According to Sydney-based research firm Investment Trends’ 2022 1st Half Online Investing Report, online share traders have increased from 700,000 in 2019 to approximately 1.47m today.
Australian Bureau of Statistics migration statistics for 2022 revealed that 224,000 Australians left Australia permanently to migrate overseas in 2022.
Thus, it follows on that a large number of those Australians are also online share traders who many of whom are likely to continue trading ASX listed investments from their new homes overseas!
With those facts in mind, and with more and more Australian’s packing up their lives in Australia to head overseas to live and work, we’re regularly asked – how does Australia tax non-residents who:
- invest in the Australian sharemarket, and,
- trade/day-trade ASX listed investments?
Before we dig into the answers, we first need to understand what is the difference between an investor and a share trader.
Share investor versus share trader – what’s the difference?
It is important to understand the difference between share investors and share traders, as the Australian tax outcomes can vary considerably, especially if you are a non-resident for Australian tax purposes.
The difference between the two, is primarily based upon:
- the frequency and nature of transactions made during the course of the year, and perhaps more importantly;
- whether the shares/investments purchased were held with the intent to make short term profits, or with the intent to generate much longer term profits via growth in the value of their shares over a long time-frame.
Share Investors
To explain in further detail, a share investor is somebody who buys shares with the intention of holding those shares over a medium to long time-frame to generate profits via growth in the value of the share price (known as capital gains), along with income via dividends.
Most taxpayers who buy and sell shares are generally considered to be investors by the Australian Taxation Office (ATO) and as such, any gains or losses that they make from selling their shares will generally be subject to Australia’s capital gains tax rules when those shares are disposed of.
Share Traders / Day-traders
Share traders on the other hand, are taxpayers who buy and sell shares very frequently with the primary purpose of making short-term profits from short-term price movements.
Unlike investors, share traders are considered to be carrying on a business and their share purchases are considered as their trading stock in the same way that fruit and vegetables are trading stock for grocery stores!
The short-term profits made by share traders are not considered to be capital gains but are instead considered to be business profits of that person’s share trading business and as such, those profits are subject to Australia’s ordinary income tax rules. This means that the profits and losses from the person’s share trading/day-trading activities are simply included in that person’s tax return to be taxed as income at that person’s marginal tax rate.
How do you know if you are a share investor or share trader?
Sadly the distinction is not black and white! To determine whether you are are a share investor or share trader, a range of factors need to be considered including:
- the frequency of transactions made;
- the size of transactions made,
- the length of time that each share is held;
- whether the person conducts themselves in a business-like manner (including things such as maintaining proper books and records, developing a business/trading plan, conducting extensive research etc), and;
- importantly, that person’s intention and purpose for acquiring the shares.
In short, Australians who intend to buy and sell shares with the intention of making short term profits, usually characterised by a large number of transactions conducted frequently, for short periods of time, with trading records kept in a business-like fashion, will generally be considered as share traders, with their profits taxed as ordinary income in Australia at that taxpayer’s marginal rate.
Share investors, on the other hand, generally hold shares with the intention of generating gains via the growth in the share price over the medium to long-term and generating income via dividends. Investors tend to buy and sell their shares infrequently, and often at ad-hoc times, as opposed to frequent, short-term trades made by share-traders. The gains made by investors are taxed as capital gains, and may be eligible for Australia’s 50% CGT discount (which allows a person to be taxed on only half of their gain), or potentially even tax-free in Australia where the taxpayer bought and sold the shares whilst a non-resident!
Now you’ll note that in the discussion above, for this section of the article, that we haven’t gone into any particular detail about a share investor or share-trader’s residency status for Australian income tax purposes. Neither have we discussed the very subject of this article, about how Australia taxes non-residents investors and non-resident share-traders, so let’s get to it – take a look below.
How does Australia tax non-residents share investors who invest in the Australian sharemarket?
The first thing to note is that technically, non-resident investors are taxed differently than non-resident share traders!
Let’s start with how non-resident share investors are taxed.
As non-residents are subject to tax in Australian Australian sourced income, non-residents who invest in the Australian sharemarket will (potentially) pay Australian tax on their Australian dividends and in some circumstances, on their capital gains as follows:
Unfranked Dividends:
Non-residents are generally subject to withholding taxes on dividends that they receive from Australian companies. The withholding tax rate varies from 15% to 30%.
