INTERNATIONAL ASSIGNMENT SERVICES. Australian Taxation of Foreign Nationals

Transcription

1 INTERNATIONAL ASSIGNMENT SERVICES Australian Taxation of Foreign Nationals

2 Table of Contents Introduction 7 1. Will I have to pay tax in Australia during my assignment? The Australian tax system 8 2. Will I be an Australian tax resident during my assignment? Residence for Australian tax purposes Dual residence Taxation of residents General principles Calculation of taxable income Assessable income Employment income Capital gains Dividend income Other income Employee share plans Attributable income of CFCs & FIFs Allowable deductions Foreign tax credit system Rental income Dividend income Interest income Offsets Dependant offsets Medical expenses offset Parenting allowance Taxation of non-residents General principles Calculation of taxable income Assessable income 24 4

3 4.3.1 Employment income Capital gains Passive income Allowable deductions Lodgment and payment procedures Will I have to lodge a return? When will I have to lodge a return? Assessment procedure Collection of tax at source PAYG Instalments Amendment and objection process Private rulings Tax file number Procedures and tax consequences on departing Australia General principles Capital gains tax Deferral of income and capital gains Fringe Benefits Tax Assessable income or fringe benefit Rate of tax FBT returns Treatment of specific items of remuneration Other taxes Payroll tax Property taxes Stamp duty Superannuation guarantee charge Interest Withholding Tax ( IWT ) Other taxes Business visas and work permits Short Stay Business Visas 39 (Subclass 456 and Electronic Travel Authorities) 9.2 Long Stay Business Visas (Subclass 457) 40 5

4 10. Social security and retirement benefits Health system Australian superannuation and termination benefits Superannuation contributions Withdrawal of benefits Foreign superannuation and termination benefits Payments relating to a period when you were 45 a non-resident of Australia Transfer of benefit from an overseas fund 45 to another fund 10.4 Other social security benefits Double tax treaties and tax havens Basic principles of double tax treaties Tax havens Tax planning Structure of remuneration package Timing issues Deferring certain actions until after departure Other planning Other considerations Exchange control Purchase of Australian real estate 50 Appendix A 51 Checklist of procedures in year of arrival 51 6

5 Introduction This booklet is designed to provide you with an understanding of the Australian tax implications of undertaking employment in Australia. It combines a general explanation of the law as at August 2002 with an overview of the tax issues that you need to consider in preparing for, and during the course of, your Australian assignment. Note that all tax rates are contained in a separate brochure. Click on the links to go directly to the relevant brochure. We know that having relocated to Australia, you have many issues to consider. This booklet cannot be an exhaustive tax analysis but serves as an introduction to give non-tax experts quick access to the important tax considerations involved in relocating to Australia. Tax planning is critical to the success of any overseas assignment. It is important to address the tax issues in both Australia and your home country prior to the commencement of the assignment. With proper planning, you and your employer can minimise your tax liabilities and avoid potential pitfalls. Deloitte Touche Tohmatsu International Assignment Services tax specialists can assist with assignment tax planning. With tax specialists in our offices throughout the world we can advise you on both Australian and foreign tax issues. In addition, we can assist you with projections of the total remuneration, tax and relocation costs for your Australian assignment. At the time of publication of this booklet, the Australian Government is contemplating substantial income taxation changes as a result of the Review of Business Taxation undertaken in July Some of the RBT recommendations specifically address the taxation of foreign nationals working temporarily in Australia. Legislation was introduced into parliament earlier this year which sought to reduce the tax burden on temporary residents by removing tax on most sources of foreign income and capital gains, as of 1 July Although the bill was rejected by the opposition parties, the government has indicated that it plans to push ahead with these tax reforms. Please refer to our website for articles and updates in relation to tax reform and other issues. Please note, the information and analysis in this booklet are not a substitute for competent professional advice. While every effort has been made to ensure that the text is correct, we cannot assume any legal responsibility for the accuracy of any particular statement. No action should be initiated without consulting your professional advisors. If you require further information regarding the matters dealt with in this booklet, please contact any of our offices. A list, with telephone numbers is on a the back cover of this publication. 7

6 1. Will I have to pay tax in Australia during my assignment? 1.1 The Australian tax system Generally speaking, you are taxed on your income in the year that you receive it. You will be taxed differently depending on whether you are a resident or a non-resident for tax purposes. The Australian tax year for individuals ends on 30 June and each individual liable to tax must file a separate tax return. Residents of Australia (refer 2.1) are subject to tax on gross income from worldwide sources. However, if foreign tax is payable on income derived overseas, the Australian tax payable will generally be reduced by a credit for the foreign tax paid (refer 3.5). Non-residents of Australia are taxable only on Australian source income, excluding interest, royalties and dividends which are subject to withholding tax at source. 8

7 2. Will I be an Australian tax resident during my assignment? 2.1 Residence for Australian tax purposes Your residence for immigration purposes does not determine and is not affected by your residence for tax purposes. For Australian taxation purposes, you are a resident of Australia if you: reside in Australia; or have an Australian domicile (see below), unless the Commissioner of Taxation is satisfied that your permanent place of abode is outside Australia; or have been physically present in Australia for more than 183 days of any income year (an Australian tax year begins 1 July and ends 30 June), unless the Commissioner is satisfied that your usual place of abode is outside Australia and that you have no intention of taking up residence in Australia. A non-resident is defined as being a person who is not a resident of Australia, that is, a person who does not meet any of the criteria for residency set out above. In the Commissioner s view, residency is determined having regard to whether an individual establishes and maintains a routine or mode of life that is relatively similar to the life enjoyed before entering Australia. The following factors will be relevant: purpose of your presence in Australia; your family and employment ties; maintenance and location of your assets; and your social and living arrangements. Where your day-to-day behaviour over a period of six months is similar to that before arriving in Australia, you will generally be regarded as residing in Australia from the date of arrival. Most individuals coming to Australia on an assignment expected to last more than 6 months will be regarded as tax residents of Australia. Your residency status must be determined for each year of income. If you are a resident of Australia for only part of the year, you are taxable as a resident for that part-year. 9

8 The concept of domicile is more permanent than residency. You have a domicile of origin in the country in which you were born. You may, at a later stage, acquire a domicile of choice in a different country if you regard that country as home. Most foreign nationals working temporarily in Australia are unlikely to have an Australian domicile. 2.2 Dual residence In some situations you may be a tax resident and subject to tax in both Australia and your home country under the domestic law of each country. Australia has concluded a number of treaties with other countries to avoid double taxation in these circumstances. These double tax treaties override Australian tax laws in the event of conflicting provisions. Tie breaker clauses set out criteria to determine the country in which you will be treated as a resident for the purposes of determining which country has first taxing rights on income covered by the treaty, in the event that you are a resident of both countries under their respective tax laws. These tie-breaker clauses vary from treaty to treaty (and the relevant treaty must therefore be referred to) but usually include some or all of the following factors: the country in which you have a permanent home available; the country in which you have a habitual abode; the country with which you have closer personal and economic relations; and your country of citizenship. The relevant Australian treaty must be reviewed to conclude your residency for treaty purposes. As a general rule, if you are not regarded as a resident of Australia for treaty purposes (even though you are an Australian resident under Australian domestic law) you will be subject to Australian tax only on income from sources in Australia. If you are an Australian tax resident you will want to read section 3 Taxation of residents. If you are not to be an Australian tax resident, you may wish to turn directly to section 4 Taxation of non-residents. 10

9 3. Taxation of residents 3.1 General principles As a resident taxpayer you are liable to tax on income from both Australian and foreign sources. You are also taxable on net capital gains from disposal of worldwide assets acquired, or deemed to be acquired, after 19 September Assets comprise any form of property and include intangible property. If you are entitled to claim Medicare benefits you will be subject to the Medicare Levy of 1.5% on your taxable income. If you are a higher income earner and do not have private health insurance you may be subject to a further 1% Medicare levy surcharge (refer 10.1). A tax-free threshold on taxable income is available to you as a resident (refer to Personal Tax Rates in the IAS Tax Summary). This threshold may be decreased if you are a part-year resident. As a resident you will be taxed at progressive rates which are detailed in the Personal Tax Rates section in the IAS Tax Summary. Where you have paid foreign tax on foreign sourced income, credit for that tax is allowed against Australian tax payable on that income, subject to certain limitations (refer 3.5). Foreign sourced employment income derived from a continuous 91 day period of foreign service may be exempt from Australian tax (eg a bonus in resect of previous overseas employment). If you are a tax resident you may be eligible for certain personal offsets which can reduce your Australian tax liability (refer 3.6). 3.2 Calculation of taxable income As a resident individual you are taxable on your taxable income for each year of income ending 30 June. Taxable income is calculated by deducting from assessable income all allowable deductions relating thereto for a particular year of income. Assessable income does not include exempt income. 11

