If you've worked overseas in the past 12 months, finding the best exchange rate can lead to big savings on your tax bill.
There’s no escaping tax, and when you’re working and living overseas, you’re generally obligated to pay tax there too. If you’ve only lived there for part of the year, then you might need to pay taxes after returning to Australia. Unfortunately, once you add in the prospect of international exchange rates and transfer fees, the costs can balloon quickly.
This guide explains how to keep your costs down and how to find the most cost-effective way to pay tax overseas. Compare services below by entering in the amount you need to send and the country you're sending to.
Instantly compare some of the best international money transfer services
How do you pay tax on foreign income?
To pay tax on foreign income, you’ll generally need to make some kind of international money transfer. However, if you’re not careful, a big percentage of the transfer will disappear en route and not enough will arrive to pay the tax. Then you might be on the hook for a second transfer and even more fees.
There are two ways you can make an international money transfer:
- Your bank. You can transfer money through your bank. To make sure enough money arrives, you can opt to pay all the intermediary fees yourself. Your bank will typically charge an additional “correspondent fee” on top of everything else if you choose to do this.
- With an online money transfer service. These services are just as safe as a bank transfer, and they send money through the SWIFT network exactly the same as banks do. The difference is that they’re generally a lot more cost-effective. You can expect much lower transfer fees, significantly better exchange rates and full up-front fee information, typically without any correspondent fees.
Using an online transfer service instead of a bank might very easily save you hundreds of dollars.
How much does it cost to send money overseas?
If taxes are one certainty in life, then losing funds when you send money overseas is another. There are two main costs you need to consider when sending an international money transfer:
- The exchange rate. If you look at the current exchange rate and then the actual exchange rate you can get, you’ll probably find that your rate is well below the actual market rate. This is because transfer providers need to turn a profit, so they add on a margin before selling any foreign currency to you. The larger the transfer provider’s margin, the more your transaction will cost.
- The transfer fee. The second cost to be aware of is the transfer fee. While it’s sometimes calculated as a percentage of the total amount you’re sending, it’s usually charged as a fixed fee.
- Intermediary fees. These are fees taken out by other banks along the way as the money travels along the SWIFT network. After losing money to all these fees, there may not be enough money to pay your bill when your money finally arrives. Both bank transfers and online transfer services have these fees. Online transfer services will usually show them up front, while banks might leave it as a surprise, unless you pay a correspondent fee as well.
- Correspondent fees. This is a substantial fee, often in the $20 to $40 range. If you choose to pay the intermediary fees to make sure enough money arrives at the destination, banks will often charge a correspondent fee on top of everything else. You typically won’t have to pay this fee when you use online transfer services.
No two providers offer the same exchange rate and transfer fee, and these two figures can vary widely from one transfer company to the next. That’s why you should always compare a range of transfer providers to find the best value for money.
How can you save money on an international transfer?
Before sending an international wire transfer from your bank, look around for a better deal. While most people will use their bank to send an international transfer without a second thought, the reality is that banks often impose very high margins as well as very high fees. This can make banks some of the most expensive options.
However, you will often be able to save yourself a significant amount of money by sending funds via a specialist online transfer company. These businesses focus all their efforts on foreign currency exchange and operate completely online, so they tend to have much lower overhead and can offer substantially more competitive exchange rates on all transfers.
Their transaction fees also tend to be minimal. Some companies even waive all fees when you send a large amount of money. So rather than simply using your bank to send money overseas to pay your tax bill, compare the cost of using an online transfer company to see if you could save some money.
Bank vs online money transfer companies
How much can someone save by shopping around? Take a quick look at this example to see what a difference five minutes of shopping around can make.
After spending the best part of a year working in the United States before moving back to Australia, Asher now owes US$3,000 in tax to the US government. She was going to just use her bank, but decided to compare it with two online transfer companies in the hope of saving a few dollars.
As you can see, she managed to save a lot more than that.
|Bank||Online transfer company A||Online transfer company B|
|Exchange rate||AUD$1 = US$0.717||AUD$1 = US$0.758||AUD$1 = US$0.76|
|AUD needed to send US$3,000||AUD$4,178.85||AUD$3,957.80||AUD$3,947.35|
|Total cost of transaction||AUD$4,203.85||AUD$3,964.80||AUD$3,951.35|
|Money saved compared to the bank||$0||AUD$239.05||AUD$252.50|
*The above case study is fictional and the exchange rates were correct on 20 June 2017. Make sure to get a quote for current exchange rates.
If she also paid a correspondent fee, the difference might be even bigger.
How to compare money transfer providers
Before choosing an international transfer provider to help you pay your overseas tax bill, compare a number of providers to see which one offers the best service. Remember to consider the following factors when comparing:
- Transfer fees. Look at the fees, and whether there are ways you can get it waived. In Asher’s case, she might look for a “first transfer free” deal because she only needs to make a one-off payment. Remember to consider the fees in line with the exchange rates.
- Exchange rates. Consider these next to the fees. Sometimes it might be worth paying a higher fee to access more competitive rates. Features like forward contracts or limit orders might also help you access better rates.
- Transfer processing time. What’s your time frame? You might incur additional expenses, which might need further transfers, if your payment arrives late.
- Regular payment flexibility. Will there be multiple payments? It can help to look at whether you can set up multiple or recurring payments.
- Forward contracts and limit orders. These, respectively, let you lock in the current rate for a future transaction or schedule a transaction to take place at a certain rate.
- Customer support and assistance. How can you get in touch with someone if something goes wrong?
Three tips for paying taxes overseas
Shop around to find a more effective money transfer service, but bear the following in mind:
- If you’re an Australian resident, then you need to report income earned while overseas to the ATO. This applies even if you already paid overseas taxes on that income.
- It’s usually cheaper not to exchange money at all. If possible, you may want to try paying the taxes while still overseas in order to avoid exchange rates. Failing that, remember to shop around for the most competitive rates.
- Have you considered a multi-currency account? This is a single account that can hold multiple currencies. With this, you could save your income in US dollars and then use that money to pay your taxes without needing to lose on the exchange rates. When ready, you might take your time and wait until you can convert the rest back into Australian dollars at more competitive rates.
Paying taxes in Australia from overseas
It is also important for Australians who are working overseas to check if they need to pay any tax in Australia. Take a look at the following table to see if the ATO considers you a resident for tax purposes. For more information, you can check out our guide.
|Leave Australia temporarily and do not rent or buy a home overseas||Yes||Primary place of residence is Australia|
|Leave Australia permanently||No||Australia is no longer primary place of residence|
|Visiting Australia for more than six months and spend most of your time in one place||Yes||Behaviour of a resident|
|Visiting Australia for more than six months and spend your time in multiple locations||No||Behaviour of a traveller|
|Studying at an Australian institution for more than six months||Yes||Behaviour of a resident|