Digital nomads: The tax man still finds you if work remotely from overseas

The ATO has rules for Australians wishing to work overseas temporarily and wanting to stop paying income tax in Australia.

Indonesia wants Australians to work remotely in Bali.

As I write this piece from an overwater bungalow on an island off the coast of New Caledonia while on a short wedding anniversary getaway, I can see first hand the attraction for Australians to live abroad in exotic locations around the Pacific and Southeast Asia while maintaining their Australian business and work.

Covid-19 has redefined the way many work and we now enjoy the most work flexibility out of any generation in history. It is safe to say that the traditional 9am to 5pm Monday to Friday work week is dead and buried, as hard as Elon Musk tries to resist it.

Many companies have employed a hybrid model where two to three days per week are worked from a physical office location and the remainder of the week is completed from home. Other companies have closed their capital city offices altogether in place of full-time remote working arrangements.

And with the global acceptance of video conferencing as the default communication tool, not having an office to physically meet clients and suppliers has generally not posed an imposition for those who have taken the plunge and moved to a full remote set-up.

So that begs the question, if you don’t need to live near a physical office, does this mean that you can live anywhere in the world assuming you can work within the Australian timezone?

Some countries are seizing the opportunity with this paradigm shift in workforce mobility and are looking to welcome Australians with open arms into their country with what is known as a “digital nomad visa”. This week the Indonesian government raised the idea for Australians to live in Bali for up to five years and pay no income tax in Indonesia.

As long as the Australians do not compete with local workers for work within Indonesia, they can live and work in Bali and keep invoicing their Australian clients without any Indonesian tax implications. The attraction for Indonesia is that they will see an increase in cashed-up Australians arriving in their country who will start spending in the local economy to meet ongoing living expenses.

Sounds great. However, the only loser in this scenario may not want to let you go so easily. The Australian Taxation Office has rules for Australians wishing to work overseas temporarily and wanting to stop paying income tax in Australia by declaring themselves “non-resident” for tax purposes.

Timothy Ricardo, director at Bishop Collins Chartered Accountants, says: “The bar is set very low to be classified as an Australian resident especially for those who have lived here all of their life and only move overseas temporarily. Residency comes down to the facts in each individual case, some of the tests that can be applied include the ‘resides test’, ‘domicile test’, the ‘183 day’ test and the ‘superannuation test’.”

In other words, even if you pay no tax while living abroad in places like Bali, the tax office may still consider you an Australian tax resident and demand that you pay tax on all income generated while living abroad. And if you do satisfy the ATO requirements to become a non-resident for tax purposes, there are further considerations to work through.

Ricardo says: “You need to consider the assets that you hold. When you cease to be a resident these assets may have a taxing point. You also need to be particularly careful with your main residence as the capital gains consequences are severe for non-residents.”

From July 1, 2020, Australian expats no longer enjoy the six-year former residence exemption on capital gains tax. Prior to this, an expat could move overseas and, provided they did not purchase another home abroad, they could rent out their Australian home for up to six years and either move back into it or sell it without any capital gains tax implication for the period they rented it out.

However, if you now move abroad and rent out your home, if you decide to sell it while away you will be liable for capital gains tax for the whole ownership period, not just the time that you rented it out while overseas.

The tax implications of moving abroad to work can be severe, noting the potential impact on your Australian residence. It is therefore imperative that you seek specialist accounting and taxation advice to understand where you stand beforehand rather than be hit with unexpected penalties and taxes down the track.

It sounds great in theory for those lucky enough to be working remote full-time to move abroad to a low-cost, no-tax country. But you need to work through the considerations on the Australian side. Seek advice on whether the ATO will let you go and, if it does, what the tax implications are.

James Gerrard is principal and director of Sydney planning firm www.financialadvisor.com.au