If you live outside Australia, the Australian Taxation Office can only tax income that has an Australian source, and the Australian source income rules for foreign residents turn on a handful of tests that vary by income type: where you physically perform the work, where a business operates, where real property sits, and who pays a dividend, interest coupon, or royalty. Getting the source test right decides whether Australia can tax the income at all, and if it can, at what rate.
One structural point sits underneath everything else. Foreign residents get no tax-free threshold. For the 2025-26 income year, tax starts at 30 cents in the dollar from the first dollar of Australian-sourced income, rising to 37 cents above $135,000 and 45 cents above $190,000.1Australian Taxation Office. Tax Rates – Foreign Resident The Medicare levy does not apply, because foreign residents are generally not eligible for Medicare.
Employment Income Follows the Worker
Salary and wages are Australian-sourced when the work is physically performed in Australia. Under Section 6-5 of the Income Tax Assessment Act 1997, ordinary income is assessable when derived from an Australian source, and courts have consistently applied a place-of-performance standard.2Australian Taxation Office. ATO Interpretative Decision 2002/216 – Assessability of Ordinary Income Where your employer sits, where you signed the contract, and which country your pay lands in do not change the answer. If your feet were on Australian soil when you did the work, the income is Australian-sourced.
Australian employers paying foreign resident workers must withhold under PAYG at foreign resident rates, which begin at 30 cents in the dollar from the first dollar. If the payee has not quoted an Australian Business Number, withholding jumps to the top marginal rate. These obligations bind foreign employers too, provided the services are performed in Australia.3Australian Taxation Office. Withholding from a Foreign Resident Employee
Business Profits and the Permanent Establishment Test
Business income follows the enterprise’s operational footprint rather than the individual’s location. The ATO looks at where contracts are negotiated and concluded, where goods are made or services delivered, and where the business is actually managed. Shipping goods into Australia from an entirely overseas operation is a different case from stationing sales staff in Sydney to close deals.
The pivot is whether the foreign enterprise has a permanent establishment in Australia. A branch office, factory, or workshop counts. A place where contracts are habitually concluded on the enterprise’s behalf counts. A pure storage or purchasing facility does not.
Under the US-Australia tax treaty, specific time thresholds decide whether temporary activity crosses into a permanent establishment:4Internal Revenue Service. Convention Between the Government of the United States of America and the Government of Australia for the Avoidance of Double Taxation
- Building, construction, or installation projects: more than 9 months
- Supervisory activities connected to a construction project: more than 9 months in any 24-month period
- Drilling rigs or ships used for natural resource exploration: at least 6 months in any 24-month period
- Substantial equipment maintained in Australia: more than 12 months
Once a permanent establishment exists, only the profits fairly attributable to it are Australian-sourced. The rest of the enterprise’s worldwide income stays outside Australian tax.
Dividends and Interest
Dividends Paid by Australian Companies
A dividend paid by an Australian resident company is Australian-sourced, but the tax treatment for a non-resident depends on franking. Fully franked dividends already carry imputation credits reflecting corporate tax paid, and a non-resident owes no Australian income tax or withholding tax on the franked portion. You do not include those dividends on an Australian return, and you cannot claim a refund of the franking credits.5Australian Taxation Office. Dividends and Non-Resident Companies and Shareholders
Unfranked dividends are subject to a final withholding tax: 30 percent for residents of non-treaty countries, and 15 percent for residents of most treaty countries, including the United States.6Australian Taxation Office. Interest, Unfranked Dividends and Royalties Because withholding is final, no further Australian liability arises and no deductions can be claimed against it. If any part of the unfranked dividend is declared conduit foreign income (profits the company earned overseas), that portion is exempt from withholding.
Interest
Interest is Australian-sourced when the borrower is an Australian resident or when the debt relates to an Australian business operation. The lender’s location is not the test. Withholding is 10 percent for non-treaty countries and 10 percent under the US-Australia treaty.4Internal Revenue Service. Convention Between the Government of the United States of America and the Government of Australia for the Avoidance of Double Taxation Some treaty settings give a full exemption in narrow cases, such as government-to-government lending or certain financial institution transactions.
Rental Income and Royalties
Rent from Australian Property
If the property sits in Australia, the rent is Australian-sourced. The physical location of the land or building is the sole test, and both domestic law and the US-Australia treaty confirm that.4Internal Revenue Service. Convention Between the Government of the United States of America and the Government of Australia for the Avoidance of Double Taxation A non-resident landlord lodges an Australian return reporting net rental income (gross rent less allowable deductions such as property management fees, repairs, and depreciation) and pays tax at the foreign resident rates.
Non-residents who invest through a Managed Investment Trust rather than holding property directly face a separate final withholding regime on fund payments: 15 percent for residents of countries with an information-exchange agreement, 30 percent otherwise, and a concessional 10 percent for distributions from a clean building MIT holding only energy-efficient commercial buildings with at least a 5-star Green Star rating.7Australian Taxation Office. Withholding Tax Arrangements for Managed Investment Trust Fund Payments
Royalties
Royalties use a payer-based sourcing rule. Under Section 6C of the Income Tax Assessment Act 1936, a royalty is deemed to have an Australian source if it is paid by an Australian resident or is deductible against the profits of an Australian permanent establishment. This covers payments for patents, copyrights, trademarks, and industrial designs. Where the intellectual property was created, and where it is being used, do not decide the source. Only where the payer sits.
