Tax Tip 322: Comparison of Dividends Paid to Resident v Non-Resident

Tax Tip 322: Comparison of Dividends Paid to Resident v Non-Resident



When Australian franked dividends are paid to non-residents for tax purposes there is generally no further tax to pay in Australia but the franking credits are lost. This creates a different outcome for the amount of income received.



Example 1

Bart is a resident of Australia and is earning $100,000 pa from shares – that is $30,000 in franking credits and $70,000 in dividends.

He is ‘retired’ and has no other income.

In 2021 financial year he would be taxed on $100,000 with $24,178 in tax payable. $75,813 is what Bart would be left with in his hand.

But in 2022 Bart retires overseas and becomes a non-resident for tax purposes.

He will receive his $70,000 in dividends as per normal but will not benefit from the franking credits.

He will be left with $70,000 in the hand.

$5,813 is essentially lost by not being able to use the franking credits.


Example 2

Lisa is the same as Bart but earns $30,000 in dividends fully franked.

Lisa’s total tax as a resident would be $1,887 and she would end up with $28,113 in her hands

But as a non-resident she would only receive $21,000 in her hands as she would get no credit for the franking credits.

Lisa is worse off by $7,113 per year by being a non-resident.


Example 3

Maggie has $200,000 worth of fully franked dividends

In Australia she would pay $64,667 in tax and end up with $135,333 in her hands

As a non-resident though she would be on $140,000 with no benefit for the $60,000 in franking credits.

This would mean she is about $14,777 better off by being a non-resident.


The more passive share income you have the less worse off you are by being a non-resident.



Note that these ignores the CGT consequences of becoming a non-resident and you could be taxed in the country that you are a resident of.

 

Its better to use the cash value of the dividend as the sum "received / earned" and not the gross amount incl of franking, since franking credits are not received or paid and are notional and only available to a tax resident.

eg Example 2 Lisa receives and earns $21K. She would pay $0 tax. Therefore no tax is paid as franked income is exempt from Australian tax in return for forfeiture of franking credits. She is not "worse off" if she pays no tax.

Its also important to consider the country of residence of the non-resident.

A. Lisa resides in Hong Kong. HK doesnt tax foreign dividends. So Lisa pays 0% tax on $21K of income - worldwide.
B. Lisa is a US citizen. The USA would also tax the $21K dividend (not the franking credit) and give a credit for AU tax paid ie $0. Final tax rates will be based upon US tax paid.

From a CGT perspective there could also be CGT benefits for a non-resident. Only "taxable Australian Property" is subject to CGT for non-residents. This includes real property and indirect property such as shares, units or indirect interest in property owning entities. Unless they own 10%+ of that entity there is no CGT. If Lisa's shares are not TAP (eg CBA bank shares) then she may sell these and pay $0 in CGT. Again this may not be final and their residency may affect final tax:

A. Lisa resides in Hong Kong. HK doesnt tax foreign CGT events. So Lisa pays 0% tax on any capital gain worldwide
B. Lisa is a US citizen. The USA would also tax the gain (based on USD terms). Final tax will be based upon US tax paid.

Most importantly tax residency is not a choice and advice on when a persons change of tax residency occurs may also produce other outcomes. eg If Paul owns Australian CBA shares when he ceases to be a tax resident and he doesnt declare a CGT event at market value on the date he departs those shares may continue to be subject to Australian CGT when sold.

 

Very interesting calculations.

But changing your residency status to maximise income/pay less tax isn't easy.

 

I think its better to compare what ends up in the pocket.
It was just a simple set of calcs to demonstrate the differences.

 

I get asked the question by two groups

1. People intending to depart who ask whether they should sell or invest in local or AU markets while absent and
2. People returning who often suddenly find tax outcomes they didnt expect. Australian tax rates can be comparably high.

Especially those from HK. A flat 15% tax rate doesnt compare well to here except fopr the 0% CGT and dividends issues. And at its worst withholding tax on unfranked or interest is 15% / 10% resopectively which sits well as a comparision.

yes datto its less choice and more a consequence. But planing the choices can help esp those departing AU. Some.

 

It's also interesting to look at what happens if you leave to work abroad. Many countries tax capital dividend separately from employment income.