10 Resident tax rates are applied to taxable income to determine gross tax payable from which any foreign tax credits and offsets are deducted to determine the net tax payable. 3.3 Assessable income Generally, your assessable income as a resident can be classified under the following headings: Employment income Your gross income includes most cash remuneration arising from your employment. Cash remuneration comprises salaries, wages, commissions, bonuses and allowances. Certain cash allowances, being living-away-from-home allowances ( LAFHAs ), are subject to the fringe benefits tax ( FBT ) regime and are therefore not income. An allowance is a LAFHA if it is provided to you while you are living away from your usual place of residence to compensate for additional expenses incurred and other disadvantages suffered in order to fulfil employment duties. Benefits-in-kind, such as accommodation, low-interest loans and motor cars, provided to you or your associate by your employer are not included in your assessable income. Instead, your employer is liable to FBT on the taxable value of these benefits (refer chapter 7). A lump sum payment that you receive as a consequence of termination of employment or office is taxable on a concessional basis. Bona fide redundancy payments are tax-free up to certain limits (refer to Superannuation and ETPs in the IAS Tax Summary). Termination payments are subject to a surcharge if your adjusted taxable income exceeds the Surcharge Threshold (refer to Superannuation and ETPs in the IAS Tax Summary). The surcharge is levied only on the portion of the termination payment relating to the period post 20 August Bona fide redundancy payments are not subject to the surcharge. Lump sums received on termination of employment can be rolled over, i.e. deposited directly into an Australian superannuation fund, approved deposit fund or other approved roll-over fund. Tax then becomes payable by the fund on the contribution. You will be liable to further tax when you withdraw an amount from the fund. 12

11 3.3.2 Capital gains Capital gains on sale of assets acquired after 19 September 1985 are assessable. Assets comprise any form of property and include intangible assets such as options, rights under restrictive covenants, etc., but exclude motor vehicles. The net capital gain is included in your taxable income and subject to income tax, generally at your marginal tax rate. Capital losses may be used to offset your capital gains. Any excess capital loss may be carried forward indefinitely to offset any gains realised in future years. Where you have held an asset for less than 12 months prior to disposal, the entire capital gain is included in your taxable income. Where you have held the asset for 12 months or more prior to disposal, you can elect between two methods for calculating the amount of capital gain to be included as assessable income. These methods are the Indexation Method and the Exemption Method (see below). Under the Indexation Method, the capital gain is determined after indexing the capital cost of the asset for the appropriate inflation rate as published by the Australian Statistician. As part of the transition to the new Exemption Method, indexation has been frozen at 30 September Under the Exemption Method, you can elect to claim an exemption of 50% of the nominal capital gain from the disposal of each asset. In other words, this method allows you to report a capital gain equal to 50% of the excess of the sales proceeds over the unindexed cost base of the asset disposed. Indexation is not applicable under this method. On becoming an Australian resident, you are deemed to have acquired at that time, for a consideration equal to their market value, most post 19 September 1985 assets that you own. Assets which are specifically excluded from the rules are assets having the necessary connection with Australia and assets which are specifically exempt from CGT (refer below). 13

12 Assets having the necessary connection with Australia are subject to the capital gains tax ( CGT ) rules regardless of your residency status. Assets which fall into this category are effectively located in Australia and include: Australian real estate; shares in Australian private companies; interests in Australian partnerships and trust estates; assets used in Australian businesses; interests of 10% or more in Australian public companies and unit trusts; options to acquire any of the above; and the benefits of certain restrictive covenants (eg non-compete clause payments) Your main residence is exempt from CGT provided that the property has been your main place of residence at all times prior to the disposal and has not been used for income producing purposes. If you cease to occupy your main residence whilst on assignment in Australia, you can elect that the property continue to be regarded as your main residence for CGT purposes, until the earliest of the following times: when the dwelling again becomes your main residence; when you dispose of the dwelling; or when the dwelling has been used for income producing purposes for a total of six years. The exemption from CGT is available even if the residence is used for income producing purposes (ie rented out) during your absence and you do not resume residence prior to disposal. There is also an effective exemption for personal use assets such as items of furniture and electrical appliances where the cost of the asset was $10,000 or less. However, certain assets, such as works of art and antiques, are subject to the CGT rules on disposal if the acquisition cost is at least A$500. The CGT implications upon departure from Australia are discussed in detail in Chapter 6. 14

13 A capital gain arising from the sale of an asset may attract tax in the country of source as well as in Australia. If a capital gain arising from a foreign source is taxable both in the source country and in Australia, you may claim a foreign tax credit for the foreign tax paid, up to the amount of Australian tax payable on the gain (refer 3.5) Dividend income As a resident you are subject to Australian tax on dividends received, regardless of their source. Australian sourced dividends are subject to the dividend imputation system, whereby as a shareholder you are entitled to a tax offset for the company tax paid on underlying profits. Dividends may be fully franked (where paid out of profits on which full company tax has been paid), partly franked (where paid out of profits on which only partial company tax has been paid) or unfranked (where paid out of profits on which no company tax has been paid). The following example illustrates the mechanics of the imputation system for a top marginal rate individual shareholder. Fully Unfranked franked dividends dividends $ $ Taxable profits of company Company tax paid at 30% 30 0 Net profit paid as a fully franked dividend to shareholder Shareholder receives cash dividend Imputation credit attached 30 0 Gross amount included in assessable income Shareholder subject to tax thereon at 47% (excluding Medicare levy) Less: Imputation credit (30) 0 Tax actually payable by shareholder Total tax effectively borne by shareholder on company profits

14 Your gross amount of foreign sourced dividends is fully taxable in Australia (refer 3.5.2) Other income As a resident you are subject to tax on all other income (including interest, rent, royalties, income from partnerships, trusts, pensions, businesses and any other income from any activity derived from any source, world-wide). Your foreign losses cannot generally be offset against Australian source income (refer 3.5) Certain foreign investment earnings you derive within a tax advantaged savings plan in your home country are likely to be subject to Australian tax Employee share plans The taxation of shares and options granted under employee share plans depends upon whether you acquired the shares and options before or after 28 March Where you were granted the shares or options to acquire shares under an employee share acquisition scheme ( ESAS ) before 28 March 1995, the rules governing their taxation are as follows: As a general rule, you are subject to tax at the time that unrestricted shares are acquired under an ESAS. The assessable benefit is the difference between the market value at that time and the amount paid to acquire the shares. However, where you elected to bring forward the taxing point to either the time when the options were granted or restricted shares acquired, no gain is recognised at the time that the options are exercised or restrictions on shares are lifted. On disposal of shares acquired under an ESAS, you will be subject to capital gains tax (refer for more details) on any further gain arising on disposal. 16

15 Where you were granted the shares or options to acquire shares under an ESAS on or after 28 March 1995 (subject to transitional rules which allow some rights or shares acquired after 28 March 1995 but before 1 July 1996 to be treated under the old rules), the rules governing their taxation are as follows: Where an ESAS meets certain conditions, it will be qualifying, and liability to tax can be deferred for up to 10 years from date of grant. A qualifying ESAS must involve ordinary shares (or options in respect thereof ) in either the employer company or holding company of the employer. The shares or options will not be qualifying when offered to employees with a shareholding of more than 5% in the company. The shares (but not options) must be offered to at least 75% of all permanent employees of the employer. Where the conditions are not met an ESAS will be nonqualifying, and you will be subject to tax on the value of the discount inherent in the option or share at the date of original grant, regardless of any restrictions on exercise or sale thereof. There are specific rules for determining the market value of unlisted options, taking into account the share price, exercise price and exercise period of the options and ignoring any restrictions attached to the options. Under these rules most options will have a value at grant date. If a qualifying ESAS satisfies certain additional conditions including being offered on a non-discretionary basis with a 3 year minimum disposal restriction, a $1,000 exemption of taxable value per annum is available to you, if you elect to be taxed up front on all ESAS benefits granted in a particular year. On disposal of shares acquired under an ESAS, you will be subject to capital gains tax (refer for more details) on any further gain arising on disposal. If you are subject to tax in your home country upon the acquisition of the shares or options, a foreign tax credit may be claimed in respect of the foreign tax paid on the gain (refer 3.5) in order to reduce the Australian tax payable. Care must be taken in these situations to avoid double tax on the gain, particularly since there are no clearly defined Australian tax rules regarding the source of the gain. 17

16 Professional advice should be sought from Deloitte Touche Tohmatsu on the application of these rules if you acquire shares or options or exercise options acquired under an ESAS while on assignment in Australia Attributable income of CFCs & FIFs There are three different regimes which can operate to attribute income to you as an Australian tax resident. Attribution means that you are assessed on income you do not actually receive, where that income is received by a foreign entity in which you have an interest. The Controlled Foreign Company ( CFC ) rules apply to attribute income to you as an Australian resident shareholder in respect of profits derived by a foreign company that is controlled by 5 or fewer Australian residents. The Foreign Investment Fund ( FIF ) regime can apply to assess you on the annual increase in market value of your non-controlling interests in foreign companies and trusts unless: you hold a temporary resident visa in Australia lasting no more than 4 years and you have not applied for permanent residency; or the total value of your investments in FIFs does not exceed A$50,000; or the investments are in foreign public listed companies which do not engage in certain prohibited activities (such as funds management and financial intermediation services); or the interest is held in a foreign employer sponsored superannuation fund; or the interest is held in a US corporation or certain other US entities subject to tax on worldwide income; or the interest is held in a US mutual fund. The Foreign Life Assurance Policy (FLP) regime can apply to assess you on the annual increase in surrender value of any FLPs in which you have an interest. 18

