Expatriate tax - Australia

Consideration of the possible impact of the various Australian tax regimes is recommended to ensure that no tax planning opportunities are missed. In particular, Australia’s unique rules around the taxation of Fringe Benefits (non-cash benefits) and the tax liability it creates for employers can lead to a mismatch of taxation with foreign jurisdictions.

Also, compulsory employer Superannuation (Pension) contribution requirements can come with significant penalties for non-compliance. Employers should also be aware of the state tax obligations (principally Payroll Tax) that exist in addition to the federal income tax regime.

Work visas are required to undertake duties in Australia and serious penalties can apply for breach of visa conditions. There are a number of varieties and types of visas, therefore, we recommend consultation with an immigration lawyer before the finalisation of any assignment.

Information on visas can be found at the following website:

https://immi.homeaffairs.gov.au/visas/getting-a-visa/visa-listing

The Australian fiscal year runs from 1 July to 30 June.

Australia operates a self-assessment regime whereby taxpayers file an annual tax return and self-assess the tax liability for the year. The filing date for an individual’s tax return is ordinarily 31 October following the year-end. The filing due date may be extended up to 15 May when the taxpayer uses a recognised tax agent (such as Grant Thornton) and obtains an extension of the filing deadline.

Additionally, married couples file separate income tax returns.

Individuals are taxed at progressive rates according to total taxable income. Rates for the 2023/24 income tax year are:

Resident tax rates (including temporary residents)

Foreign resident rates

In addition to the tax rates, Medicare (currently levied at 2%) will apply to the income of resident taxpayers.

In addition, the Medicare Levy Surcharge of up to 1.5% can also apply to individuals and families who exceed certain income thresholds and who do not hold complying private health insurance.

Please note temporary migrants to Australia who are from countries without a reciprocal health care agreement may qualify for an exemption from Medicare. This is obtained through the application for a Medicare Entitlement Statement.

Tax residents of Australia are taxed on worldwide income and gains, whereas non-residents (often referred to as Foreign Residents) are generally taxed on Australian sourced income and gains only.

Please note that a separate subcategory of residency 'Temporary Resident' exists for Temporary Migrants who meet the residency requirements but reside in Australia on certain types of Temporary visas. Generally, Temporary Residents are taxable on their worldwide employment income and Australian sourced income and gains.

These general rules may be modified by certain domestic concessions and tax treaty tax provisions depending on individual circumstances.

Generally, an individual is a resident of Australia if he or she resides in Australia according to the ordinary meaning of the word. 'Reside' is defined in the dictionary as 'to dwell permanently, or for a considerable time, to have one's settled or usual abode, to live, in or at a particular place'.

Where an individual does not satisfy the 'Ordinary Concepts test' of residency, they may also be deemed an Australian resident if they satisfy any one of following three statutory tests of residency:

• the domicile test
• the 183 days test
• the Commonwealth superannuation test.

The tests consider factors such as the number of days spent in Australia, as well as subjective criteria, such as personal ties to Australia to determine whether an individual is a resident. Since the residency tests outlined above are evaluated using a balance of the facts approach, it is important that each individual case is evaluated based on its specific facts and circumstances.

Note. Changes announced in the 2021-22 Federal Budget will seek to change the Residency tests. The principal focus of the new rules is on a two-step simplified approach consisting of;

1. Primary 'bright-line test' - this test will consider the time spent in Australia (ie ‘day count’) to automatically determine the residency status of the majority of individuals where that are in Australia for a minimum of 183 days; and
2. A secondary test – known as the 'factor test'. Under this test, and for each 'factor' an individual satisfies, they can be considered to have a higher level of connection to Australia.

These changes are yet to be finalised and will apply from the first income year after the date of Royal Assent. These proposed ammendments are currently undergoing consultation.

Taxable income from employment includes salaries, wages, bonuses, lump sum payments, allowances and benefits arising under employment-related share purchase schemes and option schemes (employee share schemes).

Australia has very broad sourcing rules which need to be considered carefully in some cases. However, it is generally true that employment income is deemed to be sourced in the country in which the employment services are physically performed. 

Employee fringe benefits are subject to fringe benefit tax (FBT). This tax is imposed on employers. Common examples of benefits subject to FBT include accommodation, motor vehicles, and expense reimbursements. Please also note that a cash allowance for Food and Accommodation paid to compensate an individual for the fact they have to live away from home due to their work will also be captured under FBT as a Living Away From Home Allowance.

Additional Information:

• The FBT Year runs from 1 April to 31 March.
• Employers must also calculate the value of Reportable Fringe Benefits for each employee to be reported through the payroll for the year ended 30 June.

Certain benefits may be subject to concessional treatment depending on the nature of the expatriate assignment and the manner in which the benefit is provided. These include:

• transport for employee, family and household effects
• storage and related insurance
• visa costs
• tax return assistance
• accommodation (subject to qualification rules)
• school fees (subject to qualification rules)
• home leave flights (ordinarily 50% concession for one flight per year).

