the UK and Australia determine where you must pay your tax.
The UK residency and domicile rules
If you’re currently in the UK, your tax position is likely to be easier to understand. You’ll be a UK tax resident if you live in the UK for:
- 183 days of the year, or
- 91 days of the year or more and you have three or four ‘ties’ to the UK.
If the answer at the bottom if this flow chart is still ‘no,’ whether you are UK resident or not will depend on whether you’re an ‘arriver’ or a ‘leaver’ and how many ‘ties’ you have with the UK.
Consider your Australian residency status
So, we’ve seen what the situation is in the UK. However, it’s important to remember that Australia may also be testing whether you’re resident or domiciled there. Note that:
- Each system is different and will assess separately
- Residency is not simply where you spend the most time
- Residency is not simply where you think your ‘home’ is
- It can be possible to be trapped in both systems, which may then mean you have to rely on messy ‘double taxation’ treaties
- How your residency is determined affects which tax regime applies to you. Remember that the other country could then class you as a foreigner and you may still have to pay tax if you make financial gains there.
Some general Australian rules about residency and domicile
Generally, if you’re an Australian who leaves the country with your immediate family, and with the intention of residing outside the country for two or more years and establishing a home overseas, you are likely to be treated as non-resident from the date of your departure.
This means that you will not be liable for Australian tax on your offshore income, but you will remain liable for Australian tax on your Australian sourced income (e.g. rental income).
Returning to Australia
Once you decide to return to Australia with the intention of staying permanently, you will generally be treated as a resident for tax purposes from the date of your return.
This means that you will become subject to tax on your worldwide income, and liable to Capital Gains Tax on the sale of assets, no matter where they are located.
There are also some special rules concerning the application of Capital Gains Tax and the taxation of pension benefits.
Here are some common situations:
‘Non-domiciled’ UK tax residents
If you’re a UK resident but you have your permanent home (‘domicile’) outside the UK, you may not have to pay UK tax on foreign income.
The same rules apply if you make any foreign capital gains – for example, you sell shares or a second home.
In these circumstances you have a choice of whether to use the ‘arising’ basis of taxation or the ‘remittance’ basis of taxation.
If you are resident and not domiciled in the UK, you pay UK tax on your UK income and gains on the arising basis.
You can then choose to pay UK tax on your foreign income and foreign gains on either the arising basis or the remittance basis of taxation (see below).
If you have foreign income or foreign gains, the arising basis can be complex as you will have to declare your worldwide income and gains to HMRC via a Self-Assessment tax return. However, paying tax on the arising basis does mean that you usually benefit from the personal allowance for Income Tax and the annual exempt amount for Capital Gains Tax.
If you choose to use the remittance basis for a tax year you will pay UK tax on:
- Any of your income and gains which arise/accrue in the UK
- Any of your foreign income and gains that you, or another relevant person, brings (or remits) to the UK (this is even if that remittance occurs in a later tax year).
If you’re a long-term UK resident and you choose to be taxed on the remittance basis, you may also be liable to pay the Remittance Basis charge.
Note that it is possible for you to be UK resident under UK tax rules and, at the same time, be resident in another country under that country’s rules. This is referred to as ‘dual residence.’
For example, if you’re a UK resident and resident in Australia, there may be provisions that determine where you will pay tax.
Australia and the UK do have a double tax agreement (DTA), designed to prevent double taxation on your income. For example, if you’re an Australian resident doing business in the UK, the treaty ensures that your foreign income is not taxed in the UK and then again in Australia.
Professional advice is vital
Ensuring that you have clarity with respect to your tax residency is a matter of utmost importance and so you should seek professional advice before moving overseas and indeed signing any employment contract.
Issues of domicile, residency, and tax can be complex, so please contact us to find out how we can help you. As a cross-border financial planning firm with offices in both the UK and Australia, we’re uniquely placed to help you with your financial arrangements.
Get in touch to find out how we can help.