International Tax Issues
Question 1
I have a NZ partner who owns 30% of my Australian-based business.
Each quarter he receives a 30% dividend, in line with his ownership.
Is there some way he can receive the dividend without incurring tax charges both here (Franking credits) and in NZ (personal tax)?
Answer
Double tax treaties exist between Australia and New Zealand. This aims to prevent a shareholder from being taxed twice.
The distinction here is that the individual will not pay tax in Australia on fully franked dividends. It acknowledges that the company has paid tax.
There may be opportunities under the Trans-Tasman imputation credit account (ICA). An Australian company that distributes profits to New Zealand shareholders may elect to maintain a New Zealand ICA. If it does this it must observe the same imputation rules as a New Zealand company and it must file an annual imputation return to the NZ Inland Revenue Department.
Question 2
I have a query that I would appreciate some help with. A band from New Zealand has approached us. They are about to go on tour here in Australia and they have asked if they need to register for an ABN? I guess they would be a partnership of sorts, but would they need to register for an ABN while touring and charging venues for their performances? If so, I suppose they would register as a foreign entity? Furthermore, would they need to do a tax return in Australia and subsequently apply for tax file numbers? I suppose that any tax they pay in Australia would be credited to them when submitting their tax return home in New Zealand? This has come up because venues are asking for tax invoices from them.
Answer
The Foreign Resident Withholding arrangement which applies to both individuals and non-individual entities was introduced on 1 July 2004 and is part of the Pay As You Go withholding system.
Australian payers are required to withhold an amount to cover expected income tax liabilities on payments made to foreign residents being paid for providing entertainment.
Generally, under Australia’s international tax treaties, income derived by foreign resident entertainers is taxed in Australia. Therefore, the entertainer will need to apply online for a TFN and ABN and is required to lodge an income tax return. For a foreign entertainer to apply online for a TFN and ABN, a passport number is required to prove their identity.
The Australian payer is required to supply a foreign resident with a Payment Summary. The foreign resident entertainer will then need to report these amounts by lodging an Australian Income Tax Return with the amounts withheld claimed as a credit against the tax assessed. A Notice of Tax Assessment will be issued after the lodgement of the tax return. The Notice of Assessment will be proof of tax paid in Australia and a credit for the tax can be claimed in the foreign resident’s home jurisdiction.
If the foreign resident expects to incur tax-deductible expenses which will reduce their taxable income a Foreign Resident Withholding (FRW) application may be lodged, prior to lodging an income tax return. The reason for this type of variation is ‘tax-deductible expenses’. A Tax File Number and Australian Business Number are required when applying for this type of variation. A foreign resident’s actual tax liability is determined following the lodgement of their tax return and not only by the lodgement of a FRW application.
Foreign entertainers from the United States are exempt from paying Australian tax where gross receipts do not exceed US$10,000.00 for the taxable year. A US resident entertainer under these circumstances may apply for a FRW variation based on ‘tax treaty applies”. A TFN and ABN are not required when applying for this type of variation. Proof of identity of the foreign resident is however required. Also, lodgement of an income tax return will not be required.
A fact sheet on ‘Foreign resident PAYG withholding’ can be downloaded from www.ato.gov.au.
Question 3
As a resident taxpayer (company or individual) can I get a tax refund on foreign imputation credits (not withholding tax) on dividends? The foreign country is Mexico.
Answer
Company
The Company will get a tax credit but is unable to pass on the credit through its franking account. This may eventually result in a portion of a future dividend paid by the Australian resident to shareholders being unfranked.
Individual
The individual can get a foreign tax credit in the calculation of their tax liability but NOT a tax refund.
Question 4
We have a client who is a non-resident of Australia, however, is a resident of Monaco and has been for many years.
She earns interest in Australia from a Term Deposit, lodges a Tax Return here as a non-resident, and is assessed at 10% of her interest income. She has not lodged a return in Monaco.
She will soon receive Income in Monaco, paid as a fee for secretarial services, no tax is deducted.
Does she need to include the Monaco income in her Australian tax return, and does she need to declare Australian income in Monaco?
Answer
A non-resident of Australia is only assessable on Australian source income. The interest income subject to 10% withholding tax should not be included in her Australian tax return.