17 The non-resident trust estate rules can attribute income to you as an Australian resident if you have transferred property or services to a non-resident trust or have received a distribution from a non-resident trust. The rules under which these regimes operate are complex and professional advice should be sought on their potential application. 3.4 Allowable deductions Generally, expenses and losses are deductible provided you incur them in gaining or producing assessable income. However, expenses of a private, domestic or capital nature are generally not deductible. Commonly allowable deductions include: interest paid on funds you borrow to invest in income producing assets; depreciation of assets used to produce your assessable income; donations to approved organisations; employment-related expenses such as the cost of tools of trade, trade journals, business related seminars and regular subscriptions to trade, professional and business associations; business related travel expenses but not cost of travel from home to work; car expenses including all costs or outgoings that are incurred in maintaining and operating a car for employment related (ie business) purposes (allowable car expenses do not include the expenses of operating an employer provided vehicle or the costs of travel from home to work); and tax agent fees that you pay. Refer to our flyer Record keeping requirements for details regarding the evidentiary requirements that must be fulfilled in order to support employment related deductions claimed in your income tax return. 19

18 There is no standard deduction and you must be able to comply with specific substantiation rules where work-related claims exceed $300 in a year of income. When you make a claim for such expenses, you must declare in your tax return that you have the necessary receipts and other records (eg travel diaries for most overseas travel) to substantiate the claim. Contributions you make to your home country pension or tax advantaged savings arrangements are not allowable as tax deductions in Australia. Generally company contributions to such schemes would not be considered assessable income to you, but the tax treatment would depend on the terms of the individual scheme. Such contributions may be subject to fringe benefits tax or may be nondeductible to your employer. 3.5 Foreign tax credit system The Foreign Tax Credit System ( FTCS ) provides a mechanism for relief from double tax where you derive foreign income and foreign tax has been paid on that income. The source of an item of income is factual and is determined separately in each case. While there are general rules regarding different types of income, consideration must always be given to the facts surrounding each case. In general terms, income is sourced as follows: Income type Employment Dividend Interest Rental Factors determining source Where the duties are performed Where the profits, out of which the dividend is paid, are earned Where the obligation to pay the interest arose Where the property is situated Under the FTCS the Australian tax otherwise payable on foreign income is reduced by the amount of foreign tax paid. The credit in respect of any year is limited to the amount of Australian tax payable on the particular class of foreign income or the actual amount of foreign tax paid, whichever is less. 20

19 For this purpose there are two classes of income relevant to individuals: passive income; and other foreign income Passive income includes dividends, interest, annuities, rents, royalties, capital gains, commodity gains and attributed income (refer 3.3.6). Other foreign income includes employment and business income. Where the foreign tax credit claimed is limited to the amount of Australian tax on the particular class of foreign income, any excess foreign tax paid can be carried forward for up to 5 years to be offset against your Australian tax on foreign income of that class in a subsequent year. Where there is an overall foreign loss from a particular class of foreign income, that loss may be offset only against future income from that particular class (i.e. it is quarantined ). For this purpose, interest is a separate class of foreign income to other passive income. Hence your foreign interest income cannot be offset against your rental loss. Your foreign interest income is assessable and your foreign rental loss may be used only to offset income of that class in the same or a future year. Capital losses are separately quarantined under the general capital gains tax provisions (refer 3.3.2) Rental income You may rent out your home while you are on assignment in Australia. The rental income is assessable, for Australian tax purposes, and deductions may be claimed for expenses of maintaining your home. If you are also subject to tax on this income in your home country, a credit may be claimed for the foreign tax paid. As of 1 July 2001, interest and borrowing expenses incurred in relation to a foreign rental property are fully deductible in your income tax return. However where you have a net foreign rental loss generated by other deductions, this loss is not deductible against your Australian source income. It may only be offset against your other foreign sourced income of the same class (see above). 21

20 If you pay mortgage interest to an overseas bank or financial institution as a resident of Australia, you are generally required to remit interest withholding tax equal to 10% of the mortgage interest paid. You may not claim a deduction for the mortgage interest in your tax return unless this tax has been paid (refer 8.5). Our flyer Common rental deductions lists deductions that you can claim against your rental income, including an outline of the main rental property depreciation assets Dividend income The gross amount of foreign sourced dividends you receive (after grossing up for foreign withholding tax paid thereon) is taxable. You will be allowed a credit for any foreign tax paid on the income. Where you receive the dividends from a country with which Australia has entered into a Double Tax Treaty, the credit is limited to the rate of tax specified in the relevant treaty (refer to Australia's Double Taxation Treaties), notwithstanding that foreign tax may have been deducted in excess of this amount. A refund claim for the tax deducted in excess of the treaty rate must be separately made to the relevant foreign tax authority. You are not entitled to a credit for any foreign underlying tax paid by the foreign company on profits out of which the dividend is paid Interest income As a resident you are subject to Australian tax on all interest derived regardless of its source. You may claim a credit for foreign taxes you pay on foreign sourced interest. In the case of interest received from treaty countries, the foreign tax credit is limited to the rate of tax specified in the relevant treaty (normally 10% but sometimes 15%). Foreign tax may have been deducted in excess of this amount in which case a refund claim for the tax deducted in excess of the treaty rate must be made separately to the relevant foreign tax authority (refer to Australia's Double Taxation Treaties). 22

21 3.6 Offsets Details of the rates of personal offsets available to resident taxpayers are contained in Offsets in the IAS Tax Summary Dependant offsets As a resident taxpayer you may be entitled to claim an offset against Australian taxes payable where you maintain your spouse or your dependent parent or parent-in-law during the year Medical expenses offset As a resident taxpayer you are allowed an offset for unreimbursed medical expenses above a certain threshold incurred in obtaining medical treatment for you or your dependants (refer to Offsets in the IAS Tax Summary) Parenting allowance Dependent spouses with dependent children may directly receive a tax-free parenting allowance in cash, on a fortnightly basis, from Centrelink. Eligibility for the allowance depends upon the immigration residency status and the income of the dependent spouse, as determined for Social Security purposes. It is unlikely that a spouse holding a temporary resident visa will be eligible for these allowances. 23

22 4. Taxation of non-residents 4.1 General principles As a non-resident you are subject to Australian tax only on your Australian sourced income. As a non-resident you are subject to tax on gains derived from the disposal of certain assets having a necessary connection with Australia (refer 4.3.2). As a non-resident no Medicare Levy is payable (refer 10.1). No tax-free threshold is available and tax is payable at progressive rates (refer to Personal Tax Rates in the IAS Tax Summary). No concessional offsets are available to you as a non-resident. You are liable to withholding tax at the rate of 10% on Australian interest, 30% (reduced by most treaties to 15%) on the unfranked part of any Australian dividend income and 30% (reduced treaty rate of 10%) on Australian royalties (refer to Australia's Double Taxation Treaties). You will not be subject to Australian tax on franked dividends you receive. 4.2 Calculation of taxable income Your taxable income is calculated by deducting from assessable income all allowable deductions relating thereto for a particular year of income. However, as a non-resident you are taxable only on Australian sourced income, and may claim allowable deductions only for expenditure that relates to that income. 4.3 Assessable income Employment income Generally employment income is sourced where the services are performed. Accordingly, as a non-resident you are not subject to Australian tax on your earnings for services performed outside Australia. 24

23 Where you perform services both in and out of Australia, it is usually necessary for you to keep detailed records of all workdays to enable an appropriate apportionment between Australian and foreign source earnings, based on time spent in and out of Australia. In certain circumstances employment income for services in Australia may be exempt from Australian tax through the operation of a double tax treaty (refer 11.1) Capital gains The capital gains tax ( CGT ) regime is described at As a non-resident, you are subject to tax only on capital gains derived from the disposal of assets having the necessary connection with Australia acquired after 19 September These assets are described at Passive income Australian source interest you derive as a non-resident is subject to withholding tax at source (i.e. withheld and remitted by the payer) at the rate of 10% of the gross amount of the interest. This represents a final tax liability on such income and the income need not be included in your Australian tax return. It is your responsibility to advise the payer of your non-resident status. Australian source unfranked dividends that you receive while nonresident are subject to withholding tax at source at the rate of 30% of the gross dividend, unless Australia has concluded a double tax treaty with your country of residence (refer to Australia's Double Taxation Treaties), in which case a 15% (in most cases) withholding tax rate will apply. The withholding tax is a final tax liability on such income and the income need not be included in your Australian tax return. Australian source franked dividends that you receive while nonresident are not subject to withholding tax or to any further Australian tax in your hands and are not required to be included in your Australian tax return. 25

