A double taxation agreement (also know as a tax treaty or DTA) is an agreement between two countries that seeks to avoid or mitigate the double taxation of personal and business income. Australia has signed a double taxation agreement with more than 40 countries, so what does it all mean for Australian expats.
What is double taxation?
Double taxation is the taxation of the same income by two or more countries.
For example, as an Australian expat, double taxation might occur if you were to be considered a tax resident of two countries (eg. Australia and the country you are living in). Double taxation would occur if you were to be taxed on your income once in the country where you were living / working, and secondly be taxed on that same income in Australia.
The impacts of double taxation are often mitigated in Australia through either
- Double Taxation Agreement (Tax Treaty)
- Foreign Income Tax Offsets
In this article we will focus on the double taxation agreement.
What is the purpose of a Double Taxation Agreement?
According to the ATO, a double taxation agreement (also known as a tax treaty or DTA) is a bilateral agreement between two countries that generally aims to :
- reduce or eliminate double taxation of income caused by overlapping tax jurisdictions
- provide a level of security about the tax rules that will apply to particular international transactions by
- allocating taxing rights between the countries over different categories of income
- providing rules to resolve dual claims in relation to the residential status of a taxpayer and the source of income
- providing an avenue to present a case for determination by the relevant taxation authorities where a taxpayer considers there has been taxation treatment contrary to the terms of a tax treaty.
What countries does Australia have a double taxation agreement with?
Australia has signed a double taxation agreement (tax treaty) with over 40 countries. Here you will find a list of the countries with Australian tax treaties.
How does a double taxation agreement work in practice?
Determining Tax Residency
Most of the double taxation agreements include a “tie-breaker” test. If under the laws of Australia and the laws of your country of residence, both countries consider you to be a resident for taxation purposes, then the tie-breaker test in a double taxation agreement will provide rules for you to determine which sole country you will be considered to be a resident for taxation purposes.
Identifying Taxing Authority over Specific Income
A double tax agreement will generally identify which country has the right to tax different sources of income :
- In some instances, the double taxation agreement may allocate sole taxing rights of certain categories of income (eg. rental income, capital gains)
- In other instances, the double taxation agreement may impose a limited rate of taxation on certain categories of income (eg. withholding tax on dividends and interest income).
The effect of most double tax agreements (for those that are determined to be resident in two countries), is that your investments in Australia are taxed in Australia, and your foreign income is taxed overseas. However each double tax agreement has its own peculiarities and so its worth reviewing with your accountant or the tax office.
What is your experience with applying a double taxation agreement? Share in the comments section at the bottom of the page.
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