Should I still pay digital nomad taxes to the Australian government?
Life as a Digital Nomad: Should I pay digital nomad taxes to the Australian government? This article will discuss some legal ways of reducing taxes for digital nomads from Australia, and ask if you need to pay taxes.
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This article is not formal tax advice is for informational purposes only, and the facts might have changed since we wrote it.
Anybody who wants formal advice should contact a tax professional, or in some cases, the government departments directly.
Introduction – changing work cultures around the world have opened up opportunities for digital nomads, but not all governments have fully caught up, leaving many nomads confused as to where to file their annual obligations.
Should you keep paying your digital nomad taxes to the Australian government? Is this the case even if you already paid taxes to the government of the country you are currently residing in?
The post-coronavirus era has seen the flourishing of a new kind of workforce, one that is untethered to offices or cubicles and takes full advantage of the benefits of remote work—the digital nomad.
Wanderers who take to the road, utilizing the power of the internet to work and sustain a living on tropical getaways and exotic locales. While the lifestyle has been growing in popularity for years, advocated by social media influencers and internet content creators, it was only until the pandemic had forced the world into lockdown that countries began officially recognizing, and even welcoming, its existence.
Countries from Greece, and Portugal, to Brazil, Bali, and Malta have begun offering residence visas for remote workers in a bid to create more sustainable tourist economies. These ‘digital nomad visas’ allow remote workers to live and work in these countries, as long as they make a minimum income from abroad.
But many tax systems are not well-suited for these new types of workers. For instance, digital nomads are, by nature, far removed from their country of origin that their personal income taxes are essentially severed from the local infrastructure that they fund.
Moreover, the contractual and gig economy jobs that comprises a large part of the work that nomads do are incompatible with the Pay As You Earn tax system employed by many countries around the world. All this creates a lot of confusion for those who want to adopt the nomadic lifestyle.
As an Australian nomad, should I still pay digital nomad taxes to the Australian government?
Simply put, it really depends on your tax residency. Before leaving Australia, you should already figure out your tax and superannuation obligations to prevent any issues. If you have not, The Australian Taxation Office (ATO) has online services available for use for most needs.
These services include a list of four residency tests you can use to determine if you are an Australian for tax purposes. The ATO website also has an online tool that you can use to assess your current circumstances.
Basically, as a nomad, you need to figure out if you are still considered an Australian resident for tax purposes. There are only two relevant outcomes here, as discussed below.
For digital nomads that are still considered Australian tax residents
If you are one, then you still need to lodge an Australian tax return, meaning that for your digital nomad taxes, you must declare all your foreign employment income earned working overseas, as well as any exempt income even if tax was withheld in the country where you earned it. This applies even if you have already been taxed in the country you currently reside in. Depending on the country, you may be entitled to a foreign income tax offset (FITO) to relieve double taxation.
This offset depends on Australia’s comprehensive tax treaties with over 40 countries around the world, including Canada, China, Japan, Malta, Spain, and the United States. Digital nomads may find it worth their while to check the full list to find more information about how to handle income Australian residents earn overseas and the income foreign residents earn in Australia.
Essentially, any salary, wages, commissions, bonuses, allowances and income assessed under the employee share scheme provisions you earn overseas you should declare on your tax. There are exemptions to this, but they largely apply to those who engage in service of other countries, such as operating disaster relief funds, or through religious and charitable organizations.
For Australian digital nomads considered foreign residents for tax purposes
If you have ceased being an Australian resident for tax purposes and are now considered a foreign resident, you no longer have to report your worldwide income to the Australian government, except if you own taxable Australian property in which case you are still subject to capital gains tax.
This exception aside, this means that your digital nomad taxes should go solely to the government of the country you are residing in.
You also still need to declare your Australian income in your tax return, which includes any income you receive from Australian companies while overseas, rental income you earn from any Australian properties, or Australian pensions and annuities.
If the Australian financial institution or company that pays you has already correctly withheld tax, you do not need to declare any Australian-sourced interest, dividends or royalties you derive while you are a foreign resident.
If this is your first year as a nomad and are changing your residency status to a foreign resident during an income year, you still need to file your tax return for the days you were an Australian resident. The ATO advises you still answer ‘yes’ to the question ‘Are you an Australian resident?’ on your tax return.
“This ensures you are taxed at resident rates for the income year. You are entitled to a pro-rata tax-free threshold for the number of months you are an Australian resident,” the taxation office says.
The ATO clarifies this even further in its website, “From the date you cease to be an Australian resident, there is no need to show your foreign-source income in your tax return. Also, all Australian-sourced interest, dividends and royalties you received after you ceased to be an Australian resident are subject to the withholding tax provisions as a final tax. They should not be included in your tax return.”