24 Australian source rental income is taxed on an assessment basis and is not generally subject to tax withholding at source. It is therefore required to be included in your tax return. Australian source royalty income is subject to withholding tax at source at the rate of 30% of the gross royalty, unless Australia has concluded a treaty with your country of residence (refer to Australia's Double Taxation Treaties), in which case a 10% (in most cases) withholding tax rate will apply. The withholding tax is a final tax liability on such income and the income need not be included in your tax return. 4.4 Allowable deductions Generally, expenses and losses are deductible only to the extent to which they are incurred in gaining or producing Australian source assessable income. Expenses of a private, domestic or capital nature are generally not deductible. Refer to section 3.4 for a list of the most common deductions. As with resident individuals, no standard deduction applies and you must retain proper documentary evidence to substantiate any deductions claimed. Expenses incurred in earning Australian sourced interest and dividends are not allowable deductions. 26

25 5. Lodgment and payment procedures 5.1 Will I have to lodge a return? If you are a resident of Australia you must lodge a separate tax return if your taxable income exceeds the tax free threshold for the year (refer to Personal Tax Rates in the IAS Tax Summary). You may also need to lodge a return if your income is below the threshold but you have had tax deducted from income at source (e.g. tax instalment deductions from salary). If you are a non-resident and you derive any Australian source assessable income you must lodge a return. Assessable income does not include dividend, interest or royalty income that is subject to the withholding tax provisions. Where you and your partner receive income jointly, you must each include your share of the income in your own return (for example net rental income from a jointly owned property). 5.2 When will I have to lodge a return? The Australian tax year ends on 30 June and income tax returns must normally be lodged by the following 31 October, although this can be varied each year by the Commissioner of Taxation ( Commissioner ). If your return is prepared by a registered tax agent, such as Deloitte Touche Tohmatsu, lodgment may be deferred provided you are registered on the tax agent's program by the date set for that purpose by the Commissioner. Tax agents are required to progressively lodge returns on their program and ensure that all returns are lodged by the due dates determined annually by the Commissioner. The due date is determined by the amount of tax that you paid in the previous year, and whether your prior year return was lodged by its due date and can vary from the end of October to mid-may of the following year. 27

26 5.3 Assessment procedure Shortly after lodgment of your tax return the Commissioner issues an assessment notice specifying the taxable income, tax assessed, credits allowed for foreign taxes, tax already paid and offsets. There is either a net refund, in which case a cheque is attached to the assessment notice, or a balance due for payment no earlier than 21 days from the issue date of the assessment. You may elect to have a tax refund deposited directly into a nominated bank account. A tax liability may be paid by direct debit on request. The assessment is usually based on information contained in the return, although the Commissioner is not obliged to rely solely on this information. A default assessment may be issued if you fail to lodge a return or a return is found to be unsatisfactory. 5.4 Collection of tax at source Tax on your employment income is withheld by way of the Pay As You Go ( PAYG ) Withholding system. Technically, the use of an offshore payroll does not avoid the PAYG withholding system. We recommend that you seek professional advice from Deloitte if you are paid by an overseas employer and PAYG withholding is not being deducted from your salary. Tax on your investment income may be withheld at source, either by non-resident withholding tax or at the top marginal rate of tax if you do not provide your tax file number to the investment body (refer 5.8). 5.5 PAYG Instalments If you had business or investment income on your last income tax return in excess of $1,000 and you had a tax liability of more than $250, you are generally liable to make tax payments under the Pay As You Go (PAYG) Instalment system. If you are liable to pay PAYG instalments, you will be notified by the ATO. You will receive an Instalment Activity Statement which will contain an instalment rate calculated by the ATO based on your latest assessed income tax return. 28

27 Most PAYG instalment payers will calculate their instalments by multiplying the instalment rate by their instalment income. Instalment income includes: fees received for services; employee share plan income; interest; rent; and dividends. Salary and wages are excluded. Instalment income does not include capital gains. PAYG instalments will usually be made quarterly. You have the option of making an annual payment where the following criteria are satisfied: your most recent notional tax (as advised by the ATO, usually corresponding to business and non CGT investment income from the previous year) was less than $8,000; and you (or a partnership in which you are a partner) are not registered or required to be registered for GST. Quarterly payments will be due no earlier than 21 days after the end of each quarter. Instalments for most taxpayers will therefore be due on 21 October, 21 January, 21 April and 21 July. Note that the ATO can extend these deadlines. The date for annual payments will be no earlier than 21 October following the tax year-end. You are able to vary the amount of each instalment in line with variations in your income. This can be done by applying to the ATO to vary the instalment rate. If your notional tax is in excess of $8,000 or if you are registered for GST purposes or are in a partnership registered for GST purposes you can choose to pay an amount notified by the Commissioner or you can calculate actual income subject to PAYG. 29

28 5.6 Amendment and objection process You can request an amended assessment to correct an error made when preparing the original return. This request should be made within four years of the issue of the assessment notice. You have four years in which to object to an assessment. Objections must be lodged in writing and state fully the grounds upon which they are based. The Commissioner must provide a written decision on the objection. You can appeal against an objection decision if still dissatisfied. 5.7 Private rulings You may request a private ruling to obtain the Commissioner's view on the application of a particular tax law. A private ruling issued by the Commissioner in respect of an arrangement which commenced after 30 June 1992 is generally binding on the Commissioner, but can be overridden by a subsequent Public Ruling in its prospective application. 5.8 Tax file number Every person liable to taxation in Australia must obtain a tax file number ( TFN ). You must complete an application form and present at least two types of original approved identity documents (eg passport, birth certificate) with the application to the Australian Taxation Office ("ATO ). You must provide your TFN to your employer within 28 days of commencing employment. Failure to do so creates an obligation on the employer to deduct tax instalments from your salary at the top marginal rate (currently 48.5%). If you are an Australian resident you should provide your TFN to your relevant financial institutions to avoid tax being withheld from income at the top marginal rate. If you are a non-resident you should advise your Australian financial institutions to deduct withholding tax at source from investment income. 30

29 6. Procedures and tax consequences on departing Australia There are a number of matters that you will need to address shortly before departing Australia. These matters generally apply only if you cease to be a resident of Australia when you depart. 6.1 General principles As a foreign national leaving Australia permanently, you will not be subject to any special administrative requirements other than to ensure normal tax return ruling requirements are competed (either before or after departure). No tax clearance certificate or notification to the ATO is required prior to departure from Australia. If you depart Australia during a tax year it will often be necessary to vary your PAYG instalments based on your estimated income for that year, if this is less than the income on which PAYG instalments have been determined. 6.2 Capital gains tax Upon ceasing to be an Australian resident, you are deemed to have disposed of all assets then held, to which the CGT provisions apply, at their market value at that date. Certain assets excluded from these rules include: assets acquired before 20 September 1985; assets having the necessary connection with Australia (refer 3.3.2); and assets held at the date that residence commenced, or acquired by inheritance, provided you were not a resident in Australia for more than 5 years in the last 10 years prior to ceasing residence. You may therefore be subject to tax on unrealised gains, including exchange rate variances in respect of assets held overseas. However, you may elect to treat all assets otherwise deemed to be disposed of as assets having the necessary connection with Australia. The effect of the election is that no gain is recognised at the time of departure from Australia and the actual capital gain on ultimate disposal will be subject to Australian tax. If appropriate, the election should be made for the tax year that you cease Australian residency. 31

30 The Protocol to the US/Australia Double Tax Agreement is expected to take effect from 1 July 2003 and offers protection against double taxation of capital gains for US citizens working in Australia as it has detailed rules allocating taxing rights in respect of capital gains. Under the Protocol, US Citizens who elect to defer the Australian CGT will, if they ultimately sell the assets after returning to the US, pay tax on the whole gain only in the US. If the gain is realised when the individual has a tax-home in a third country, the individual will have to pay Australian capital gains tax, but US domestic law provides a mechanism for allowing a credit for the Australian tax in such circumstances. If an individual departing Australia chooses to recognise the deemed disposal in Australia at departure, such disposal may, if so elected by the individual, also be recognised for US tax purposes. In this case, the individual will be considered to have sold and immediately reacquired the asset for US purposes at its fair market value at that time. This will ensure that US citizens may claim a credit for the Australian tax paid against their US tax liability. 6.3 Deferral of income and capital gains In order to not trigger an Australian tax liability before departing Australia, you should consider deferring the exercise of any options and the disposal of any assets to which the CGT or ordinary income tax provisions apply, until after departure from Australia. 32