As a general observation, Monaco levies no income tax on individuals.
Question 5
Can you please provide details of how a tax equalisation scheme is set up and managed by a Company on behalf of an individual who is on secondment from Malaysia and who shall only pay a notional personal income tax amount whilst working in our Australian Company as part of his agreed contract? I appreciate your comments and help on this matter.
Answer
Under tax protection, an expatriate employee is protected from higher tax costs but in the event, the actual taxes imposed are lower, he retains the benefit. Therefore, an employee who is assigned from Australia to Malaysia is likely to have a lower tax liability than he would have had if he remained in Australia. He would therefore pay his own Malaysian and Australian tax liability (if any) and retain the tax savings.
Conversely, a Malaysian employee assigned to Australia is likely to suffer a higher tax liability due to the assignment. Under tax protection, he is liable to fund these taxes only to the extent of his hypothetical Malaysian tax and the Company will be responsible for the excess.
As illustrated from the above two examples, an arbitrage opportunity exists for the expatriate employee to seek opportunities in lower-tax jurisdictions and avoid those opportunities where he does not personally benefit from tax savings. This can reduce the mobility of employees as they wait for the ‘right’ opportunity.
The principle behind a tax equalization program is that the employee should be ‘no better or no worse off as a result of taxes while on a foreign assignment. In other words, the employer guarantees that the employee’s tax burden will be neither greater nor lesser if the employee had remained in the home country. If the tax burden is higher in the host country, the Company reimburses the excess. However, if total tax costs are lower the tax is lower, the tax savings will pass to the Company, not to the employee.
Question 6
We have an outlet in Canada and the majority of our business is located in Australia. We sent employees to Canada on a temporary assignment a few years ago with the intention of them coming home after 6 months. However, due to circumstances, the employees remain in Canada to this day.
I have read the Canadian Double Tax Agreement and I believe the individual employees are considered residents of Canada for tax purposes (being there for the entire year and carrying out employment duties there). There is plenty of literature about residency; however, it is not our responsibility to determine individual tax residency status for employees.
What are our duties as an employer with regard to withholding tax from employee wages? If the employee starts overseas, do we withhold in Canada immediately, after 6 months, etc?
Do we withhold at all? Please note that we pay a contractor in Canada to pay our Canadian nationals employed there.
Answer
Whether or not each individual is a resident of Australia will be determined by their unique circumstances.
If they are still being paid by an Australian-based Company and they maintain a home and family in Australia making regular visits, then arguably they are still Australian Tax Residents.
I can easily accept the employees may qualify as Canadian Tax Residents. In the event that a taxpayer could be a tax resident of Canada and Australia, the Double Tax Agreement stipulates that the taxpayer will be a resident of the country where their “dominant economic interests’ are”.
Circumstances may vary for example:
- A married man makes regular visits to family in Australia where his dominant economic interests lie.
- Single man likes life in Canada, has met a Canadian lady, and bought a property there. Does not own assets in Australia and has not been home during his stay.
You should seek specialist advice on this one.
Question 7
Please advise tax implications for an Australian employee who is sent to Singapore to work for an extended period of time, say 1-2 years.
Answer
If employed by an Australian company and the employee maintains a permanent residence in Australia making regular visits to that home, then they will be an Australian resident.
Question 8
If you have a non-resident director of an Australian Company being paid overseas for his duties, for example, “promoting the Australian subsidiary operations”, do you still need to withhold PAYGW tax from the Directors Fees Paid to the non-resident Director?
Answer
Where an Australian company engages a foreign resident as an employee PAYG must be withheld from payments made. The marginal rates to be applied will be at non-resident rates.
Question 9
Australian Company has a branch in New Zealand. New Zealand has not produced income, so the Australian Company paid all expenses. Are these expenses deductible in the Australian Company?
Answer
As this is a branch only and the Australian Company incurred the expenses in its own capacity, the expenses are deductible in the Australian Company.
These expenses might be deductible subject to the transfer pricing provision. Division 13 of ITAA36 requires that the supply or acquisition of goods or services between related parties under an international agreement must be for arm’s length consideration. The commissioner is able to adjust the pricing on a cross-border related party transaction by reference to the conditions which would have existed between independent parties under comparable circumstances.
