Understanding the Indonesia-Australia Tax Treaty One Article At A Time

Navigating taxes can feel like wading through a labyrinth of legal jargon, especially when dealing with multiple countries. If you’re living or working between Australia and Indonesia, the Indonesia-Australia Tax Treaty is your best friend — it’s all about preventing double taxation, making sure you don’t pay taxes in both countries for the same income. We know these things can get a little technical, so we’re breaking it all down for you, article by article, so you can gain a well-rounded understanding of what it all means and how it relates to you. 

Article 1: Personal Scope

This article determines who the treaty applies to — basically anyone who’s a resident of either Australia or Indonesia. If you’re living, working, or investing between these two countries, this treaty helps ensure you’re not being unfairly taxed in both places. Knowing you’re covered under the treaty sets the stage for understanding how it will apply to you.

Article 2: Taxes Covered

This portion of the treaty ensures that if you’ve earned income from either the Income Tax under the 1983 law (Indonesia) or the Australian income tax and resources rent tax (which is mostly for oil, gas, and minerals), you don’t pay the same tax twice on that income in both countries. It also future-proofs the treaty, so if the tax laws change, the treaty will still apply. 

Article 3: General Definitions

This article defines key terms such as “resident,” “person,” “company,” and “permanent establishment.” For example, permanent establishment (PE) means a fixed place of business like an office or factory used to conduct business activities (which can then be taxable for foreigners).

Understanding these definitions helps you know if the treaty applies to you. For instance, if you run a business between Indonesia and Australia, having a PE in either country means you’ll be taxed there, so knowing what constitutes a PE is critical.

Article 4: Residence

Residency is important because it determines which country gets to tax your income. If you’re a resident of both countries, this article breaks down how to decide where your tax home is – based on factors like where your permanent home or closest economic ties are. 

This affects where you pay your taxes. For example, if you have homes in both countries, the one where you have stronger personal and financial ties will typically take priority for tax residency. 

Article 5: Permanent Establishment

This article defines permanent establishment (PE) and explains what qualifies, such as an office, branch, or even a farm. The key takeaway is that if you have a PE in either country, that country gets to tax the income from that business. 

So, if you’re running a business, having a PE in Indonesia or Australia means that portion of your income is taxed there. This could impact how you structure your business if you operate across both borders.

Article 6: Income from Real Property

Income from real property (e.g., rental income, sale of land, mining profits) is taxed where the property is located. 

If you own property in Indonesia but live in Australia, you’ll be taxed by Indonesia for income generated from that property. This is particularly important for investors or expats who own rental properties abroad. You need to consider that this income will ALSO need to be reported in Australia if it is your country of domicile for tax purposes. Any tax paid in Indonesia can be used as a tax credit in Australia to offset any additional Australian income tax. See Article 24.

Article 7: Business Profits

If you own a business, this article determines where your profits are taxed. If your business operates in both countries, the country where you have a permanent establishment can tax the profits related to that branch of your business. 

So, if your business earns profits in both Indonesia and Australia, you only pay taxes in the country where the income is generated or where you have a PE. This helps you avoid double taxation on your business income. This is a very simple summary, and you need to consider interactions between the business between both countries and whether reporting spans both, or even CONSOLIDATED tax returns are necessary for a parent / subsidiary relationship - see Article 9 below.

Article 8: Ships and Aircrafts

Profits from operating ships or aircrafts are taxed where the company is based, unless the operations are restricted to one country. 

If you’re in shipping or aviation, your profits will be taxed by the country where your business is based, unless your operations are confined to one country, in which case that country can tax you.

Article 9: Associated Enterprises

If your business operates in both countries and the same people control both branches (like if there was a parent company in Australia and a subsidiary in Indonesia), the profits need to be split fairly between them. Essentially, this article prevents businesses from shifting profits to the lower-tax country. 

If you’re managing related businesses in Indonesia and Australia, tax authorities can adjust your profits to ensure you’re not shifting income between the two to minimise taxes. It ensures your profits are fairly allocated between both countries. 

Article 10: Dividends

Dividends paid by companies in one country to residents in the other can be taxed in both places, but the country where the dividends are earned can usually only incur up to 15% tax. 

So, if you’re earning dividends from investments in Indonesia or Australia, you won’t be taxed excessively. The treaty caps the withholding tax, making it easier for you to invest cross-border without a heavy tax burden. 

Article 11: Interest

Interest income (from bonds, loans, etc.) can be taxed in both countries, but the source country can’t tax more than 10% of the interest.

So, If you’re investing in bonds or earning interest from loans, you’ll benefit from a tax cap, ensuring that you won’t face more than 10% withholding tax on the interest.

Article 12: Royalties

Royalties are taxed in the country where they’re paid. The treaty limits the tax to between 10-15%, depending on the type of royalty (e.g., for patents, trademarks, or films).

This means that If you’re earning royalties from intellectual property or licensing deals, this cap ensures you won’t be overtaxed, making cross-border business more appealing and profitable.

Article 13: Alienation of Property

This article governs tax on profits from selling property. If you sell property in the other country (like land or a house), the country where the property is located gets to tax the gains.

Therefore, if you own property in Indonesia and decide to sell it, even if you’re living in Australia, Indonesia will tax the profits from the sale. This article ensures that you’re taxed where the value is created. Consider reporting requirements in both countries also.

Article 14: Independent Personal Services

Freelancers and contractors, take note – You’ll be taxed in the country where you perform your services unless you spend more than 120 days in the other country or have a fixed base there.

This means that if you’re an Australian freelancer working on a project in Bali, you’ll only be taxed there if you spend more than 120 days or set up a base of operations. This is crucial for digital nomads and freelancers working across borders. AGAIN, consider reporting requirements in both countries also.