31 7. Fringe Benefits Tax 7.1 Assessable income or fringe benefit It is necessary to distinguish between the items included in a remuneration package which are assessable income to you, upon which you are subject to income tax, and items which are fringe benefits, upon which your employer is subject to fringe benefits tax ( FBT ). The chart at 7.4 summarises the standard tax treatment of most commonly provided remuneration items. Where a benefit is subject to the FBT regime it is exempt from income tax in your hands. Whether an employer seeks to recover any FBT costs against your gross remuneration package is a matter of contract between you and your employer. Your employer must report the grossed-up value of all fringe benefits provided to you for any FBT year, on your annual payment summary. An exemption is provided where the taxable value (i.e. before the gross-up) is less than $1,000. You must report the amount on your tax return and it is taken into account for the purpose of computing certain charges, including the superannuation surcharge (refer ). 7.2 Rate of tax FBT is levied on the grossed up taxable value of all fringe benefits. The gross-up factor depends on whether or not your employer can claim an input tax credit under the Goods and Services Tax ( GST ) for the benefit year (refer to Fringe Benefits Tax in the IAS Tax Summary). The purpose of the gross-up is to equate the cost of providing a fully taxable fringe benefit with the cost of providing an equivalent benefit as salary for a top marginal rate taxpayer. FBT is a tax-deductible expense to the employer. 33

32 7.3 FBT returns The FBT year ends on 31 March and employers are required to lodge an annual return to report the taxable value of all benefits provided, ascertained in accordance with specific valuation rules. The taxable value of fringe benefits can be reduced by: any contribution made by you towards the provision of the benefit (eg running costs paid by you on an employer provided car); and the amount for which you could have claimed an income tax deduction if you had personally incurred the expense (eg the business use of a home telephone paid for by your employer). Certain benefits, such as Australian superannuation, are exempt from FBT and are not required to be included in an FBT return. 7.4 Treatment of specific items of remuneration As a general rule cash remuneration, including most allowances to cover estimated expenses, is income to you while benefits in kind and reimbursements of actual expenditures incurred by you are fringe benefits. Typical benefits included in an expatriate's remuneration package and their usual treatment for FBT purposes are shown in the following table. The actual tax treatment will depend upon your individual circumstances. 34

33 Type of Benefit Accommodation (1) Base Salary Business Subscriptions Car allowance Car provided Car for spouse Car parking Children's education (1) Domestic help Employee shares and options Entertainment reimbursed Frequent flyer benefits from employer paid travel (2) Home leave (1) Home telephone (part business use) Home purchase and sale costs (4) In-house benefits Language lessons (English for migrants) Laptop computer Leasing of household goods (1) Life insurance premiums Living away from home allowance (LAFHA) (1) Low or interest free loan Medical insurance premiums Mobile phone Orientation briefings Relocation expenses including storage Settling-in allowance Sporting club subscriptions Australian Superannuation contributions Tax equalisation payments (3) Australian tax return preparation fees Utilities Subject to Fringe Benefits income Tax No FBT Concessional FBT Full FBT 35

34 The following notes should be read in conjunction with the table: 1. You must be living away from home in order for the benefit to be either exempt from, or subject to, concessional FBT. As a general rule, you will be considered to be living away from home if you are working in Australia on an assignment of a finite duration with a definite intention to return to your home country to live at the completion of the assignment. 2. Where you pay for the membership into a frequent flyer scheme, the value of benefits obtained from the use of frequent flyer points accumulated from employer paid travel are generally non-assessable income to you and also exempt from FBT, unless the membership of the scheme was obtained by arrangement between the employer and an airline. Where an employer pays your membership fee for use of an airport lounge, the fee itself is specifically exempt from fringe benefits tax. 3. The tax treatment of tax equalisation payments depends upon the tax equalisation arrangements in place. However, tax equalisation settlements are usually treated as part of your assessable income. 4. You must have changed your usual place of residence and sold a house at the former location within a certain time period for the benefits to be exempt from FBT. 36

35 8. Other taxes There are a number of indirect taxes levied by State governments and municipal authorities, which are relevant to foreign nationals working in Australia. The more commonly encountered taxes are briefly described below. 8.1 Payroll tax Payroll tax is levied by each State government on the gross payrolls of employers operating in that State. Most States exempt employer groups with a total payroll of under $500,000 from the tax and adopt a maximum rate of tax of 6.85%. The tax is payable by the employer. 8.2 Property taxes There are two types of property tax: Rates levied by local authorities on all properties to cover the cost of community services; and Land tax levied by State governments at varying rates on the unimproved value of land. In most states, it is not applicable to the average home but may apply to investment properties. 8.3 Stamp duty Stamp duty is a tax imposed by State governments on certain documents including contracts for the purchase of houses and cars. Bank debits tax is payable on withdrawals from bank accounts in some states of Australia. 8.4 Superannuation guarantee charge A non tax-deductible charge is imposed on employers for failing to provide a minimum level of superannuation contributions for each of their full-time, part-time and casual employees. The required employer contribution level is determined based on a percentage of ordinary time earnings (refer to Superannuation and ETPs in the IAS Tax Summary). 37

36 The charge is equal to any shortfall in contribution plus a penalty for failure to comply. At present there are certain limited classes of employees for whom contributions are not required, including: prescribed employees (refer ); employees that are exempt under a totalisation agreement (refer ); employees aged 70 and over; and employees receiving salary and wages of less than $450 a month. 8.5 Interest Withholding Tax ( IWT ) All residents of Australia, who pay interest to a non-resident of Australia, are required to withhold and remit to the ATO, a tax equal to 10% of the gross interest paid. An exception is provided where the interest is incurred as an expense of carrying on a business overseas. You are liable to interest withholding tax if you are a tax resident and pay mortgage interest to a bank in your home country, regardless of whether your residence is used for income producing purposes. This interest withholding tax should be remitted via an Instalment Activity Statement (refer 5.5) although you will need to complete an additional form to have this information added to your quarterly statement. US citizens will be exempt from IWT once the Protocol to the Double Tax Agreement between Australia and the US takes effect. The Protocol is expected to take effect from 1 July Other taxes There are no death, estate, gift or wealth taxes in Australia. Sales tax is a Federal tax, which is generally imposed on the last wholesale sale of new goods imported into or manufactured and consumed in Australia. Goods and Services Tax (GST) is levied on most goods and services at a rate of 10%. The Tourist Refund Scheme is a GST recovery mechanism which permits an outbound traveller from Australia to recover GST paid on goods which are being exported as accompanied baggage. The refund will be paid on goods costing $300 (GST inclusive) or more, bought from the same store, no more than 30 days before you leave. 38

37 9. Business visas and work permits All nationals, excluding Australian and New Zealand citizens, require a valid visa to enter and remain in Australia. The appropriate type of visa will depend on an individual's intended length and purpose of stay. The time involved in securing a visa is usually greater the longer the period of stay required. The following visa classes may be suitable for persons seeking to enter Australia for business or employment purposes. 9.1 Short Stay Business Visas (Subclass 456 and Electronic Travel Authorities) Individuals intending to visit Australia for business purposes such as negotiations, speaking at or attending conferences, or fulfilling contractual obligations for an overseas employer may apply for a Short Stay Business visa if they are not required to remain in Australia for more than three months. These visas accommodate most business/work activities that will not have adverse consequences for employment or training opportunities, or conditions of employment, for Australian citizens or Australian permanent residents. However, applicants for Short Stay Business visas must not intend to undertake any business-related employment or training activity in Australia as this is not a work visa and persons seeking to engage in paid employment in Australia should apply for the Long Stay Business visa (Subclass 457). For nationals of certain countries, the Short Stay Business visa is available as an Electronic Travel Authority (ETA), an electronically stored visa which can be obtained from travel agencies, airlines or over the internet. Individuals who are not eligible for an ETA, can make an application for a Subclass 456 Temporary Business (Short Stay) visa at the nearest Australian diplomatic mission or, in some countries, certain local travel agents, through agency arrangements. It is not possible to apply for a subclass 456 or ETA visa in Australia. 39

38 9.2 Long Stay Business Visas (Subclass 457) Subclass 457 visas provide for long-term stay and employment in Australia for periods of more than three months and up to four years for expatriate personnel in the following categories: employees of Australian based companies; personnel from offshore companies seeking to establish a branch of the company in Australia, participate in joint ventures or undertake employment in relation to a contract awarded to an offshore company; independent executives seeking to establish new businesses or join existing businesses in Australia; certain services sellers; and certain persons accorded diplomatic-type privileges and immunities To seek a Subclass 457 visa for an expatriate to work for an organisation in Australia, there are generally three processing steps administered by immigration as follows; the employer must be approved as sponsor; the employer must then lodge a business nomination which describes the activity (vacancy/position) to be undertaken by the expatriate and that nomination must be approved; and a visa application must be made by the applicant. Subclass 457 visas are granted with multiple entries for a specific period of time (up to 4 years). The primary or main applicant is only entitled to work in Australia for the sponsoring organisation in the nominated occupation approved by immigration. Provisions exist in Australian immigration law for Subclass 457 visa holders to change employer or occupation in Australia. The sponsorship, nomination and visa application can be lodged with a local or overseas Australian immigration office. Subclass 457 visa applications may include the primary applicant's spouse and dependent children. Provisions exist in Australian immigration law for Subclass 457 visas to be extended from within Australia for a further temporary stay or permanent residence. 40

