Withholding Tax for Australian Expats

A common misconception amongst many Australian expats is that if they invest in the Australian stock market whilst a non-resident of Australia for tax purposes, that they will be liable for Capital Gains Tax (CGT) or income tax on their dividends while abroad. In most instances, this is not the case and instead it is withholding tax that can apply on interest earned and unfranked dividends received.

This week our team at Ally Wealth Management is exploring when withholding tax would apply and how it works.

What is withholding tax and when does it apply?

Withholding tax is an amount of a particular payment made to you that is withhold by the financial institution and paid to the Australian Tax Office (ATO). For non-tax residents of Australia, this would apply for three key categories:

  • Unfranked Dividends: These are dividends that are paid to you by Australian companies, whereby the corporate tax has either not been paid at all, or has only been partially paid before dividends were distributed.
  • Interest: This refers to the interest that you earn on cash at the bank.
  • Royalties: Such as regular income streams on mining or agricultural land.

A tax return is not required to be filed in most cases if you do not own Taxable Australian Property (TAP), and just hold Australian shares for example, as the withholding tax is automatically processed for you by the financial institution.

It is important also to note here that withholding tax does not apply to fully franked dividends. This refers to those dividends that are paid to you as a shareholder after the company has fully paid their corporate tax on the earnings.

What is the withholding tax rate that applies?

For non-residents of Australia, the withholding tax rate is 10% for any interest that you receive or royalties, and 30% for any unfranked dividends. However, if your current country of residence has a Double Tax Agreement (DTA) in place with Australia, then this would revert to a rate of 15%.

For example, for those Australian expats who reside in Singapore, there is a DTA in place between the two countries, and the rate that would apply on an unfranked dividend would be 15%.

To illustrate how this works in practice, consider the following example:

James and Susan are an Australian expat couple living and working in Singapore, and are non-residents of Australia for tax purposes. They currently have a cash balance in their Australian bank account of $100,000, which is receiving an annual interest payment of 0.50%. In this instance, it would mean that they would earn $500 in total interest prior to the withholding tax being applied. Factoring in the 10% withholding tax, this would mean that $50 would be automatically withheld for them, and they would receive a net payment of $450.

How should I factor this into my financial planning?

Many Australian expats across the globe would prefer to accumulate their wealth in Australian Dollars (AUD), particularly for those that plan to return to Australia. In considering the foreign exchange risk, this would be a sensible option for the majority. Foreign exchange risk is often overlooked, and if the exchange rates happen to work against you at the time that you require your capital, then this could be quite a nasty surprise.

As a result of this, it’s therefore important to factor in the withholding tax to your overall investment strategy. This may mean avoiding those companies that pay unfranked dividends for example, holding less cash in your Australian bank account and more offshore, or even selling down your holdings that do pay unfranked dividends prior to the dividend record date.

There are many considerations here, and there is certainly no ‘one-size-fits-all’ approach for Australian expats in managing their wealth and factoring in the withholding tax that applies. We would recommend that you consult a professional to review your investment strategy, and ensure that you’re not paying more tax than you need to be.

If you have any questions at all about withholding tax, how this could apply to you and how it may impact your financial plans, reach out to our team at Ally Wealth Management for a complimentary discussion.

 

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. We would also encourage you to obtain tax advice from a registered person (such as a tax agent or tax (financial) adviser).