Tax Treatment of Dividends as a Non-resident Australian Expat – The Australian reporting season for Financial Year 2022 has seen several ASX 200 companies post stellar results, with some paying out record dividends to Australian shareholders.
In this article we look to spotlight dividend yield and discuss how dividends are treated for tax purposes as a non-resident Australian Expat.
It’s mostly well understood that owning shares as a non-resident has advantages from a Capital Gains Tax (CGT) standpoint, with capital gains falling outside of the ATOs tax net.
This is so long as the shares are purchased and sold as a non-resident or deemed as disposed of at the time you stopped being an Australia resident.
What is perhaps less understood is the ATOs treatment of dividend income when investing in Australian shares as a non-resident. Here’s what you need to know.
Non-resident Withholding Tax
Unlike income that is sourced from Taxable Australian Property (TAP), such as rental income from an Australian investment property, which is subject to foreign resident tax rates, dividend income is subject to a more favourable withholding tax regime.
The exact rate of withholding tax on dividends is set out in the Double Tax Agreement (DTA) or “Tax Treaty” that Australia has in place with the overseas country you are residing in.
Australia has tax treaties with over 40 countries and the rate of withholding tax will usually range from 15% and 30%.
Where there is no tax treaty in place with Australia, the rate of withholding tax is 30%.
The withholding tax amount deducted by the payer of the dividend (i.e., the company share registry) is seen as the final amount of tax to be paid on the dividend.
This means there is no further requirement to report the income on your Australian tax return as a non-resident.
Special rules also apply to the rate of withholding tax depending on whether the dividend you receive is fully franked, partially franked, or unfranked (see below).
In short, a franking credit is the amount of tax that the company you own shares in has already paid on your behalf, before the dividend is paid to you.
Where the dividend is fully franked, it means the company has paid tax on the entire amount at the corporate tax rate of 30%.
Australian resident investors would know they need to “Gross up” their dividend by the franking amount, with the franking amount subsequently available to use as a credit to offset tax payable. This is not the case for non-residents.
Only Australian resident taxpayers can claim a tax offset for a franking credit attached to a dividend.
For non-residents, a dividend is exempt from withholding tax to the extent that it is franked. Therefore, if you receive a fully franked dividend, there would be no withholding tax deducted from the dividend.
Only the extent to which a dividend is unfranked will it be subject to the rate of withholding set out in tax treaty.
Therefore, an unfranked dividend will be entirely subject to withholding tax at the relevant rate.
With the majority of Blue-chip ASX companies paying shareholders a fully franked interim and final dividend each year, this provides non-residents are very tidy way to build wealth in Australia, as there are few tax filing obligations to the ATO, reducing your tax administration burden.
Conduit Foreign Income
Income received from foreign sources paid by an Australian company to a non-resident is mostly considered conduit foreign income.
When this income is paid to a non-resident, the portion declared to be conduit foreign income is exempt from Australian withholding tax.
This means should you have a large allocation of your portfolio in Australians shares deriving their income from overseas sources, or through an Exchange-traded fund (ETF) targeting an overseas market such as the S&P 500 in the US, there may be little to no withholding tax on this component of the dividend income.
Opportunities for Australian Expats
With dividend yields for Australian shares continuing to return above 5% p.a., they remain a tax effective source of investment income while overseas.
Particularly if your country of residence does not tax, or taxes at a very low rate your Australian sourced dividend income.
They can be maximised by income reinvestment and compounding returns over a suitable investment time horizon.
When combined with the CGT exemptions available to non-residents, as well as the low tax administration burden, they can offer Australian expats a great way to build wealth over the long-term, while still providing flexibility should your overseas circumstances change.
Of course, you will need to assess what local tax may apply to your dividend income in your local country of residence.
Speak to your Licenced Financial Adviser if you would like to learn more about investing in shares and other listed investments as non-resident, and to determine the suitability of the asset class against your own personal circumstances and objectives.