Withholding is 30 percent for residents of non-treaty countries. Under the US-Australia treaty, the cap is 10 percent.4Internal Revenue Service. Convention Between the Government of the United States of America and the Government of Australia for the Avoidance of Double Taxation
Capital Gains: Only Taxable Australian Property Counts
For non-residents, capital gains tax reaches only assets that qualify as “taxable Australian property” under Division 855 of the Income Tax Assessment Act 1997. Gains on other assets are disregarded. The categories are:8Australian Taxation Office. Taxable Australian Property
- Australian real property: houses, apartments, commercial buildings, land, and leasehold interests
- Indirect interests in Australian real property: shares in a company whose assets consist principally of Australian real property
- Mining, quarrying, or prospecting rights where the resources are in Australia
- Assets used to carry on a business through an Australian permanent establishment
- Options or rights over any of the above, including off-the-plan purchase contracts
The indirect interest category catches a structure some non-residents assume is safe: holding Australian real estate through a company. If the company’s value is primarily derived from Australian land, the shares themselves are taxable Australian property.
15 Percent Withholding on Sale
Since 1 January 2025, buyers of Australian real property must withhold 15 percent of the contract price when the seller is a foreign resident, regardless of the property’s value. The previous $750,000 exemption threshold is gone. The withholding is not a separate tax; it is a prepayment against the seller’s CGT liability, and the seller claims it as a credit when lodging their Australian return.
No 50 Percent CGT Discount
Australian residents who hold an asset for more than 12 months can halve their capital gain. Foreign residents who acquired taxable Australian property after 8 May 2012 get no discount at all if they were non-residents for the entire ownership period.9Australian Taxation Office. CGT Discount for Foreign Residents If you were an Australian resident for part of the ownership period, a pro-rata discount is available for the resident portion. Assets acquired on or before 8 May 2012 have transitional rules allowing a partial discount under either a pro-rata or market-value method.
Main Residence Exemption Does Not Apply
This is the rule that catches expatriates hardest. If you sell your former home after 30 June 2020 and you are a foreign resident at the time of sale, the main residence exemption is unavailable. Years of living in the property as an Australian resident before leaving do not preserve it. The test is applied at disposal, and non-resident status at that moment disqualifies the exemption in full.10Australian Taxation Office. Main Residence Exemption for Foreign Residents
The narrow escape is the life events test. It requires that you were a foreign resident for a continuous period of six years or less, and that during that period one of the following occurred: you, your spouse, or your minor child was diagnosed with a terminal illness; your spouse or minor child died; or the sale was triggered by the breakdown of your marriage or relationship. Outside those circumstances the full gain is taxable at foreign resident rates with no discount.
Treaty Relief for US Residents
The US-Australia treaty stops the same income from being fully taxed by both countries. It works by allocating primary taxing rights to one country for certain income types and capping withholding rates on passive income.
The 183-Day Rule for Short-Term Work
Under Article 15, a US resident working temporarily in Australia is exempt from Australian tax on employment income if all three conditions are met:4Internal Revenue Service. Convention Between the Government of the United States of America and the Government of Australia for the Avoidance of Double Taxation
- Presence in Australia is no more than 183 days during the Australian income year
- Pay comes from an employer that is not an Australian resident
- Pay is not deductible against the profits of an Australian permanent establishment
All three must be satisfied. A US employee sent to work at a company’s Australian subsidiary for five months likely fails the third condition if the subsidiary bears or is charged for the cost, even though the 183-day count is fine.
Caps on Passive Income Withholding
The treaty caps the rate Australia can impose on passive income flowing to US residents:
- Dividends: maximum 15 percent of the gross amount
- Interest: maximum 10 percent
- Royalties: maximum 10 percent
The dividend cap applies only to the unfranked portion. Fully franked dividends already carry no non-resident withholding, so the treaty rate rarely binds on dividend income.
The Tie-Breaker If You Are Resident of Both Countries
Dual residency is common for US citizens living in Australia and Australians with a Green Card. Article 4 resolves it through a cascading test: permanent home first (with weight to where the family lives), then habitual abode, then closer personal and economic ties, with citizenship as the last resort. The treaty determination only governs treaty questions; it does not override domestic filing duties. A US citizen resolved as an Australian resident under the treaty still files a US return reporting worldwide income.
A Note for US Persons
If you are a US citizen or Green Card holder, being a non-resident of Australia does not simplify your US position. The IRS taxes worldwide income regardless of where you live, so Australian-sourced income sits on your US return as well. The usual mechanisms for avoiding double tax on the US side (the foreign tax credit) and the separate reporting obligations for foreign accounts and assets (FBAR and Form 8938) run in parallel to Australia’s rules, not in place of them. Australian superannuation raises specific US trust-reporting issues that turn on whether the fund meets the criteria in Rev. Proc. 2020-17.11Internal Revenue Service. Rev. Proc. 2020-17 Those obligations are a separate subject from the Australian source rules that decide what the ATO can tax in the first place.