39 10. Social security and retirement benefits 10.1 Health system The Medicare levy is a compulsory form of health insurance administered by the Australian Government. If you are a tax resident of Australia you are generally subject to the Medicare levy, collected as part of the tax system. No levy is payable if your taxable income is below a certain level and phasing-in provisions apply to low income earners. If you are liable to the Medicare levy, you must pay an additional 1% surcharge if you are a high income earner and you do not have private hospital insurance with an Australian registered health fund (refer to Medicare levy in the IAS Tax Summary). If you are a non-resident of Australia, you are not subject to the Medicare levy or surcharge. Part year residents are entitled to a proportionate reduction in the levy for the period of non-residence. If your earnings are below the relevant thresholds you will receive a tax offset if you have private health insurance. As an incentive to take out private health insurance with a health fund registered in Australia, you may be able to receive a reduction in the cost of private health insurance in the form of an offset. The offset can be claimed either as a direct reduction in the insurance premium, a cash or cheque rebate from Medicare or as an income tax offset. Most expatriates working in Australia on temporary resident visas are ineligible for Medicare benefits. However contributors to government health schemes in the United Kingdom, Finland, Malta, Italy, Sweden, New Zealand and the Netherlands are entitled to receive limited reciprocal rights under Medicare. If you are not entitled to Medicare benefits you may apply to the Minister of Health for a certificate of ineligibility to Medicare benefits which will relieve you of liability to the Medicare levy and surcharge. This application is generally filed at the end of an income year and cannot be filed for a future period. 41

40 The benefits available under Medicare cover only certain treatment by doctors, so private medical insurance cover is common and recommended. None of the agreements that Australia has entered into with other countries regarding social security benefits (totalisation agreements) limit the liability to the Medicare levy. Under Lifetime Health Cover, health funds are required to increase premiums over a base rate depending on the age when a member first takes out hospital cover with a registered health fund. If you join after the age of 30, you will pay a 2% premium loading for each year you delay joining. The loading is capped at a maximum of 70% above the premium payable by a person who joins at the age of Australian superannuation and termination benefits Superannuation contributions Your employer is required to make a minimum annual contribution to superannuation on your behalf, calculated as a percentage of salary up to a maximum income threshold. Failure to contribute the required amount will result in a non-deductible superannuation guarantee charge being imposed on your employer (refer 8.4). Any superannuation contributions made by an Australian employer to an Australian complying superannuation fund are deductible to the employer provided they are within the deductible limits (refer to Superannuation and ETPs in the IAS Tax Summary). Superannuation contributions made by your employer as well as fund earnings are assessable to the superannuation fund (at the rate of only 15% for a complying resident fund which satisfies various prudential requirements). A surcharge is imposed on the fund in respect of deductible contributions made on behalf of employees and by self employed individuals where the individual's total income, broadly defined as taxable income plus deductible superannuation support, exceeds a certain threshold. If your total income exceeds the threshold a 15% surcharge will be imposed on the fund (refer to Superannuation and ETPs in the IAS Tax Summary). 42

41 Employees cannot generally claim a tax deduction for their own contributions to superannuation, although this may be effective in certain limited circumstances. Exemption from superannuation Your employer may not need to make superannuation contributions on you behalf if: You meet the criteria for exemption from superannuation as a prescribed employee : you hold a subclass 456 or 457 temporary resident visa or ETA equivalent (956 and 957); and either a) Have been appointed as the company's national (or deputy national) managing executive, or state manager; or b) i) Are a senior executive, or are otherwise establishing a business activity in Australia on behalf of the company; and ii) Your position carries substantial executive responsibility; and iii) You have the appropriate qualifications; and iv) Your role is a full time position; or You meet the criteria for exemption from superannuation under a totalisation agreement: a) You are from a country with which Australia has a totalisation agreement which provides relief from superannuation, and b) You would otherwise be covered by the social security / compulsory pension laws of both countries; and c) Your assignment period (both expected and actual) is within the prescribed limits; and d) Your employer obtains a Certificate of Coverage from the relevant home country authority. Australia has negotiated social security agreements that include relief from dual social security/superannuation obligations with the following countries: USA Portugal Netherlands. 43

42 The agreements with the USA and Portugal took effect from 1 October 2002 and the agreement with the Netherlands is expected to take effect from 1 April Withdrawal of benefits You can generally only withdraw benefits from an Australian superannuation fund on: death; permanent disability; or ermanent retirement from the work force. As of 1 July 2002, accumulated superannuation benefits may be refunded to certain foreign nationals who have permanently departed Australia. Access to accumulated benefits will be granted where: You entered Australia on an eligible temporary resident visa; and Your visa has expired or been cancelled; and You have permanently departed Australia. There is an administrative requirement to satisfy the Superannuation Trustee that the funds may be released. The refund of accumulated superannuation entitlements will be subject to a final withholding tax at a rate dependent on the type of contributions made into the fund. For compulsory superannuation guarantee charge contributions the rate is 30% (if you are less than age 55). This tax is a final tax and you are not required to report the payment in your Australian tax return. Certain components of lump sum termination benefits that you receive (including payments of pensions and annuities which do not comply with certain standards) which do not in total exceed a reasonable benefit limit (RBL) are taxed at concessional maximum rates. For the current rates and RBL, refer to Superannuation and ETPs in the IAS Tax Summary. Any benefit in excess of your RBL which you take as a lump sum is taxed at the top marginal tax rate of 47% plus the Medicare levy (if applicable). 44

43 Lump sum benefits from an Australian fund cannot be rolled over to a foreign superannuation fund without incurring a tax liability, although tax deferral may be available upon rollover to another complying Australian fund Foreign superannuation and termination benefits Payments relating to a period when you were a non-resident of Australia (i) Foreign superannuation payments Generally, if the foreign fund benefit was accumulated while you were a non-resident of Australia and is paid out within 6 months of you becoming an Australian resident, it will be exempt from Australian tax. However, if the benefit is received outside the 6 month period, a part thereof will be assessable. The amount subject to tax will (with certain exclusions) be the excess received over your accumulated entitlement in the foreign fund on the day you became a resident plus additional contributions thereafter. You may claim a foreign tax credit for foreign tax paid on the amount that is assessable in Australia. (ii) Foreign termination payments In most cases, any other lump sum payment made solely in consequence of termination of a period of foreign employment is exempt from Australian tax, even if received after you again become an Australian tax resident Transfer of benefit from an overseas fund to another fund If you transfer a benefit from an overseas fund to another fund it is treated in the same way as a benefit payment and is subject to tax at the time of the transfer. The amount you transfer will be a member undeducted contribution to the recipient fund and can thus be subsequently withdrawn free of Australian tax, e.g. certain UK pensions can be transferred in a tax effective manner to certain approved Australian funds. 45

44 10.4 Other social security benefits While Australia operates a social security system which provides pension, health, unemployment and a range of other benefits to low income earners, no special contributions have to be made to this system, either by employer or employee, other than the Medicare levy. Family allowances are paid to families supporting children under 18 years of age and certain full-time dependent students. In addition a non-working spouse may be eligible for the parenting allowance (refer 3.6.3). On arrival in Australia you should contact your local Centrelink office to ascertain eligibility for such benefits. Australia has entered into a number of totalisation agreements with other countries for the provision of social security benefits. These agreements provide a definition of residency for social security purposes and determine an individual's entitlement to welfare payments such as unemployment, age and widow pensions. 46

45 11. Double tax treaties and tax havens 11.1 Basic principles of double tax treaties Australia has entered into a number of double tax treaties (refer to Australia's Double Taxation Treaties). Australia's tax treaties generally follow the OECD model and are designed to minimise the likelihood that you are subject to double tax on the same income in two different countries. Common provisions found in most of the treaties include: exemption from Australian tax on income derived (when you are a resident of another country) from employment in Australia which is not attributed to a fixed base of the employer in Australia, provided you are present in Australia for less than 183 days in the tax year and, as a general rule, are subject to tax on the employment income in your country of residence; dividends received when you are a resident of one country from a company resident in the other country subject to tax at no more than 15% in the country of source; interest received when you are a resident of one country from a source in the other country subject to tax at no more than 10% in the country of source; and pensions and annuities derived when you are a resident of one country normally subject to tax only in that country Tax havens There are no tax havens within Australia. Effective controlled foreign company ( CFC ) and foreign investment fund ( FIF ) legislation exists which precludes a resident of Australia from sheltering income offshore in a tax haven (refer 3.3.6). 47