Question 10
Please advise what the tax implications are for a pension payment received from another country?
Answer
The gross pension is generally assessable but there are some exceptions. Generally, a credit is allowed for any tax paid on the pension in the other country.
Question 11
I had a new client today with the following situation:
Her husband and she left Australia in 2004 for him to work overseas on a permanent basis, they set up a household and were away from Australia until 2012/13. Given their circumstances, they were considered to be Non-Residents, and under the belief that this status would continue, she lodged a final tax return in the 2004-2005 year. He left Australia earlier and the last tax return that he has lodged was in 1999-2000. With only minimal interest income they were under the impression that they were not required to lodge tax returns for each year from 2000 for him and 2005 for her.
On the ATO portal, her lodgement status shows a return was not necessary for each year, but he has showing returns not lodged for each year as he did not notify the ATO of a final return or that he was not required to lodge. They returned to Australia in July 2012 and remained here the entire year, so their status reverted to a resident. He has just taken up a six-month contract in China which he may extend once it is completed in August 2014.
At this stage, she has remained in Australia and their plans are undetermined. In 2007 they met with a Financial Planner here in Australia from ABN Morgans who set them up in a Managed Portfolio with an associated bank account from Macquarie. They have proceeded to purchase shares and within the portfolio have received interest income, unfranked dividends, franked dividends, franking credits, other trust income, and Capital Gains and losses in each of 2006/07 through to 2012/13 years. Although they notified the planner that they were non-residents in those years no tax appears to have been withheld from their Interest and unfranked dividend income. In addition, she received Interest from an ANZ account with again no tax amount being withheld despite them notifying the bank. They are able to withdraw funds from the Macquarie Bank Account as required and withdrew a sum of $20,000 at one stage for personal use.
My question is are they required to lodge tax returns for each of 2006/07 through to 2011/2012 years given they were classed as non-residents and received interest income, franked and unfranked dividends where no tax was withheld and had capital gains and losses on shares that they purchased and sold over this time?
As residents in 2012/13, we will be lodging tax returns for them both. From my quick calculation given the non-resident status, they are likely to have between $500 and $1,200 tax to pay each year on their income earned.
Answer
As your clients as non-residents earned assessable income throughout 2006/07 to 2011/12 and have a tax liability, they are
required to lodge taxation returns in the relevant years. The fact that the financial planner did not arrange the appropriate withholding taxes means they have a tax liability and must lodge tax returns.
The withholding taxes are non-franked dividends (15%) and interest (10%). No withholding tax is necessary for the dividends.
Question 12
What options does an Australian resident company have to pay a special dividend to a non-resident company to minimise withholding taxes?
Answer
The best way would be to pay a fully franked dividend – then there would be no withholding tax. Note that a dividend must be paid at the same rate to all shareholders in the same class e.g., “ordinary” shareholders.
Question 13
A New Zealand citizen has income from bank interest in Australia. The bank deducts tax at a higher rate. Can we get a TFN for New Zealand citizens to avoid tax deductions at the source?
Answer
You need to establish that the NZ citizen is definitely a non-resident of Australia for income tax. In this instance withholding tax of 10% would be paid on the interest and the gross income would be taxable in NZ with a credit allowed for the Australian tax paid.
In the event the NZ citizen is a tax resident of Australia, he needs to supply his tax file number to avoid withholding tax of 47%.
Question 14
Mr X is working as a contractor (commercial advertisement producer) for overseas clients. Mr X is an Australian and has an ABN (no GST registered).
One of the overseas clients in France paid $100k to Mr X to make sure he supports that the client’s staff can shoot the commercial advertisement in NZ as scheduled.
Some of the catering & trip expenses & other payments in France were paid by Mr X (part of contacting terms) as he received the fund from the client for that purpose.
Since Mr X is a sole trader and he receives the funds in an Australian business bank account, I believe he needs to include the incomes and expenses in his tax return although he worked overseas. Is this correct?
