Moving around: Why the tax office plays a role in
When you’re making a decision about
whether to accept a lucrative job overseas,
the Tax Man is generally the last person
you’re thinking of - family members, what your life might be like, whether you can
afford a maid, maybe, but the Tax Office? Generally not. Whether you are taking
up a role overseas or a bringing talent into the country for your business, the tax
office needs to play a role in the decisions you make.
Individuals moving overseas
I have a friend who is moving to the United Arab Emirates (UAE) to take up
a contract. His first comment to me was how great it will be because the individual
tax rate in the UAE is zero and it’s a lucrative contract. But life is never that simple.
For example, you might be living and working in the UAE but if you are not leaving
Australia for good, the Australian Tax Office (ATO) might consider you to be a
resident of Australia and tax any income you make overseas as if you were here.
As a general rule, residents of Australia are taxed on all income in Australia
regardless of where the income is sourced.
If you are considered to be a non-resident you are generally only required to pay
tax on the income you earn from Australia.
Working out whether or not you are a resident of Australia can be difficult as
it requires the exercise of judgement rather than applying a single black and white
test. Many people believe it is just a matter of how much time you spend out of the
country but this is not always the case. There are four tests that are used to work
out your residency status.
The first test looks at whether you reside in Australia.
For example, are you moving out of the country permanently and migrating, or just
moving away for a while? The actions you take, for example do you appear to cut
ties with Australia or do you have a life to walk back into, help determine this test.
If your spouse stays behind, it may be difficult to argue that you are a nonresident.
The second test looks at your place of domicile as well as where you have your
your permanent home.
Someone who was born or migrated to Australia will generally retain their
Australian domicile unless they leave Australia permanently. Someone with an
Australian domicile will be treated as a resident for tax purposes unless they can
show that their permanent home is overseas.
There is a range of factors to consider in order to determine whether someone’s
permanent home is overseas.
The third test is the 183 day test.
Assuming you are not already considered to be an Australian resident by the other
tests, the 183 day test looks at how long you are physically present in Australia
during a particular income year.
The final test is the superannuation test.
If you are a current member of certain superannuation funds covering
Commonwealth Government employees then, you will generally be considered a
resident for tax purposes regardless of how long you intend to live overseas.
Once you have worked out whether you are a resident or a non-resident you need
to look at the impact of your residency status on the assets you have. If you
become a non-resident this can trigger a capital gains tax liability based on the
market value of certain assets at that time. In some cases you can choose to defer
the tax liability, but this could mean paying more tax in Australia on the eventual
disposal of those assets. Proposed changes also mean that non-residents will
pay a higher level of CGT than residents, as they will no longer have access to the
50% CGT discount.
The residency tests can be confusing. If you are planning on working overseas,
get professional assistance before moving so you fully understand the implications
of the move.
For businesses bringing talent into the country
If you bring employees into the country for periods of time, the tax concessions
that apply to compensate them for the additional expenses and disadvantages
they might suffer because they need to live away from home to do their job are
about to end. The rules dealing with Living Away From Home Allowances
(LAFHAs) will fundamentally change if the Bill currently before Parliament becomes
The changes, originally intended to apply from 1 July but have now been pushed
back until 1 October, will mean that it is almost impossible for foreign workers to
access this concession. The main condition for accessing the concession under
the new rules is that the employee must have a usual place of residence in
Australia that is maintained for their personal use and enjoyment while living and
working in another location (i.e., it cannot be rented out or sub-let while they are
away). Employees will only be entitled to claim deductions against a LAFHA for a
maximum period of 12 months for a specific work location (there is an exception for
fly in fly out workers). This means that to qualify for the concession from 1
October, a foreign worker will need to have an Australian residence then live away
The new LAFHA rules tax employees on the allowances they receive under the
income tax regime, instead of taxing the employer under the FBT regime. LAFHAs
will need to be included in the taxable income of the employee and will be taxed at
their marginal tax rates. There may be an exception if the allowance covers the
ordinary food costs, in which case they will still be taxed through the FBT system.
LAFH benefits that are not paid in the form of a cash allowance (e.g.,
reimbursement of actual expenses) will still be taxed under the FBT system in the
hands of employers.
There are transitional rules for those with agreements already in place but any
material changes to the employment agreement will bring the agreement into the
new system. The Bill before Parliament to enact the LAFHA changes appears to
have a fairly strict interpretation of what a material change is and notes common
issues like an extension of time of a contract, a change to the salary of the
employee or a change in the working hours of the employee.
LAFHAs will still be of benefit to Australian employees living away from home but
will be severely restricted for anyone else.
The changes are not yet law so for many employers it is a case of wait and see. If
you are already providing LAFHA or similar benefits to employees then it’s
important to consider the impact of these new rules as soon as possible.
What changed on 1 July?
• Small businesses now have access to:
An immediate deduction for depreciating assets costing less than $6,500 (GST exclusive)
An immediate deduction on the first $5,000 for motor vehicles used for the business (new or second hand)
All other assets depreciated at 15% in year of purchase and 30% inn future years
• Companies now able to ‘carry back’ up to $1m of losses offset against previous tax paid
• New reporting regime for building & construction industry
• GST changes to hire purchase agreements entered into from 1July. Businesses accounting for GST on a cash basis can claim the full tax credits up front. All components of the arrangements are now subject to GST, even if credit component is disclosed separately.
• Carbon Tax introduced
• Wider range of businesses will qualify for fuel tax credits
• Concessional contribution cap for those 50 and over now same rate as everyone else at $25,000.
• Income tax rates changed
• 15% tax on super abolished for low income earners
• Household assistance package introduced
What’s pending or deferred
• LAFHA changes deferred until 1 October 2012.
• For SMSFs, the off market transfer restrictions due to commence on 1July 2012 have been deferred until 2013 2012 have been deferred until 2013.
If there is anything we can assist you with, or are concerned about, please contact us today to discuss.