46 12. Tax planning Various planning techniques are available to foreign nationals working in Australia. Their practical application will vary depending upon your personal situation. The following techniques are a guide only as to what may be suitable and professional advice should always be obtained regarding the practical application of a particular technique Structure of remuneration package You should agree on the structure of your remuneration package prior to arrival to maximise the tax advantage arising from the inclusion of benefits which are either exempt from, or subject to concessional FBT (refer 7.4). Include a living away from home allowance as compensation for additional expenses incurred and other disadvantages suffered where you are required to live away from your usual place of residence in order to undertake employment duties. Such allowances are, to the extent that they represent allowances for reasonable additional accommodation and food costs, tax free. Annual tables are published to determine the reasonable food cost component. (Refer to Fringe Benefits Tax in the IAS Tax Summary). Consider provision of Australian superannuation in excess of statutory contribution levels. Any home country tax implications of an Australian superannuation fund should also be considered Timing issues Time arrival and departure dates on shorter term assignments to take advantage of possible treaty exemptions in the first and last year of an assignment. Receive allowances not directly related to the Australian assignment before becoming a resident of Australia. Receive bonuses relating to previous employment before becoming a resident of Australia. Receive bonuses in relation to Australian employment after becoming a non-resident if a double tax treaty is applicable to exempt such income from Australian tax. 48

47 Minimise liability to income tax and CGT by restructuring ownership of foreign assets acquired after 19 September 1985 before becoming resident in Australia. Exercise employee share options before becoming an Australian resident Deferring certain actions until after departure Do not dispose of assets potentially subject to CGT while a resident of Australia. Do not exercise options granted under an employee share plan while a resident of Australia. Do not receive restricted shares under an employee share plan while in Australia Other planning Split unearned income (e.g. interest and dividends) between adult family members or across several tax years to take advantage of lower marginal rates. If a tax resident, consider investing in Australian companies to take advantage of imputation credits attached to franked dividends paid by such companies (refer 3.3.3). Structure assignment to be able to claim that you are solely resident of another country under a treaty, thereby ensuring Australia has no taxing rights on certain types of income. 49

48 13. Other considerations 13.1 Exchange control Exchange control was abolished some years ago. However cash transfers into or out of Australia that exceed $10,000 must be reported to the Australian Transaction Reports and Analysis Centre. It is the responsibility of the cash dealer to report the cash transfer. Cash dealers are primarily financial institutions but include other persons and institutions that have the capacity to collect significant sums of cash. Various tax reporting requirements may be imposed on transfers of currency from Australia to designated countries considered tax havens Purchase of Australian real estate If you are a temporary resident and wish to purchase Australian real estate you will generally be required to obtain approval from the Foreign Investment Review Board. Such approval is not easily granted to temporary residents for immigration purposes. No special tax concessions apply regarding the purchase or construction of a personal home. Interest on borrowed funds used for this purpose is not tax deductible. However, any gain on disposal of an individual's principal residence is exempt from CGT. Limited tax deductions are available for maintenance costs required for the business use of a home study. More significant deductions are available if a portion of the home is used as a place of business. 50

49 Appendix A Checklist of procedures in year of arrival Procedure Done See paragraph Does my letter of assignment detail the intended terms of my arrangements regarding length of stay and remuneration package? Has my remuneration package been structured in the most taxeffective manner for FBT purposes? Am I going to be in Australia less than 183 days in a year of income and qualify for exemption from tax by reason of a double tax treaty? Am I a resident or non-resident of Australia for tax purposes? Have I obtained a tax file number? Have I advised my employer and all investment bodies of my tax file number? Have I registered with a tax agent to obtain extended tax return lodgment arrangements? Am I keeping details of days worked in and out of Australia if I am a non-resident or my foreign earned income is subject to tax overseas? Have I obtained a record of the market value of all post CGT assets held at the date that I became a resident of Australia, in case I should sell them while resident in Australia? Have I made any necessary elections regarding employee shares/options granted to me before I became a resident of Australia? , Do I need to continue to file an overseas tax return while in Australia and if so, have I made the necessary arrangements for its completion? Am I on an Australian payroll and will I be getting an Australian payment summary in respect of my earnings for each tax year or will I need to obtain annual details of my earnings paid by a foreign employer to report on an Australian tax return?

50 Procedure Done See paragraph Am I aware of the need to maintain a travel diary for all overseas business trips? Am I keeping records to substantiate all expenditure that is taxdeductible? Have I registered with an Australian private health insurance fund to avoid the Medicare levy surcharge? Do I qualify for social security benefits? Will I have to pay instalments of tax under the PAYG instalment system?

51 You can contact the following DELOITTE AUSTRALIAN IAS PRACTICES Sydney Grosvenor Place 225 George Street Sydney NSW 2000 (02) Melbourne 505 Bourke Street Melbourne VIC 3000 (03) Brisbane Riverside Centre Level 26, 123 Eagle Street Brisbane Qld 4001 (07) Perth Central Park St George's Terrace Perth WA 6000 (08) Adelaide Deloitte House 190 Flinders Street Adelaide, SA 5001 (08) ACTUARIAL ASSURANCE & ADVISORY CORPORATE FINANCE CORPORATE REORGANISATION ENTERPRISE RISK SERVICES FORENSIC DELOITTE GROWTH SOLUTIONS MANAGEMENT SOLUTIONS RE:SOURCES TAX

52 FBT continued FBT on Cars Statutory Formula Annualised Kilometres Travelled Statutory Fraction Applied to Car Cost 14,999 or less 26% 15,000 to 24,999 20% 25,000 to 40,000 11% 40,001 or more 7% Offsets 20% rebate on unreimbursed medical expenditure over $1,500 Dependent spouse tax offset (2001/02) $1,437 Low income earner tax offset $150 Family Tax Benefit (FTB) Part B youngest child under 5 - $2,836, youngest child 5 or over - $1,978 Notes: (1) Spouse tax offset reduced by $1 for every $4 by which the spouse s net income exceeds $282 (2) Low income earner tax offset is reduced by $1 for every $4 which the taxpayer s income exceeds $20,700 (3) FTB reduced by 30 for every $1 by which the spouse s income exceeds $1,752 Australian Tax Timeline 1 July 2002 Beginning of the 2002/03 Australian tax year 28 October 2002 Last date for payment of 1 st quarterly PAYG instalment for 2002/03 31 October 2002 Last date to be listed on Deloitte s lodgment program to obtain an extension to the tax return filing deadline. 28 February 2003 Last date for payment of 2 nd quarterly PAYG instalment for 2002/03 28 April 2003 Last date for payment of 3 rd quarterly PAYG instalment for 2002/03 (+/-) 30 April 2003 Last date for lodgment of 2001/02 return ~2 weeks after lodgment 2001/02 income tax assessment issues from ATO 30 June 2003 End of the 2002/03 Australian tax year 28 July 2003 Last date for payment of 4 th PAYG instalment for 2002/03 21 October 2003 Last day for payment of 2002/03 annual lump sum PAYG Visit our client resources website for access to Australian tax information and administration documents you will need during your international assignment Contacts Sydney (02) Sally Morton Stephen Coakley Melbourne (03) Sarah Lane Adelaide (08) John Rawson Brisbane (07) Lisa Hando Perth (08) Ross Atkins This publication is of a general nature, intended as a background briefing only. It is not intended to be relied upon as, nor to be a substitute for, specific professional advice. No liability will be accepted for any loss occasioned to any party acting upon or refraining from acting in reliance on information contained in this publication. The liability of Deloitte Touche Tohmatsu is limited by, and to the extent of, the Accountants Scheme under the Professional Standards Act 1994 (NSW) Deloitte Touche Tohmatsu. All rights reserved. Printed in Australia. International Assignment Services Tax Summar ummary 2002/2003