Secondly, Mr X receives the fund from the client and this fund is for the project that falls in FY17 and FY18. Can he defer the part of income to next year’s tax return if the project is not finished (this means he had not paid some expenses yet in the current financial year)?
Answer
As an Australian resident, he is assessable on global income received, these payments must be properly disclosed in this tax return. It would appear the GST implications are that this is not “a supply in connection with Australia” but the precise arrangements would need to be examined.
It would also appear that this is an export of services for GST again meaning GST should not be charged on the transactions given Mr X would now appear to be exporting services.
Regarding a payment received for work not done at 30 June 2017, it is possible that this may be taken out of the P+L and transferred to the liability section of the Balance Sheet as ‘unearned income’ using the ‘Arthur Murray’ principle.
Question 15
We are providing a service to a Singapore-based company that does not have an Australian enterprise.
The service includes – Collecting empty gas containers from an Australian Port and transport them back to our yard for storage.
When required we transport the containers to a plant for filling then deliver them back to our storage yard before taking them to the wharf for export.
Are we correct in not charging GST for the service because…?
1. the non-resident is not registered for GST
2. the non-resident does not have an Australian enterprise
3. the sale (service) is not connected to Australia.
Answer
You are supplying transportation and storage facilities – there is no doubt that these are supplies in connection with Australia.
It is clear that you are not the exporter of the goods.
So, on the face of it, these are supplies on which you may charge GST.
There is really only one basis on which you could argue the supply was GST-free.
This is a supply that is constituted by the repair, renovation, goods modification, or treatment of goods from outside Australia whose destination is overseas.
We reviewed relevant rulings and sections 38-355-5 and 38-355A. This states that transportation, loading, and handling of goods during the course of international transport are GST-free.
On this basis, there is an argument that the supplies are GST-free, but we would recommend you seek a private ruling.
Question 16
I just have some technical questions received from a client regarding a change in residency status due to a new job they’re taking overseas.
Basically, questions 1 and 2 are straight forward if they are determined to be a non-resident for tax purposes, then they will only have to declare their Australian income on their Australian Tax Return as well as complete the schedule for worldwide income for determining if they have to repay their HELP debt.
The only thing I am not entirely sure on the consequences of questions 3 and 4 on the implications as a Director and trustee of 2 companies and on being a non-resident for tax purposes. The other question is whether there are any implications for returning money earned overseas to Australia during the term of the contract or at the end. From previous experience, I know that the Tax Office can pick up the transfer of large sums of money to Australia and question it to ensure it does not have to be declared. Can you comment on this, please?
Facts:
· They currently are a permanent public servant with the Dept of Defence.
· To take the new position they will need to resign from the current position or get a leave of absence for 3 years.
· The new position is with the Australian Embassy working on similar projects for the Dept of Defence.
· The new position is contracted for 3 years. Payment is in USD. The embassy does not deduct tax from the salary.
· The embassy requires they use the online ATO test to determine residency for tax purposes. (It seems that it is standard practice for Embassy staff not to pay tax in the USA due to an IRS classification).
Considerations:
– Has a HELP debt.
– Holds Australian shares, with dividend income.
– Is a Director and trustee of two companies.
Questions:
1. If they declare as a non-resident will they be liable for Australian tax, other than Australian income?
2. If so, will they need to declare income in Australia to the Australian tax Dept?
3. Should they remain as a Director and trustee of the two companies?
4. Should they transfer all the shares to one of the trusts to avoid complications?
Other:
· Are there implications for the repatriation of money to Australia during the term of the contract or at the end?
· Would their partner be treated in the manner if they work in the USA either for the Embassy or otherwise?
· Would income earned in Australia before departure for the new position be normally taxed in Australia?
· Do you see any issues with the attached ATO test of residency?
Answer
- If it can be fairly determined your client is a non-resident then they will only be assessable on Australian source income in Australia.
- Correct
- When you say Director and Trustee, we assume they are the director of a trustee company. We would stress that every company incorporated in Australia needs at least one Australian resident to be the director. So yes, they may still be a director but will need to have another person appointed – possibly a family member or close personal friend.