As a foreign resident, you also do not have to pay the Medicare levy. The number of days in the income year that you are no longer an Australian resident can be counted as exempt days.
How do you figure out your tax residency?
So how do you determine if you are still an Australian tax resident for your digital nomad taxes? For this purpose, the ATO provides four tests: the resides test, the domicile test, the 183-day test, and the Commonwealth superannuation test.
The most primary of these tests is the resides test. Quite simply, if you reside in Australia, you are considered an Australian resident for tax purposes and you don’t need to apply any of the other residency tests.
Generally speaking, the courts and the ATO rely on the normal definition of ‘resides’ in these cases as the term is not defined within income tax legislation itself.
The ATO cites the Shorter Oxford Dictionary to define ‘reside’ as ‘…to dwell permanently, or for a considerable time, to have one’s settled or usual abode, to live, in or at a particular place…’
Should your case demand more specificity, courts and the taxation office refer to factors such as physical presence, intention and purpose, family, business or employment ties, maintenance and location of assets, as well as social and living arrangements to determine residency.
These factors are relevant in all residency cases and differ on a case-by-case basis. Each situation is considered by regarding all relevant facts, details, and circumstances. The ATO further adds that no single factor is likely to be decisive, as many will be interrelated.
This is especially important to keep in mind for digital nomads who maintain significant ties to Australia.
A 2020 court case decided at the Full Federal Court indicated that, “Save in the most exceptional circumstances, the existence of a house in Australia maintained by a taxpayer who is working overseas, and the maintenance of a family in that house, has great significance in determining the taxpayer’s residency ‘in that it demonstrates a continuity of association with Australia and an intention to treat that place as home’”.
A person who fails to cut their connection with Australia will be treated as an Australian resident. A good rule of thumb to consider is how you live your life in Australia and overseas. If you work overseas as nomad, but your family and social lives are still rooted in Australia, chances are you are still legally an Australian resident and should pay your digital nomad taxes to the Australian government.
Another thing to note is that you can be a resident of more than one country at the same time. When you have dual residency, you should look at the relevant double tax agreements to determine your country of residence for tax purposes and which country has taxing rights over certain classes of income to prevent double taxation.
Finally, even if you don’t satisfy the resides test, even after taking regard of all these factors, you will still be considered an Australian resident if you satisfy one of three statutory tests.
The domicile test is likely the most relevant for Australians who wish to figure out where to pay their digital nomad taxes, especially those who hop from one country to the next.
A domicile, legally speaking, is a place considered by law to be your permanent home. This definition encompasses something more than a residence. The law recognizes that you may have no fixed place of abode but will always have a domicile. It may be a domicile by origin, as in where you were born, or a domicile by choice, as in an intentional decision to move to a new permanent home.
You can only have one domicile at a time, whereas you may be resident in two or more places.
There is also another type of domicile, one that is imposed by law. A child’s domicile, for instance, is determined to be that of its parents, and will chance when the domicile of the parent’s changes. A person will have the capacity to have their own independent domicile when they reach 18 years of age, and upon marriage.
Digital nomads may be away from Australia for a lengthy period of time. Unless there are other significant factors, such as family and financial ties remaining in Australia, it is usually easy to determine that they do not reside in Australia. Thus, many digital nomads can fail the resides test.
However, if you are a resident who has always lived in Australia, the ATO will continue to hold that you have a domicile in Australia even when you are absent overseas, unless you choose to permanently migrate to another country. Determining if you have a permanent place of abode abroad will be the most important consideration regarding this test.
The most relevant factors to consider in determining this are the intended and actual length of stay overseas, including the continuity of that stay; the existence of an established home overseas; the existence of a residence in Australia (while overseas); and any family and financial ties.
For digital nomads who have no fixed or habitual place of abode and move from one country to another, it is important to note that you would not be considered to have adopted a permanent place of abode outside Australia under the domicile test. Therefore, you will be considered an Australian resident in such cases and are required to pay digital nomad taxes to Australia.
This test only applies to individuals arriving in Australia, and as such is not useful for digital nomads trying to understand their tax obligations. This test determines if a person is an Australian resident if they spend more than half the income year, whether continuously or with breaks, in Australia.
The Commonwealth superannuation test
Similarly to the 183-day test, the superannuation test is not at all relevant for digital nomads as it only applies to Australian Government employees working at Australian posts overseas and who are members of the Commonwealth Superannuation Scheme or the Public Sector Superannuation Scheme.
With the current pace in which technology continues to redefine work around the world, it may be some time yet before governments like Australia can catch up and adjust their tax systems to accommodate new concepts like digital nomad taxes. Yet as more and more countries recognize and even welcome the digital nomad, it might not be such a long wait.
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