53 Personal Tax Rates Resident Non Resident Taxable Income $ Tax $ % On Excess Taxable Income $ Tax $ % On Excess 6,000 Nil 17 Nil Nil 29 20,000 2, ,000 5, ,000 11, ,000 14, ,000 15, ,000 19, Note: (1) The general tax-free threshold of $6,000 is reduced in a year of partial residence Medicare Levy (Residents Only) Medicare levy 1.5% Medicare levy surcharge (1) 1% Threshold Individuals Families Medicare levy $14,539 $24,534 (2) Medicare levy surcharge $50,000 $100,000 (3) Note: (1) Applies to taxpayers with income above the threshold without approved private patient hospital cover (2) Plus $2,253 for each child (3) Plus $1,500 for each child after the first Certain individuals on temporary resident visas are ineligible for Medicare benefits and can apply to the Minister of Health for a certificate of exemption Fringe Benefits Tax (FBT) General FBT rate on grossed up value 48.5% Gross-up factor benefits for which employer can claim input tax credit under GST Gross-up factor benefits for which employer cannot claim input tax credit under GST FBT benchmark interest rate 6.05% LAFH Tax exempt reasonable food allowance (FBT year ending 31 March 2003) Family Size Tax Free Allowance Tax Free Allowance Per Week $ Per Annum $ 1 Adult 122 6,344 2 Adults 179 9,308 3 Adults 170 8,840 2 Adults, 1 Child 191 9,932 2 Adults, 2 Children 170 8,840 2 Adults,3 Children ,296 3 Adults, 1 Child ,296 3 Adults, 2 Children ,752 4 Adults ,752 Note: (1) Children are persons younger than 12 years at the beginning of the FBT year, ie 1 April. In relation to larger family groupings, an allowance based on the above figures plus $57 for each additional adult and $28 for each additional child is accepted Superannuation and Eligible Termination Payments Employer Contributions Age of Employee Maximum Deductible Contributions Less than 35 $12, Under 50 $35, Years and Over $87,141 Superannuation Contributions and Termination Payments Tax Surcharge Adjusted Taxable Income $ Surcharge % Nil - 90,527 Nil 90, ,924 Adjusted Taxable Income less $90,527 $1,295 Over 109, Superannuation Guarantee Employers must contribute 9% of an employee s earnings base (to a maximum earnings base of $29,220 per quarter in 2002/03) to a complying superannuation fund. Reasonable Benefit Limits (RBLs) RBL Standard Limits Lump Sum $562,195 Pension $1,124,384 Tax-free Amount of Bona Fide Redundancy Payments The tax-free amount of a bona fide redundancy or approved early retirement scheme payment is the lesser of: (i) the actual payment received; or (ii) $5,623 plus $2,812 for each whole year of employment service completed. It should be noted that the tax-free amount calculated above, does not represent part of an ETP. Withholding Tax on Australian Income Received by Non Residents Unfranked dividends (1) 30% Interest 10% Royalties (2) 30% Note: (1) Reduced to 15% by most tax treaties (2) Reduced to 10% or 15% by most tax treaties

54 Australia s Double Taxation Treaties The following table sets out those countries with which Australia has entered into double taxation treaties together with the source country tax limits applicable to dividends, interest and royalties. as at 1 April 2001 Country Dividends % Interest % Royalties % Argentina Austria Belgium Canada China Czech Republic 5 or Denmark Fiji Finland France Germany Greece No limit No limit No limit Hungary India Indonesia Ireland Italy Japan Kiribati Korea Malaysia Malta Netherlands New Zealand Norway Papua New Guinea Philippines Poland Romania 5 or Russia 5 or Singapore Slovak Republic South Africa Spain Sri Lanka Sweden Switzerland Taiwan Thailand United Kingdom United States Vietnam

55 Tax Rental Services Property Case Studies Deductions Outlined below are some of the common rental deductions that you can claim against your rental income. Please note that you should maintain records of these expenses in order to maximise the available deductions on your income tax returns. Common Rental Deductions Advertising Agents commission/management fees Bank charges Body corporate fees/strata levies Borrowing expenses eg. application fee, stamp duty on mortgage Cleaning Construction cost of building write-off Council rates Depreciation (refer below) Gardening Insurance Morgage interest on loans used to acquire property Land tax Legal fees/leasing preparation Pest control Repairs and maintenance undertake during period of assignment to obtain a tax deduction Safe deposit box Stationery, telephone and postage Travel costs Water rates TAX SERVICES RENTAL PROPERTY DEDUCTIONS

56 Common Depreciable Items Where applicable, note the date of purchase and purchase cost of the following items: Air-conditioner Blinds Carpets Curtains/drapes Dishwasher Furniture and fittings Heater Hot water service Light fittings Microwave Stove Rangehood (above stove) Refrigerator Security system Sprinkler system Washing machine TAX SERVICES RENTAL PROPERTY DEDUCTIONS

57 Record Keeping for Employment Tax Related Services Deductions Case Studies In Australia, income tax is calculated on the basis of a person s taxable income. Taxable income is calculated by deducting general and specific deductions incurred in the year of income from the total assessable income for that year. An allowable deduction is an expense that is directly related to your income earning activities. However, you cannot claim a deduction if the Commissioner of Taxation considers the expense is of a private or capital nature. For most employment related deductions, it is necessary to obtain written evidence to prove your claim. Failure to keep this written evidence could result in the Commissioner of Taxation disallowing your claim for a deduction. What is written evidence? A receipt is the most common form of written evidence. To be a valid receipt the following information must be recorded: 1. the name of the supplier 2.the amount of the expense 3. the nature of the goods or services 4.the date the expense was incurred, 5. the date of the document. You can add the day the expense was incurred or the nature of the goods or services, if these items are not originally shown. However, additional supporting evidence will be necessary (ie. credit card statement). Credit card statements are accepted instead of a receipt, provided all the necessary information is recorded on the statement. If the expense is a small item (ie. less than $10 and up to a maximum of $200 in aggregate for the year) or it is considered unreasonable to expect you to get a receipt, you can keep an expense diary instead of getting written evidence. The information that needs to be kept in an expense diary is the same as that shown on a valid receipt, as noted above. You must keep documents used to prepare your income tax return for 5 years from the date the return was lodged. TAX SERVICES RECORD KEEPING FOR EMPLOYMENT RELATED DEDUCTIONS

58 When is written evidence necessary? It is not necessary for you to keep written evidence if your employment expenses do not exceed $300 for the year. If the total amount of your claims exceeds $300 you will need to have written evidence of the total amount of your claim. However, this $300 limit does not include expenses related to overtime meal allowances, travel allowances and car expenses. Travel allowances If your employer pays you an allowance to cover travel expenses, you do not have to have written evidence provided your claim does not exceed the rates specified by the Commissioner of Taxation. These rates change each year and are different for each location. You should contact your Deloitte tax adviser for further information about the rates. For overseas travel the Commissioner provides daily rates only for meals and incidental expenses. You must keep written evidence of accommodation costs incurred whilst travelling overseas. If you wish to claim a deduction in excess of the Commissioner s reasonable rates, you will need written evidence of your total expenses. If your employer does not pay an allowance to cover travel expenses, you can still claim a deduction for travel expenses. However, you will need to have written evidence of all expenses. Where you are travelling for periods in excess of 5 consecutive nights, you need to keep a travel diary. In this diary you must keep details of each business activity undertaken whilst travelling. Each entry must contain details of the nature of the activity, the day and time when it began, how long it lasted and where the activity took place. What records must you keep for depreciation claims? If you are claiming depreciation, you must keep a record of the purchase of the item. The purchase document must record the same information that would be recorded on a receipt. You must keep this written evidence for 5 years after the last year in which a depreciation claim is made on the property. How can you work out your motor vehicle expense deduction claims? If you own or lease a motor vehicle, there are 4 methods that you can use to work out your claim. You must use one of the following methods. However, you can use a different method for each year and for each car. 1. Log Book method This method requires you to keep a log book for 12 weeks for all business related trips commencing in the first year in which you wish to use this method and then every 5 years thereafter. In the log book you must record the following: the date the trip began and ended the odometer readings at the start and end of the trip the kilometres travelled on the journey, the purpose of the trip. The purpose of a log book is to determine your percentage of business related usage of your motor vehicle. TAX SERVICES RECORD KEEPING FOR EMPLOYMENT RELATED DEDUCTIONS

59 Generally, expenses of home to work travel is considered to be of a private nature and is therefore, not deductible. You must also keep written evidence of all expenses incurred during the year. You must keep a record of the odometer readings of the motor vehicle at the start and end of each year of income. If you have not kept written evidence of your fuel and oil expenses, the expense can be worked out by using your odometer readings. The log book method is the best method to use if you are using your car extensively during the year for business purposes. 2. Cents per kilometre Your claim is worked out by multiplying the business kilometres travelled during the year by the rate specified by the Commissioner for cars. These rates vary each year based on the engine capacity of the car. This method is limited to a maximum of 5,000 business kilometres travelled during the year. (ie. if you travel in excess of 5000 business kilometres, your claim is limited to 5000 kilometres) 3. One-third of actual expenses This method is only available if you travel more than 5000 business kilometres during the year. Under this method you are required to keep written evidence of all expenses incurred during the year. You are entitled to claim a deduction of one-third of these expenses. If you haven t kept written evidence of fuel and oil expenses, the claim can be determined by odometer readings % of original cost of car This method is only available if you travel more than 5000 business kilometres during the year. The calculation is based on the original cost of the car to you but limited to the motor vehicle depreciation cost limit determined annually by the Commissioner of Taxation. However, if the car is only owned for part of the year, the claim is apportioned accordingly. You must keep a record of the cost you paid for your car. If you have any further questions concerning the written evidence required to correctly claim tax deductions, please contact your Deloitte tax adviser. It is not necessary to keep detailed records of the kilometres travelled. You only have to be able to provide a reasonable estimate of how you determined the kilometres travelled. This method is better where low business kilometres are travelled during the year or inadequate car expense records have been maintained. TAX SERVICES Record Keeping for Employment Related Deductions