Building on Terry's example:

Bart earns 120k from employment, and gets a further 10k from franked dividends:
As Australian tax resident, the 10k dividends would be taxed at 39% (37% + 2% medicare levy), with 30% franking credit, so net tax is $900 leaving $9100 cash in had.
As a non-resident living where capital income is taxed at 25.5%, the tax agreement specifying that Australia should collect 15% withholding but doesn't because of the franking credits, meaning the local tax is then 10.5%, tax is $1050 leaving $8950 cash in hand.

Now Bart earns $180k from employment, and gets a further 10k from franked dividends:
As Australian tax resident, the 10k dividends would be taxed at 47% (45% + 2% medicare levy), with 30% franking credit, so net tax is $1700 leaving $8300 cash in had.
As a non-resident the tax is still the same $1050 with $8950 cash in hand.

This also applies to those working, not only those who are retired. In fact high earners can be better off as non-residents, depending on how capital income is taxed in their country of residence.

 

Bit like sailing - you should always check the weather before you go.
Some basic things to help with planning:
You always have to be a tax resident of somewhere. You can't leave Australia and not become a tax resident somewhere else.
Many countries have much clearer rules about tax residency than Australia. Here in Europe it's very common that 183 days physical presence in any 12 month period automatically makes you a tax resident.
You can be a dual tax resident, in which case the tax agreement specifies has tax is divied up between the countries.
Citizenship has no direct effect on tax residency, except for citizens of the USA and Somalia. However it can have an indirect effect on how Australia determines tax residency. For example someone goes abroad to work, and has a 6 month work visa. If that same person was also a citizen of the country they are going to, that means there is no limit on how long they could stay. Depending on the other circumstances, this can make the difference between the ATO ruling that that person remains a tax resident of Australia or not.

 

if you were going to start an online business which country would be the best place to call home?

 

That's a big question! Lots to consider before I could answer:
What are you selling? Goods, services or both?
Where are your customers?
Then you need to look at candidate countries and how they rate in these aspects:
Do directors need to be resident?
Banking system and payment processing?
Legal issues?
Bureaucracy & tax reporting?
Logistics, if selling physical goods?
Speed of setup?
Language?

 

Hmm... Dont assume tax residency is the same everywhere. And most taxpayers think of residency and think of where they live. Thats quite wrong. eg If I move to another country under a visa its possible its not a change of tax residency in the sort term (2 years or less). But if i emigrate it may well be a trigger.

Double tax agreements can often impact when tax laws overlap. eg European tax periods and AU tax periods can vary too. Ctizenship can alter matters if it means the person has emigrated rather than visiting nder a visa. The number of days test is usually a secondary test and a migration test applies first under the OECD tax treaty model.

Tax advice in each nation is essential. PRIOR to a change

 

Personally I have worked (physically present) in 17 countries and changed tax residency 12 times in my working life. So I do have some experience in this area, both moving to a new country and becoming a tax resident, and working in an another country and not becoming a tax resident.
My comment that in Europe 183 days in 12 months makes you a tax resident is true, here is the OECD summary country by country on tax residency:
Tax residency - Organisation for Economic Co-operation and Development
It's especially true in this part of the world: Denmark, Sweden, Norway, Finland, Estonia, Latvia, Lithuania and Germany all have the 183 day rule with slight variations.
In the Schengen area Australian citizens can visit for up to 90 days in a 180 day period. Any longer and a visa issued by one of the Schengen countries is needed. So to meet the 183 day rule for tax residency you must have some kind of visa or have an EU citizenship.
Interestingly the number of Australians with another citizenship is quite high, the most recent report by the Australian Citizenship council put the number at 4.4 million but that was 20 years ago. With the recent issue with federal politicians having another citizenship it was reported that up to half of Australians either have or would be eligible for another citizenship, anyhow the point is that an Australian having another citizenship is neither rare or unusual. I am a dual citizen myself, I can live and work anywhere in the EU. There is usually some paperwork to do on arrival, typically registering yourself and getting a social security/tax file number if you don't already have one. Do that, stay 183 days and you are a tax resident...

 

That's very true. You need to find someone specialized in this area in both countries, not just domestic tax law.