- As there may be issues with overseas controlled trusts, they may wish to consider selling shares or having more issued to family members – there may be stamp duty and/or CGT issues to carefully consider – it really depends on the underlying assets. Also, if there is no change in beneficial ownership there usually is not a problem, but legal advice should be sought.
First dot point…. No there should not be issues.
Second… each individual has their own unique circumstances and subjective intention plays a part – the key for both would be in what their intentions are at the end of the three years – If they were open to staying on and had a permanent dwelling/residence in the USA then it is suggested they would be considered non-residents.
Third… yes, with the tax-free threshold adjusted for the months in the year.
Fourth… as the entire family is moving to the USA and it is an OECD nation then we do not see issues – the ATO can quite rightly enquire but it is all above board. We have sent you material on diplomatic staff indicating USA tax would be payable on the earnings. They effectively must waive diplomatic rights or risk losing permanent residence status in the USA. This appears to be the official IRS position but in practice…for Australian diplomatic staff, it may be different. Your client can be guided by the Embassy and what happens in practice.
Question 17
I have a tax essential premium subscription and have a question regarding my clients’ pension from China (they hold a PR visa but not Australian citizens and are AUS tax residents). I do not report said pension as per ATO ID 2002/337 but noted that the ID has been withdrawn in Dec-2018 so I am wondering if the ATO has changed their view on Chinese pensions and now becoming assessable?
Answer
Between 2001 and 2016 thousands of interpretative decisions including ATO ID 2002/337 were issued.
In the last three years no more have been issued and the ATO has systematically been withdrawing IDs.
Usually, the reason is that guidance is contained elsewhere on the ATO website.
If there has been a change in law or the ATO’s interpretation of the law this is clearly stated on the reason for withdrawal.
This is not the case here and on the basis that tax is payable on the pension in China, then the double tax agreement still applies.
This means the pension should not be taxable in Australia.
Question 18
I have a client who together with his spouse is currently residing/working overseas on consulting assignments…but employed/paid by his resident Australian company. The clients have been overseas for around 2 years and have not purchased a new residence over there with the express intention of returning to Australia at the end of their consulting contract. They have raised concerns regarding the re-introduced legislation relating to CGT on ex-pat’s former Australian residential property. Whilst they have been overseas for some time, I do not believe they will be impacted by the proposed legislation…however your advice would be appreciated.
Answer
We have discussed these capital gains changes in a separate article in this edition.
In any case, it is highly unlikely your client will be defined as a foreign resident. They have not severed their ties with Australia and appear to still be subject to Australian PAYG – you may wish to confirm this.
It would appear the clients purchased their property before 9 May 2017.
You need to establish the clients’ tax residency status now and assess what it is likely to be in the future – in the event they remain overseas. The date the contract expires may give you a guide.
Also, determine the likely capital gains tax (CGT) situation in the event they are no longer residents…. on the basis, the exemption applied up until them going overseas.
The key date for properties bought before 9.5.2017 are disposals after 30 June 2020 – such a sale has potential CGT implications.
Question 19
A former Australian resident “Bill” has relocated overseas to assist family members in establishing his son’s business enterprise. The initial intent was to stay there for 1-2 years then return to Australia.
Bill does not own a residence in Australia having sold this prior to his departure overseas in 2017. Bill also inherited property in Peru in 2002.
Between 2002 and 2016 the property was being redeveloped and when completed has been rented. Rental income from the property has been declared in Bill’s Australian 2016 & 2017 tax returns.
Since relocating to Peru in 2017 he has used this property as his residence. It has now become apparent that Bill will be required to spend several more years in Peru before returning to Australia, as such he would no longer be classified as an Australian resident for tax purposes. He receives a Commonwealth Superannuation income stream.
Is Bill liable for CGT on the market value less the cost base of his property in Peru upon ceasing to be an Australian resident for tax purposes?
If so, can Bill apply to defer CGT until the asset is sold or he returns to Australia, or does this option only apply to taxable Australian property?
Would he also be eligible to claim a 50% discount given that he owned the property before 8 May 2012?
Answer
Although an individual is normally taken to have disposed of the relevant asset (not Australian property) on ceasing to be an Australian tax resident, there is another option.
An individual can choose to disregard all capital gains and losses when ceasing to be an Australian tax resident.
