Navigating Taxes as an AustraliAN Digital Nomad
This beautiful world we live in is ever-changing and is currently evolving into a realm where remote work and running a business online from wherever you want has become an attainable dream. Picture this: working for yourself, globe-trotting, and living the dream in different countries– sounds like the ultimate lifestyle, doesn't it? Granting yourself the freedom to work around your own schedule, whilst not being tied down to one specific location is a relatively new and exciting frontier in the modern work structure. Just about anyone equipped with a computer, wifi, and a marketable skill set can venture into this new entrepreneurial world without borders. But amidst this digital nomad daydream, do they all grasp the ins & outs of the complications of this business world, such as the intricacies of taxes?
Taxes for remote work can be as confusing as a riddle, especially when you’re just starting out. FRE.DM is here to help guide you through the twists and turns of the tax world, making it more digestible and easy to grasp.
Understanding the Australian taxation system is absolutely crucial for an Australian remote worker running their own online business to ensure compliance within the system and to maximize their own financial benefits.
Here are some key aspects to consider when it comes to taxes and your unique business:
Tax Residency: Determining your tax residency status is a fundamental step. Australian residents are taxed on their worldwide income, while non-residents are taxed only on their Australian-sourced income.
How do you know if you’re considered a tax resident in the eyes of the Australian Taxation Office (ATO)? There are some key factors that are put into consideration in determination of your residency status-
Resides Test: If you reside in Australia, you are considered an Australian tax resident.
Domicile Test: Even if you’re sipping cocktails and hanging by the beach outside of Australia, you may still be considered a tax resident if the place that is considered your permanent home (ie your domicile) is down under, unless the ATO is satisfied that your permanent place of abode is outside Australia.
183-Day Test: If you have been physically present in Australia for 183 days or more in a tax year, you are most likely considered a tax resident.
Tax residency rules can be complex and can vary from person to person, situation to situation. To understand your residency status better, you can use the Residency Self-Assessment tool on the ATO’s website or contact us for further information.
Business Structure: Choosing an appropriate business structure for your remote business can be beneficial in how you pay your taxes and move through the business world. Each structure has different tax implications so it is important to choose the one that aligns with your business goals and financial situation best.
For remote workers, two common business structures are used include (however these are not recommended for long term, see trust and company information below):
Sole Trader - As a sole trader, the business itself is not a separate legal entity. You would report business income and expenses on your personal tax return. All the profits are taxed at your personal income tax rates. It’s a relatively simple structure, with fewer compliance requirements and lower administrative burdens. However depending on your taxable income this structure is only viable whilst your income is low. When your income exceeds a threshold (which depends on your location and situation - chat to us further about this) we would then suggest moving to a company or trust structure for tax purposes and asset protection.
Partnership - Pretty intuitive, a partnership is a business structure where two or more people (ie partners) carry on a business together with a view of making a profit. Partnerships are not taxed as separate entities. Instead, the profits or losses of the partnership flow through to the individual partners, who report them on their personal tax returns. This is a good structure if you want to pool resources and share tasks on a project, however you need to consider the limitations for tax planning with individuals as partners.
There are several other business structures you can register your business under, which are typically more complex however they provide significant benefit to support your digital nomad path. Other business structures include companies and trusts.
Companies - companies are separate legal structures registered under The Corporations Act 2001. A company business structure is a separate legal entity, unlike a sole trader or a partnership structure. This means the company has the same rights as a natural person and can incur debt, sue and be sued. You the related individual generally act as a director and shareholder (although sometimes another related entity could be a shareholder - chat with us further about this). Your responsibility to ensure the company remains solvent and you pay the minimum amount for your shares in the company. Companies can generally entitled to claim more expenses than a sole trader or partnership due to its separate legal structure. You would also be paid wages from your company with PAYG withholding tax remitted on this h the company. Companies pay tax on residual profits of 25%.
Trusts - trusts are very intricate and complicated but can often be a very beneficial structure for income streaming and asset protection. A trust is a relationship which exists where A holds property/business for the benefit of B. A is known as the trustee and is the legal owner of the property which is held on trust for the beneficiary B. The trustee can be an individual, group of individuals or a company. There can be more than one trustee and there can be more than one beneficiary. Where there is only one beneficiary the trustee and beneficiary must be different if the trust is to be valid. Whilst the trust is a separate entity in the eyes on the ATO, legally the related trustee and beneficiary are all connected to this structure and setting it up and operating it correctly defines the benefit you get from this structure. The trust holds the business and other assets and profits must be distributed to the related beneficiaries each year. That is, the trust itself does not pay tax. Tax is paid by the beneficiaries who receive capital and income distributions each year. Setting up your beneficiaries in a tax effective manner makes a huge impact to this structure (a company can also be a beneficiary). Also being aware of the capital gains tax discounts and other expense entitlements of a trust helps you to make use of the structure. Contact us further information and planning to determine whether a trust is suitable for you.
Goods and Services Tax (GST): It’s crucial to understand the GST rules. If your business has a GST turnover of $75,000 or more, and connected with Australia, you must register and generally pay the Goods and Services Tax (GST). This often applies to the sale of goods and services in Australia. There are however ways in which your income could be classified as “export services” and GST free. Contact us for more information tailored to your situation.
Income Tax: Report your income correctly. Ensure all income, including foreign income, is declared. Keep detailed records of your business income and expenses to calculate your taxable income accurately and with ease.
Deductions: Identify your deductible expenses. Keep track of all business-related expenses, such as office supplies, internet costs, and equipment. These expenses can be deducted from your assessable income, reducing your overall tax liability.
Home Office Expenses: Okay remote workers, this is a big one for you. If you work from home, understand the rules for claiming home office expenses. This may include a portion of your rent or mortgage interest (although this is generally not advised as it opens you to capital gains tax), utilities, and depreciation on office equipment.
Foreign Income: If you earn income from overseas, be aware of the tax implications. Australia has double taxation agreements with many countries to avoid being taxed on the same income in both jurisdictions.
Superannuation: Contribute to your superannuation fund. As a self-employed individual, you can make personal contributions and claim a tax deduction, subject to certain limits. Superannuation is so very important for your retirement dreams, it’s like investing in your future.
Record Keeping: Maintain accurate records. Keep your receipts, invoices, and other relevant documents for at least five years. There are great apps out there to help with this.
Lastly, Don’t Be Afraid To Seek Professional Advice: Understanding all the in’s and out’s of the complexities of tax laws is a tedious task– especially when growing your own business. Tax professionals are here to cross that task off of your To-Do list with confidence so you can focus your attention onto what you're most passionate about (and maybe explore a new country while you’re at it 😉).
If you’re still confused on where your dream job fits in the taxation world, reach out to us at FRE.DM. FRE.DM can help you chase your goals without having to worry about navigating the intricate hurdles of taxes in the process.
