Taxation of Dividends for Australian Expats – Insights for Different Countries

Investing in dividend-paying equities can be a powerful strategy for supplementing income or growing wealth over time. For Australian expats, it’s vital to understand the taxation system surrounding dividends to effectively manage their investments.

Our blog post aims to unravel the complexities of dividend taxation for Australian expats living in various countries. We’ll delve into the types of dividends, taxation rules in Australia, international dividend taxation, specific country insights, and practical tips for optimal tax planning.

Let’s start with the basics.

Understanding Dividends

Dividends are payments made by a company to its shareholders, usually out of its profits. These payments can present an attractive income stream for investors, providing regular returns on investments besides potential capital growth.

In Australia, dividends can be categorised into three types: fully franked, partially franked, and unfranked. Franking refers to the corporate tax that has already been paid on the company’s profits before being distributed to shareholders in the form of dividends. Fully franked dividends come with tax credits since the company has already paid tax on its profits. Partially franked dividends carry some tax credits, while unfranked dividends bear no tax credits as the company hasn’t paid tax on these profits.

As an example, Commonwealth Bank (ASX:CBA) paid a dividend on the 30th March 2023, which was 100% franked, meaning that it was fully franked. This means that CBA paid the full amount of corporate tax on the company’s profits before distributing the dividends to its shareholders.

For Australian residents, dividends are taxed as part of their income tax. Franked dividends come with a franking credit that can offset the income tax owed. The tax rate depends on the individual’s income bracket.

Taxation of Dividends for Australian Expats

For Australian expats, understanding the taxation of dividends can become more intricate due to the potential for double taxation. This is where it’s vital to seek professional advice from the right team who understands Australian expat rules and regulations inside out.

Your residency status greatly influences how your dividends are taxed. Non-residents of Australia for tax purposes are typically subject to withholding tax on unfranked dividends, but they are not taxed at all on franked dividends. From this, you can start to see why a fully-franked dividend portfolio can be quite an attractive proposition for many Australian expats.

Double Taxation Agreements (DTAs) between Australia and other countries play a crucial role in determining tax implications. These agreements prevent individuals from being taxed twice on the same income by outlining where and how much tax is to be paid.

Let’s have a look at a few examples to show how this can differ across different countries.

Country-Specific Insights

Singapore

In Singapore, dividend income is not taxed locally because it adheres to a one-tier corporate tax system. As per the DTA between Singapore and Australia, Australian expats will be subject to a reduced withholding tax of 15% on unfranked dividends from Australia, while franked dividends remain tax-free. This means that a fully-franked dividend would not be taxed in the hands of the Australian expat living in Singapore who is a resident of Singapore for tax purposes.

Hong Kong

Hong Kong does not impose a tax on dividend income, irrespective of its origin. Nevertheless, Australian expats will face a 30% withholding tax on unfranked dividends from Australian companies, as there is no DTA between Australia and Hong Kong. As usual, franked dividends are exempt from taxation.

Dubai

Dubai also does not impose taxes on dividends. However, unfranked dividends from Australia are subjected to a 30% withholding tax, as there’s no DTA with Dubai. As always, franked dividends are exempt from taxation. It’s important to note that tax rules and regulations are regularly changing at present, so it’s important to ensure that you seek advice for the most up to date rules.

Case Studies

Consider an Australian expat living in Singapore who receives $10,000 in unfranked dividends from an Australian company. As per the DTA, the withholding tax would be $1,500 (15% of $10,000), leaving $8,500. No further tax would be due in Singapore. This tax would be automatically withheld by the brokerage and passed onto the ATO.

Now, if the dividends were fully franked, the expat would receive the full $10,000, as there’s no withholding tax on franked dividends, and Singapore also doesn’t levy any taxes on dividends.

You can quickly see how a fully-franked dividend paying portfolio can be an attractive income stream for many Australian expats. These examples underscore the importance of understanding your dividend income and the taxation rules in your country of residence.

Practical Tips and Considerations

Navigating through the maze of dividend taxation might seem daunting. Here are a few tips:

• Familiarise yourself with the taxation laws in your country of residence and Australia.
• Understand the nature of your dividends – are they franked or unfranked?
• Consult with tax professionals to get personalised advice tailored to your situation.
• Use available resources and tools to stay updated with tax regulations in your resident country.

Conclusion

Understanding dividend taxation for Australian expats can be a complex process, varying significantly depending on the type of dividends and the country of residence. Seeking professional advice can be invaluable in navigating these complexities and optimising your tax situation.

Bear in mind, tax laws can change, so it’s essential to stay informed. We hope this blog post at least has provided you with a strong foundation for understanding dividend taxation for Australian expats. If you would like to explore how your dividends are taxed, or how you can optimise your investment strategy based on this, reach out to our team at Ally for a complimentary discussion today.

Ally Wealth Management is the trusted ally in finance for Australians at home and across the globe. As both Australian expats and residents, the founders of Ally have a unique understanding of the common personal financial challenges faced.

Book your complimentary appointment with our team at Ally Wealth Management to discuss how we can help you to achieve your financial goals.

Ally Wealth Management Pty Ltd is a Corporate Authorised Representative of Sentry Advice Pty Ltd ABN 77 103 642 888. Sentry Advice holds an Australian Financial Services Licence (AFSL) No. 227 748.

General Advice Warning: 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.