I recently just moved to Australia and completed the Australia Taxation subject last semester. I want to share some tax rules that I think are quite unique in Australia and may be useful to know for any newcomers.

I am not a tax accountant. The examples used below are very simplified as I just want to show the basic concepts without getting too technical. Australia taxation is a very large and complicated topic so be prepared to get a tax accountant. Getting a tax accountant may save you a lot of money, in addition, the fee is tax-deductible.

 

1) Negative Gearing

This is something that I think is very unique about Australia. With the negative gearing tax rules, you can offset your investment loss against other incomes.

A simple example:

Salary received	$100,000
Investment loss (for example, when you rent out a property and the rental income cannot cover the interest borrowed)	($20,000)
Taxable income	$80,000

In the example above, the person will be taxed on $80,000 instead of $100,000 because he/she can deduct the property expenses/investment losses from the salary.

In practice, it makes investing in real estate an attractive idea when someone is a high-income earner and want to get capital gains from the property. Many people said the high-income households benefit from negative gearing the most – no wonder it is a big political issue in Australia!

 

How is it different from the world?

Although Australia is not the only country that allows negative gearing, most of the other countries have some restrictions. Some countries such as the U.S. does not allow the transfer of income streams (source: Wikipedia). For Australia, negative gearing is a controversial political issue.

 

2) Franking credits and dividend imputation system

This is a hot topic for politics in Australia – that the former labour leader claimed the proposed new franking credits policy cost him votes at the election (read this for more details), so it is good to know what it is about though it may not impact you directly.

So, what is the franking credit and dividend imputation system? Dividend imputation is actually a system that prevents double taxation. A franking credit is a type of tax offset as a result of the system.

Let’s see the example below:

	Scenario A: without dividend imputation system	Scenario B: with dividend imputation system
Company’s dividend distribution	$1000	$1000
Tax rate (assume 30% tax rate for a company)	($300)	($300)
Gross Dividend received by individual	$700	$700
Assume individual tax rate 32.5%	($228)	($325)
Franking credit	0	$300
Net $ received after tax	$472	$675

The above is a very simple example as there are much more rules in practice. Assuming the company pay 30% tax while the individual pay 32.5% tax…

In Scenario A (without dividend imputation system), the individual will pay tax after the company has paid the tax, so the net $ received after tax is $472.

In Scenario B (with dividend imputation system), the individual pays tax from the $1000 dividend (the amount before company paid the tax), but he/she also received a franking credit offset of $300, so the net tax payable is $25 ($325 – $300). The net $ received after tax is $675.

The example above assumes a person with a higher tax rate (32.5% individual tax rate vs 30% company tax rate). What if a person has a lower tax rate, let’s say 19%? Then the person may receive a tax refund. Most of the tax offsets are not refundable but franking credit is refundable. In practice, it impacts the superannuation funds the most which are in pension phase. (read this for more info)

 

3) Once become a resident in Australia, he/she has to pay taxes for overseas incomes

Although this may not be unique to Australia, this is very important to know for newcomers. As an Australian tax resident, we need to pay any oversea income though it is not earned in Australia.

Does it mean that a person can pay tax twice? Yes and no – to overcome this issue, Australia has a Double Tax Agreement (DTA) agreement which is to prevent someone from being taxed twice. Each DTA is different, and not all countries have a DTA with Australia. Both Malaysia and New Zealand have DTAs with Australia.

As a resident In New Zealand, we have 4 years of foreign income tax exemption – meaning we do not need to pay tax on oversea income for up to 4 years. However, we do not get such exemptions in Australia. Therefore, it is an important consideration before gaining residency in Australia.

 

4) Concessional and non-concessional contributions for superannuation

Superannuation, also known as ‘super’, is money set aside for retirement. It is equivalent to KiwiSaver in New Zealand or KWSP in Malaysia.

Personally, I like the generous superannuation rate. The employer contributes a minimum of 9.5% of the base salary. Compared to New Zealand, New Zealand only has a 3% rate (own contribution) plus it is optional!

What is more important, is that we only need to pay 15% tax on entry and income earned (provided it is within the ‘cap’). If you are a high-income earner, you may need to pay up to 45% for the money earned. This is because the Australian government wants to attract people to save more for retirement.

Since the super is important in the retirement phase, it is not a bad idea to spend a few hours to do research and choose a good superannuation company with minimum management fees.

 

5) Capital Gain Tax (CGT) and Main Residence Exemption Issues

Capital gain tax (CGT) is not new for many people, though each country has its own rules of CGT and perhaps has special tax treatments for the main residence.

In Australia, we generally need to pay CGT for the sale of capital assets but no need to pay CGT for the sale of main residence (home). However, there is a new rule in December 2019 that bans such exemption for the foreign tax residents.

So, what is the big deal for someone new to Australia?

Before the rule was implemented, foreign residents could claim the main residence exemption in Australia. Considering the home property is likely to be the biggest asset for most of the people, the change in law will negatively impact many people especially expats in Australia.

For example, if someone who was initially an Australian resident and lived in his/her main residence for many years, and then subsequently become a foreign resident, he/she will have to pay a CGT – which can be up to 45%! (ignoring other factors)

It can impact Ben and myself if we buy a property in Australia and then lose the tax residency (which can happen easily if we are away from Australia for a period of time). It becomes an important factor to consider before buying a property in Australia.

 

Summary

Taxation in Australia is a very complicated subject. I hope the above provides some basic ideas about the unique tax rules in Australia for newcomers like myself. There are so many more rules – and if you plan well you can legally minimise taxation.

Living overseas means more complicated tax affairs, so it is not a bad idea to hire a tax accountant. My husband, Ben, consulted with a tax accountant before gaining residency in Australia. By the way, I work in the finance department and find some of my finance colleagues also have a tax accountant.