Specific advice should be sought in advance to ensure planning opportunities are maximised and qualification criteria are met.

Australian tax residents (including temporary residents) are given credit for foreign tax paid on foreign-source income. In general terms the tax credit (foreign income tax offset) recognised in Australia will be limited to the lesser of the foreign tax paid or the Australian tax applicable to the foreign income.

General tax deductions against employment income are available where incurred wholly and necessarily for the derivation of income and not reimbursed by the employer. Examples include the cost of preparing the annual tax return and charitable donations. Out of pocket work related expenses should be reviewed to consider their deductibility across a set of comprehensive rules.

Employees working in Australia are subject to the Australian PAYG withholding rules. The employer deducts PAYG from salary and wages and remits this to the Australian Taxation Office (ATO).

As of 1 July 2019, all employers are required to report payroll through Single Touch Payroll (STP). STP is a reporting format, whereby STP-enabled payroll software reports employees' payroll information (such as salaries and wages, pay as you go (PAYG) withholding and superannuation) to the ATO at the same time payment is made.

The ATO have implemented STP Phase 2 from 1 January 2022 which significantly increases the amount of payroll data reported across to the ATO in real-time. This includes a significant aspect of the payroll reporting including employment basis and tax treatment of employees and categorisation of paycodes. This will creategreater transparency and sharing of data between the various tax authorities and key statutory bodies including the disaggregation of payment data.

There are also requirements specifically targeting expats including introducing country codes, foreign tax reporting and residency classification as part of broader tax scrutiny.

Certain timing and reporting concessions exist for employees who are on a shadow payroll. In addition, under certain conditions a PAYG variation can be obtained from the Commissioner of taxation to avoid the requirements of making PAYG remission.

Summaries detailing the gross wages and PAYG withheld for the year ended 30 June must be prepared and provided to each employee by 14 July or reported through STP.

Australia has a capital gains tax regime such that Australian residents are taxable on their worldwide gains realised from the disposal of a capital asset. Capital assets include real property, personal property, and shares. Any gain made from a capital asset is included as income and taxed at the marginal tax rates in the year in which the capital gains tax (CGT) event occurs. Where the asset in question has been held for at least 12 months by an individual, the gain may qualify for a 50% discount.

Temporary and non-residents are only taxable on gains arising from the disposal of Taxable Australian Property (TAP). TAP includes but is not limited to a direct or indirect interest in Australian real property.

Payroll tax is an employer state tax, and rules vary with each state. Generally, tax is levied on (but not limited to) salaries and wages, allowances, superannuation, and fringe benefits provided to employees located in that state.

The key obligations are:

• employers must register for payroll tax when they first expect to exceed the state threshold
• payroll tax is calculated and paid on a monthly basis. An annual reconciliation must also be lodged for the year ended 30 June
• penalties and interest charges apply to late submission of calculations and payments
• there would ordinarily be a requirement to automatically group parent and subsidiary entities.

Superannuation is a form of compulsory employer pension, and is currently levied at 11% (effective 1 July 2023) of Ordinary Time Earnings (OTE). OTE encompasses most wages, salaries and allowances paid to employees.

Employees have the right to choose their superannuation fund. However, in the absence of an election by the employee, contributions should be made to an employee’s stapled superannuation fund.

• Superannuation is calculated each quarter and must be received by the superannuation fund by the 28th day following the end of the quarter.
• Superannuation must be paid on all OTE, even where an employee earns less than$450 in a given month (this has come into effect1 July 2022).
• Superannuation contributions may be capped at the maximum contributions base for the quarter.
• Employers may be exempted from providing Superannuation for temporary residents so long as the individual comes from a country with a bilateral social security agreement and a certificate of coverage is obtained.
• At the end of the assignment, an employee may be able to withdraw or 'cash out' their accumulated superannuation fund. This withdrawal would ordinarily be subject to a tax at 35% referred to as a Departing Australia Superannuation Payment. This is in addition to the 15% tax levied on contributions made into the Superannuation fund.

Gains from employment related share/option schemes are ordinarily taxable under Employee Share Scheme (ESS) rules. There are specific reporting requirements and rules regarding the timing of taxation which may not align with the foreign tax jurisdiction in which the shares or options are issued.

The ESS income is reported in the employee’s personal tax return in the income year in which the acquisition occurs.

Expatriates should also seek expert advice because depending on their specific circumstances, some or all of the income may be exempt from Australian tax or alternatively it may be taxable but with foreign tax paid recognised as a credit on some or all of the income. This can have associated risk for double taxation as it is not uncommon for the taxing points in Australia to not be aligned with that of the home country tax jurisdiction.

Workers compensation insures employers against compensation claims by its employees for personal injuries and diseases arising out of or during the course of employment. The workers compensation scheme is managed by the states, and therefore, the rules vary from state to state.