The rate charged by Australia on their dividends, depends upon whether Australia has entered into a tax treaty with that investor’s country of residence. If the non-resident investor lives in a tax treaty country, then the withholding tax will be applied at the rate of 15%. If however, the non-resident investor lives in a non-treaty country the withholding tax rate doubles to 30%.
Where withholding tax has been deducted from dividends, non-residents are not required to include the dividend in their Australian tax returns, as the withholding tax is treated as that person’s final tax to Australia.
Franked Dividends:
Firstly, what are franked dividends? Well, franked dividends are simply dividends that have been paid out of the after-tax profits made by a company (i.e. from profits upon which the company has already paid tax). As the company has already paid tax on their profits, the tax paid by the company is treated as the final tax for the non-resident investor, and as such, franked dividends are not subject to any further taxes by Australia (including withholding tax).
Put a different way, non-residents who receive Australian franked dividends do not pay income tax, nor withholding tax on their franked dividends! Surprisingly, non-resident investors are also not required to include their franked dividends in their Australian returns. Instead, the non-resident investor must simply leave the dividends out of their Australian return as if the dividend never existed in the first place!
It should be noted however, that unlike tax residents of Australia, non-residents are not entitled to claim a refund of the franking credits (tax paid by the company) attached to the dividends.
Capital Gains:
Shares and investments that have been bought and sold whilst an investor is a non-resident are NOT subject to Australian capital gains tax (unless the shares disposed of are considered “Taxable Australian Property”).
Explained differently, non-resident investors are generally subject to capital gains tax (CGT) on the disposal of shares in Australian companies, but ONLY if the shares are considered “Taxable Australian Property”.
Without going into too much detail about the definition of “Taxable Australian Property” (which can be found on the ATO website), in relation to ASX listed investments, any given share investment that a person owns will only qualify as “Taxable Australian Property” if the company in question:
- Principally owns Australian real estate; and,
- If the shareholder owns 10% or more of the company!.
Thus for a person’s shares in an Australian company to be deemed as “Taxable Australian Property” and subject to capital gains tax in Australia, that person must own at least 10% of the company, AND the assets of the company must principally comprise of Australian real estate. Both of these criteria must be met for the company to be considered “Taxable Australian Property”.
As most people are unlikely to ever own more than 10% of an ASX listed company, this means that for most non-residents, none of their ASX listed investments (purchased whilst they were a non-resident) will typically qualify as “Taxable Australian Property”.
Thus for most non-residents, their ASX listed investments purchased whilst they were non-resident will generally not be subject to capital gains tax in Australia! Yes, you read that right . . . as a non-resident, your shares purchased whilst you were a non-resident will not be subject to Australian tax!!
To read more take a look at an article that I wrote some time ago on this very topic – Make tax-free capital gains on Australian shares whilst a non-resident expat.
Whilst this is great news for non-resident share investors, please note that it is still essential to keep accurate records of your investments and transactions, as well as any taxes paid in Australia, as this information may be required when filing your tax return in the country where you reside.
Additionally, tax treaties between Australia and other countries may impact the tax treatment of your Australian share investments, so it is crucial to understand the specific tax treaty provisions that apply to your situation.
How does Australia tax non-resident share traders/day-traders who trade Australian shares?
Although non-residents who invest in the Australian sharemarket (ASX listed shares and managed funds) will NOT generally be subject to capital gains tax in Australia, as explained briefly earlier in this article, share trading profits are not assessed as capital gains.
Instead they are assessed as business profits and depending upon which country a particular taxpayer lives (i.e. whether they live in a country with which Australia has a double tax treaty, or not), the Australian tax outcomes can be very different.
Perhaps surprisingly, Australian courts have upheld the principle that profits generated by share trading/day trading ASX listed investments are in fact Australian sourced income notwithstanding that you might have made your trading decisions, and placed your trades from your home, office or other location in the country where you live.
Most Australian share-traders presume that their profits must be income sourced from the country where they reside, however Australian courts have determined that such profits are Australian sourced income as the buy/sell contracts are conducted and concluded in Australia by that trader’s agent (i.e. by their Australian broker).