Article 15: Dependent Personal Services

If you’re an employee, your salary is taxed where you work. However, if you work in the other country for less than 120 days, your salary can only be taxed in your home country.

For example, if you’re an Australian employee sent to work in Indonesia temporarily, you’ll continue paying taxes in Australia unless you stay beyond 120 days. This gives clarity for employees on short-term assignments abroad.

Article 16: Directors’ Fees

If you’re a director of a company in one country but live in the other, the company’s country gets to tax your director’s fees.

This means that directors of companies operating in both countries should expect to be taxed where the company is based. This impacts business leaders who sit on multiple boards across both countries. Consider this carefully.

Article 17: Entertainers and Athletes

If you’re an entertainer or athlete, the country where you perform gets to tax your earnings from that activity, even if you’re not a resident there.

For example, if you’re an Australian musician touring Indonesia, you’ll be taxed in Indonesia on your concert income. This ensures that countries get tax revenue from high-profile events hosted there. Always consider reporting requirements in both countries.

Article 18: Pensions and Annuities

Pensions and annuities are taxed in the country where you live, but the country paying them can also tax them, with a cap of 15%.

So, if you retire in Bali but receive an Australian pension, Australia may still tax your pension, but at a reduced rate. This ensures a fair tax rate for retirees living abroad.

Article 19: Government Service

If you work for the government, your salary is taxed in the country where the government is based, unless you’re a resident of the other country and working there.

Essentially, government employees working in one country but for the other’s government are generally taxed by the home country, which helps clarify tax liabilities for expats on government contracts.

Article 20: Professors and Teachers

Professors and teachers who visit the other country for less than two years to teach or conduct research won’t be taxed by the host country, provided they continue paying taxes back home.

This means that if you’re an Australian professor teaching in Indonesia, your income stays tax-free in Indonesia for up to two years, as long as you're paying Australian taxes.

Article 21: Students

Students studying in the other country won’t be taxed on payments they receive for education or upkeep from outside the host country.

So, if you're an Australian student in Indonesia receiving financial support from Australia, you won’t be taxed on that money while you're studying abroad.

Article 22: Income Not Expressly Mentioned

If income isn’t specifically mentioned in other articles, it’s generally only taxed in the country where you live.

This is a catch-all to ensure no income falls through the cracks. If your income type isn’t mentioned in the treaty, this article provides guidance on where you’ll be taxed.

Article 23: Source of Income

This article clarifies that income taxed by both countries is considered to be from the country where it originates.

This helps ensure you’re only taxed in the country where the income is earned, simplifying how your income is classified for tax purposes.

Article 24: Elimination of Double Taxation

This is the cornerstone of the treaty — this article ensures you’re not taxed twice. Each country agrees to provide tax credits for taxes paid in the other country.

If you pay tax in one country, you’ll get a credit for that tax in the other country, ensuring that your total tax liability stays fair and reasonable.

Article 25: Mutual Agreement Procedure

This article provides a safety net if you think you're being taxed unfairly. It ensures both countries work together to fix tax disputes. If you feel that the tax authorities are treating you unfairly or not in accordance with the treaty, you can request help from your home country’s tax authorities, who will work with the other country to resolve the issue.

Article 26: Exchange of Information

The tax authorities in both countries agree to share relevant tax information to ensure taxes are paid fairly and properly, but this information must remain confidential.

This ensures transparency between countries and helps prevent tax evasion or underreporting. However, your personal data remains protected.

Article 27: Diplomatic and Consular Officials

Diplomatic and consular officials are exempt from local taxes, as per international law. This article simply reaffirms those protections.

So, if you're a diplomat or consular official, this article makes sure you retain your tax privileges.

Article 28: Miscellaneous

This article ensures the treaty doesn’t interfere with other agreements between the two countries, like the Zone of Cooperation Agreement regarding East Timor.

For most people, this article won’t have a direct impact, but it ensures existing treaties are honoured alongside this one.

Article 29: Entry into Force

This marks the start date for the treaty’s application, so any tax planning should take this into account. 

Article 30: Termination

Either country can terminate the treaty after five years by giving written notice before June 30th. If terminated, it stops applying at the end of the next financial year.

What does this mean for you? Don’t fret – If the treaty is ever terminated, you’ll have time to adjust your tax planning strategies, as termination won’t be immediate.

The Indonesia-Australia Tax Treaty is not just a dry legal document – it’s a lifeline for anyone navigating the tricky waters of international tax obligations between these two nations. Whether you’re an expat working remotely, a business owner operating in both countries, or an investor reaping the benefits of cross-border dividends, this treaty makes sure that you aren’t caught up in a web of double taxation. It’s designed to protect your hard-earned income by clearly outlining where and how you’re taxed, minimising the risk of paying taxes in both countries for the same income. 

The treaty provides a sense of certainty and fairness, allowing you to focus on building an abundant future and cultivating your business without the constant worry of unexpected tax bills. But it’s not always easy to decipher every article and figure out how the rules apply to your personal or business situation. That’s where expert guidance becomes invaluable. 

At FRE.DM Wealth, Michaela specialises in making complex tax regulations, much like this treaty, easy to understand and even easier to independently navigate. Whether you need help determining your tax residency, structuring your business operations, or simply ensuring your investments aren’t being overtaxed, Michaela can break down these complicated rules into clear steps. No matter where you are in your financial journey, from freelancing between Bali and Australia to running a multi-country business, Michaela’s bespoke approach will make sure that you’re maximising your wealth while staying compliant. 

So, if the tax world between Indonesia and Australia feels a bit overwhelming, don’t hesitate to reach out to Michaela at FRE.DM Wealth. She’s here to simplify the process, giving you peace of mind and letting you focus on what matters most – building your financially abundant future.