If this choice is made, then those assets are taken to be taxable Australian property until the earlier of:
- A CGT event happening to the assets (for example their sale or disposal), or
- You again becoming an Australian resident.
The effect of making this choice is that the increase or decrease in the value of the assets from the time you cease being a resident to the time of the next CGT event, or of you again becoming a resident, is also taken into account in working out your capital gains or losses on those assets. The way you prepare your tax return is generally sufficient evidence of your choice.
The 50% CGT discount will not be relevant if he elects not to declare the capital gain on cessation of residency.
However, the time of purchase of the asset for claiming the 50% discount is irrelevant for non-residents. Assets need to be valued at 8.05.2012 and the discount applies up to that date – thereafter there is no discount.
Question 20
I have a client who is a resident of Australia but employed by a foreign company in PNG. We have a statement of earnings converted to $AUD which shows Gross earnings of $254,166 with tax withheld in PNG of $92,699 ($AUD). When I show this income and foreign tax credit at item 20E and 20T, my tax calculation is showing an amount payable of $5,083 which is basically the Medicare Levy, even though the foreign tax credit is well above the Australian tax payable on this income – do you agree with my tax calculation? If you could please advise that would be great.
Answer
You should fill Item 20 O with the foreign income tax offset.
You can apply any remainder of your foreign tax offset (FITO) for an income year against your liability to pay the Medicare levy.
If any remains after that, you can also reduce any liability to pay the Medicare levy surcharge for that income year.
Your FITO is first applied against your tax payable before it is applied to your Medicare liability.
This applies regardless of whether Australia has a tax treaty with the foreign country in which the tax was paid.
Question 21
I have clients that have been living overseas previously, returned, and have now been overseas since 10/7/18 and intend to be for a while. They have moved as a family.
They do however have a rental property in Australia since 2012. One is receiving Australian income as works for Dept Foreign Affairs and Trade while the other has overseas income.
Can you please advise treatment re resident/non-residents and if there are special requirements re Dept of Foreign Affairs?
On another matter, one has a HECS debt – could you please provide a step-by-step procedure to attend to this as at this stage nothing has been done.
Answer
Normally the Dept of Foreign Affairs employee will have PAYG Australian tax deducted.
The Dept normally gives their staff some advice on tax so ask your client for any guidelines he has received.
As for residency, the normal tests will apply, and we do not have enough information to comment on this.
A start would be how long the posting is for, and what their intentions are after that posting.
Given the 50% capital gains tax discount does not apply to non-residents, it may be better that they remain, residents, if they intend to sell the property in the near future.
It would appear that their dominant economic interests are in Australia and you can confirm this.
The HECS-HELP threshold for 2019-20 is $45,881.
To repay the debt, your client can report their worldwide income through their myGov account or yourselves as their registered tax agents.
myGov is essential for clients when overseas as it does not just connect with the ATO but also other Government services such as Centrelink, Medicare, and My Health records.
Question 22
My client lives in Australia with his family and works 4 weeks on in Mongolia and 2 weeks off. He is paid by Mongolian Tugrik and taxed at 10%.
This is then converted to US dollars, then to Australian dollars. He has a spreadsheet of all payments received.
Could you please advise the process of entering the income into his tax return and if there are any outside the ordinary things I need to take into account?
Answer
Your client is an Australian resident and assessable on global income.
Gross your client’s income up to reflect the withholding tax deducted in Mongolia.
Fully disclose the income, making sure you claim the 10% withholding tax as a tax credit.
It appears that there is not any double tax agreement between Australia and Mongolia. You can convert your client’s foreign income and report it under Labels 20E and 20T in his tax return. You need to work out the foreign tax offset and report it under Label 20O. Please refer to The Guide to foreign income tax offset rules 2019.
Question 23
What are an employer’s obligations regarding employees with student visas?
Answer
If it can be established that they are enrolled to study in Australia on a course that lasts 6 months or more, they may be regarded as an Australian resident for tax purposes.
This means they pay tax on their earnings at the same rate as other residents
So, the normal employer PAYG obligations will apply.
Generally, the terms of the student visa are that they can work up to 40 hours a fortnight.