As non-residents are taxed on Australian sourced income, and as their share-trading profits are deemed by Australian courts, and the Australian Taxation office as Australian sourced income, this means that the non-resident’s share trading profits will likely be fully taxable in Australia at non-resident rates of up to 45%! For those traders who are unprepared, this is a horrible tax outcome!
But how do Australia’s tax treaties affect this terrible tax outcome?
Before I explain, it’s very important that you understand that whilst I’ll explain how Australia’s tax treaties generally apply, each of Australia’s tax treaties are different and so you should not simply rely on the general approach that I will outline below. Instead, when considering how a tax treaty applies to your circumstances it is critically important that you check the exact wording of the relevant treaty that applies to you, to ensure that you understand exactly how that specific tax treaty, and it’s residency, permanent establishment, and business profits articles apply to your circumstances. Don’t just assume that every tax treaty applies in the same way that I will outline below (because as explained, I’ll be outlining below how Australia’s tax treaties generally apply).
So, let’s dig in.
For countries that do have a tax treaty with Australia, the business profits article in Australia’s tax treaties will usually provide the country of where the person is residing, exclusive taxing right over the traders share-trading profits.
And since, Australia’s tax treaties override domestic Australian tax legislation (refer paragraphs 6 and 24 of Taxation Ruling 2001/13: Income tax: Interpreting Australia’s Double Tax Agreements), where the business profits article provides the other country with the exclusive taxing right over the trader’s profits, Australia cannot tax those profits notwithstanding that Australia’s domestic tax legislation states that the profits are Australian sourced income and notwithstanding that Australia taxes non-residents on their Australian sourced income!
So that’s if you live in a tax treaty country, that’s potentially a great outcome, particularly if that foreign country has low tax rates or if the country does not levy income tax!
Let me take you through this in more detail via the following paragraphs.
A word of warning here . . . the following discussion is a little heavy going so I apologise in advance if my explanation causes your eyes to glaze over a little as you read below. But I’ll do my best to explain things as simply as I can!
To simplify the explanation let’s use Malaysia as an example.
Firstly, let’s assume that the non-resident share trader lives in Malaysia, a country with which Australia has concluded a tax treaty. To understand the tax consequences of the trader’s share trading profits, we’ll need to take a look at the Residency article (Article 4), the Permanent Establishment article (Article 5), and the Business Profits article (Article 7) contained within the Malaysian tax treaty.
Article 4: Residency
Let’s also assume that the non-resident is determined as being a Malaysia tax resident for tax treaty purposes (this is assessed separately based on Article 4 of the treaty). If the person is a tax resident of Malaysia based on Malaysia’s domestic tax legislation, and not a tax resident of Australia (based on Australia’s residency rules), then the person will be a tax resident of Malaysia for tax treaty purposes under Article 4.
Article 7: Business Profits
Having determined that, we now need to determine how the business profits article (Art. 7) contained within the treaty applies to share trading profits generated by taxpayers who are residents of Malaysia (as determined by Article 4) for treaty purposes.
The business profits article (Article 7) provides that the profits of a Malaysian enterprise shall be taxable ONLY in Malaysia unless the enterprise carries on business in Australia through a permanent establishment situated in Australia. If the enterprise carries on business in Australia through a permanent establishment situated in Australia, the profits of the enterprise may be taxed in Australia but only so much of it as is attributable to that permanent establishment.
In short, if the person is a Malaysian tax resident for treaty purposes, and they are conducting their share-trading activities from Malaysia, then their business would be considered as a Malaysian enterprise, and thus, Article 7 prescribes that their business profits shall be taxable only in Malaysia.
The key word in the previous two paragraphs is the word only. That word denotes exclusivity. It means that if only Malaysia can tax those share trading business profits, then Malaysia has the sole and exclusive right to tax that income
However the business profits article also states that if the if the profits are attributable to a permanent establishment (in Australia) of the the Malaysian enterprise, the profits that relate to that permanent establishment will be taxed by Australia.
So the critical question then becomes, if trades placed by the non-resident share trader are conducted and concluded in Australia by that trader’s agent (i.e. placed by their Australian broker) does that mean that the Australian broker is in effect a permanent establishment of that non-resident share-trader and that the profits are taxable by Australia?
