Prior to 1 July 2009, section 23AG ensured foreign employment income derived by an Australian tax resident in respect of overseas work assignments, which were longer than 91 days in duration and taxed in the overseas country, were exempt from Australian tax.
Note that the exemption was only ever available for those who were Australian tax resident. Such income needed to be included in the taxpayer’s return as exempt income, thereby ensuring any additional income was taxed at the tax payer’s top marginal rate and that Centrelink benefits were calculated taking the exempt earnings into account.
Then, without much in the way of consultation or warning, the rules were changed on 1 July 2009 to restrict the exemption to those working for overseas aid and charitable organisations and certain government workers (for example, defence and police force personnel deployed overseas).
This means that for all other Australian residents working overseas, foreign employment income will be fully taxable in Australia at resident tax rates from 1 July 2009. This will generally result in a considerable reduction to the taxpayer’s net income and is going to be a huge issue for hundreds of airline pilots, yacht crew, mining consultants and those employed in a range of other international businesses.
Unfortunately many taxpayers may well not be aware of their additional liabilities until filing their 2010 tax return sometime in 2011, when they may receive a large and unexpected tax bill from the ATO. Commuters who make regular visits back to Australia to visit their spouse or children are particularly at risk.
Due to the way in which the changes were brought in, many of the more technical implications are yet to be solved. However there are important ramifications for both individuals and foreign employers which are relevant now.
Can I become Non-Resident?
Only Australian tax residents are taxed on their foreign employment income, and those who are classified as tax non-resident are only taxed on Australian sourced income. So the rather extreme measure of leaving the country for good will save you tax!
However, rest assured that all those changing their residency status on the 1 July 2009 will come under intense scrutiny from the ATO, and proving that you have become non-resident is not as simple as just hopping on an aircraft. Neither is it as simple as just staying out of the country for 183 days; another popular myth!
You need to establish a “permanent place of abode” overseas and leave Australia with “no intention of returning”.
Don’t Forget your Spouse
The ATO will also take into consideration factors such as the intended and actual length of your stay overseas (you must generally be away for at least 2 years), and the maintaining of association with Australia.
This means that if you leave your family in Australia, or retain your accommodation without renting it out as an investment property (and potentially paying land tax), you may be seen to have not fully broken the connection with Australia.
Additionally if you have a pattern of regularly returning to Australia for holidays or days off, once again you are more likely to be deemed resident. Note the ATO have the power to look at your passport records if they believe there is reason to do so.
You should also ensure that you have left all sporting clubs, taken yourself off the electoral roll, closed bank accounts and stopped contributing to Australian super. (Not much point in doing this if you don’t intend to retire in Australia!)
Sort Out your SMSF & CGT Before you Leave
There are significant ramifications for your SMSF if a member becomes non-resident. If not dealt with correctly, these can be as punitive as the ATO declaring your fund non-complying and taking half the value of the fund as a penalty. Make sure you get advice before you leave on how to either maintain your SMSF or roll it into a suitable public offer fund.
Leaving Australia is also a capital gains tax event and elections may need to be made for any investment assets you hold, other than Australian real estate. With the removal of the 50% discount for non-residents proposed in the 2012 budget, the case for paying CGT on departure is stronger than ever.
How Do I Pay Australian Tax?
Technically, as your foreign employment income is no longer exempt from Australian tax, it is also now not exempt from Australian withholding tax obligations. Ludicrous as this may seem, it means that your overseas employer should be withholding income tax and remitting it to the ATO!
The ATO has even produced a special form for overseas employers with a connection with Australia to complete (NAT 73297), although I am not sure how they intend to police this process. It is more likely that it will be the taxpayer’s responsibility to finalise their tax affairs with the ATO each year and, once the relevant tax return is lodged, be subject to paying quarterly installments.
You will generally receive a credit for foreign tax paid, therefore it should be possible to complete a PAYG withholding variation which will allow a smaller amount of Australian tax to be withheld from your salary each month.
Overseas employers may also now be subject to fringe benefits tax and the ATO reporting requirements that entails. The following draft determination goes into the withholding and FBT issues in quite some detail. TD2010/D1 along with the TD 2011/1EC.
Those working temporarily overseas may be able to negotiate a living away from home allowance with their employer which is both fringe benefit and tax exempt. Again, further advice should be sought on this issue as the 2012 budget has reduced the availability of LAFHA substantially.
To discuss further contact me – Lindsay@LindsayBridgland.com.au