Many Australian expats that moved overseas before 2017 were told not to worry about their HECS debt in Australia, and that there was no requirement to repay it as long as they were foreign tax residents. In 2017 the law changed, which has landed many Australian expats in hot water.

Are you aware of your obligations?

The 2017 change in law

In 2017 it became compulsory for Australians overseas to report their foreign income to the Australian Taxation Office (ATO) for HECS assessment purposes. Before this change, this was not a requirement, and many highly skilled Australian expats with substantial HECS debts were not paying off their HECS loan.

When you move overseas and have an outstanding HECS debt, you’ll be required to report your information to the ATO. What you’ll be required to report is dependent on your residency for tax purposes status.

Resident for tax purposes

If you remain a tax resident, you’ll be required to lodge the following:

• An overseas travel notification if you depart Australia for a period of 6 weeks or longer. This lists date or departure, intended date of return, country of proposed temporary residence; and
• Normal tax return reporting worldwide income.

Double Taxation

As per Div. 770 of the Income Tax Assessment Act 1997, it isn’t a requirement for Australia to have a tax treaty in place with the other country to use foreign tax paid as a means of offsetting tax liability which arises from reporting foreign source income. If there is a treaty in place, the treaty will allocate taxing rights to one of the countries for taxing employment or freelancer income. This usually means that the income is exempt in the other country. If this isn’t the case, we would resort to Div 770 and apply a foreign tax credit to offset the income tax liability in Australia.

Foreign resident for tax purposes

If you’re a foreign tax resident, you’ll be required to submit an Overseas Travel Notification which will indicate whether or not the move overseas is of permanent nature, or whether you have a return date. We will also prepare a non-resident foreign income schedule. The approach in preparing calculations of this income is similar to a normal tax return; however, its purpose is entirely different. The purpose of this schedule is for the ATO to assess whether or not you’re required to make HECS repayments or not. The ATO will issue you a Notice of Overseas Levy in addition to the Notice of Assessment. The Notice of Overseas Levy will specify whether or not you’re required to pay, and if so, how much.

The HECS amount that you are required to pay as a result of the assessment will be taken out of your HECS loan and added to your income tax account. When this occurs, the HECS amount payable turns into a tax debt payable. This means the ATO has the same powers to chase up that debt as it does with “normal” income tax debt.

Part-year tax residency

When you leave mid-year and have earned assessable income before departure, we’ll have to prepare a combination of the normal tax return and the non-resident foreign income schedule for you. Here we will assess all the income received during the financial year, and apportion the foreign source income for the period you were a non-resident. This is the income that will be assessed for HECS purposes and not for income tax purposes. It is important that this is reported correctly to prevent overpayment of income tax.

What if I have trouble paying?

If you have trouble paying for the amount specified on the Notice of Overseas Levy, or if you simply want to manage your cash flows, we can help you by setting up a payment plan with the ATO. This allows you to make weekly, fortnightly, or monthly repayments.

It is really important you make payments on time, each time. Failure to do so could mean you’ll be required to pay the full balance at once. If you’ve got an overdue unpaid debt, the ATO could forward the matter to a debt collector. This could have negative consequences for your credit rating. It is always best to openly discuss your situation with your tax professional to best manage the situation.

Record Keeping

When we report foreign source income, we need to make sure the income reported reflects income received during the Australian financial year. For this reason, the payment summaries from countries with financial year overlapping with the Australian financial years are not sufficient to ascertain foreign source income earned.

We would be required to check your foreign payslips and other documents. ATO requires that these records must be able to be made available in English during an audit. If you can request your employer or other Institute to produce these in English from the word go, it’ll save you a lot of hassle later.

Penalties

Be aware that if you fail to lodge a non-lodgement advice or tax return it is likely the ATO will find out and impose penalties. The ATO now has advanced data matching capabilities which means Australian expats need to comply with their HECS obligations when going overseas.

If you fail to comply with the ATO HECS reporting requirements, the ATO may impose fines of up to $3,600.  Accordingly, we strongly recommend that you comply with the ATO’s reporting requirements each year as you do not want to return to Australia with penalties in addition to your tax debt.

How can Taxably help?

Residency status for tax purposes is a complex area of tax law. As a specialised tax practice, we strongly recommend you contact us for any tax queries prior to lodging to the ATO. We will assist you with your HECS obligations when you head overseas, or if you're currently overseas. Our specialist team will lodge all the correct records to the ATO, assist you in your understanding of the matter and ongoing obligations, and even negotiate the best possible payment plan on your behalf with the ATO.

Please get in contact with us through our website.