Article 5: Permanent Establishment
To answer, we must turn to Article 5 which deals with the definition of a ‘Permanent Establishment’. This article provides that a permanent establishment will be deemed to exist if a Malaysian enterprise carries on business in Australia through a person (other than an independent agent) who has authority to conclude contracts on behalf of the enterprise and habitually exercises that authority in Australia.
As you can see from the above, the Malaysian tax treaty considers that no permanent establishment exists if a Malaysian enterprise carries on a business in Australia through an agent of an independent status who is acting in the ordinary course of their own business as an agent.
Thus, although the non-resident share trader places trades through Australian brokers, and although those brokers could be considered to create a permanent establishment for the non-resident share trader, as those brokers are independent and as they are acting in the ordinary course of their own share-broking businesses, this does not create a permanent establishment for the non-resident share-trader.
Therefore for most non-residents for Australian tax purposes who are based in Malaysia, and who are conducting share trading/day-trading activities, the trading profits that they will generate (via their Australian based online brokers) will typically not be assessable in Australia, and as such, can be excluded from their Australian tax returns.
But what if a non-resident share-trader resides in and trades from a country that Australia has not concluded a tax treaty with?
Where a non-resident share-trader lives in a non-treaty country, such as the Hong Kong, or perhaps the United Arab Emirates, sadly the result is that their share-trading/day-trading profits will be fully assessable in Australia as Australian sourced income and taxed at non-resident tax rates starting at 32.5% from the very first dollar of profit made, and potentially higher at rates of up to 45%!
As explained previously, non-residents are required to pay tax in Australia on their Australian sourced income and as Australian courts have determined that because the trades entered into by the the non-resident trader are ultimately conducted and concluded via Australian brokers (placed by Australian brokers), the profits from those trades are Australian sourced income.
Thus, non-resident traders are considered to be making Australian sourced share-trading profits, all of which are fully taxable in Australia at non-resident rates.
Comparatively share-traders who live in countries that have concluded a tax treaty with Australia, are not taxed in Australia on their share-trading profits. Why? Because as explained above the business profits article of most of Australia’s tax treaties states that the profits of an enterprise that is conducted from the country where the trader resides shall be solely and exclusively taxed by that country and not by Australia.
Since tax treaties override domestic tax rules, this means that although Australia’s domestic tax laws state that non-residents must pay tax in Australia on their Australian sourced income, because the treaty passed the exclusive taxing rights to the other country, Australia is usually prevented from taxing share trading profits earned by non-resident traders who are resident in most treaty countries.
It should be noted here (as before) that each of Australia’s tax treaties are different so it is important to check the exact wording of the treaty that applies to your circumstances, to ensure that you understand just how the residency, permanent establishment, and the business profits articles in that specific treaty applies to your circumstances. Don’t just assume that every tax treaty applies in the same way that I have described it here in this article.
A quick summary
As you can see, the rules relating to share investing and share trading are very complex, and it can be difficult to work out how your gains and profits are taxed, and by which country, particularly when you reside in one country but are making investments and share trades in another country, such as Australia.
To summarise, although each of Australia’s tax treaties are different and this can produce varying outcomes, the following typically applies:
- Non-resident Share investors – capital gains made by non-resident share investors are generally not subject to capital gains tax in Australia on ASX listed investments that were purchased and sold whilst the person was a non-resident.
- Non-resident Share traders (resident in tax treaty countries) – where the share trader is a tax resident of the country where they reside for tax treaty purposes (i.e. not Australia), their share-trading profits will not be taxable in Australia, however those profits will generally be taxable in the country where the share-trader resides.
- Non-resident Share traders (resident in a non tax-treaty country) – share-trading profits are deemed to be Australian sourced income and will therefore be taxed in Australia at Australia’s non-resident tax rates starting from 32.5% and increasing up to 45%.
Got some questions? Or do you need some help?
If you’ve got some questions, or you need some help understanding how you your share trading profits or your gains on your investments are taxed by Australia, or the by country where you live (or perhaps by both), book an appointment with our friendly, experienced expatriate tax advisory team, or alternatively get in contact with us today! We’d be more than pleased to be able to work through your circumstances, and the various tax issues with you.
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