5th December 2007

Dear Investor,

Taxation of Australian residents who temporarily leave Australia

Australian residents are taxed on their worldwide income, regardless of where income is derived. However, Australian residents who temporarily leave Australia may be exempt from Australian tax on income earned outside Australia.

Given the mobility of Australia’s workforce, it is more relevant than ever to review the taxation of Australian residents who temporarily work overseas. An individual who is a resident of Australia is generally assessable on ordinary and statutory income derived from all sources whether in Australia or overseas. Australia’s tax system has a wide definition of “resident” that focuses on whether the behaviour and habits of individuals are consistent with Australian residence. Residents therefore include:

  • Individuals who “reside” in Australia under the ordinary meaning of this term;
  • Individuals who are domiciled in Australia; and
  • Individuals who have actually been in Australia for more than 183 days in the relevant income year.

Under the Australian tax system, these Australian residents are taxed on their worldwide salary and wages (including any amount earned overseas) and worldwide capital gains.

However, Australian residents may not be taxed on their worldwide income if such income arises from provision of a “foreign service”. Additionally, Australia’s “double tax agreements” may expressly dictate that foreign income from a particular country is not subject to Australian income tax. In these circumstances, Australian residents are likely to pay tax on the income in the foreign jurisdiction in which they are temporarily employed. This may be beneficial to Australian residents who are temporarily working in a jurisdiction with an effective tax rate lower than Australia’s.

Foreign service exemption

Australian residents are not subject to Australian income tax for foreign earnings arising from at least 91 days of “foreign service”. Foreign service includes:

  • Service performed in the capacity of employee;
  • Service performed as an office holder; and
  • Service performed by a government employee or an employee of an international organisation.

The exemption will prevent “foreign earnings” paid to the Australian resident during the income year from attracting Australian income tax. Foreign earnings are broader than simply salary and wages and will extend to any allowances, bonuses and commissions received in the course of the foreign service.

In applying the 91 day test, any period of absence from foreign service breaks the continuity of foreign service (effectively removing the foreign service exemption), unless either of the following apply:

  • The absences do not exceed 1/6 of the total period of foreign service; or
  • They are absences which still count as foreign service and so do not break the continuity of foreign service. Examples of these absences include some types of leave, short business trips and short breaks taken back in Australia.

In addition to the foreign services exemption, certain foreign income derived by Australian residents may also be exempt under an applicable double tax agreement.

Double tax agreements

The foreign service exemption does not apply if the foreign earnings are exempt from tax in the foreign country due to either:

  • A double tax agreement between Australia and the foreign country; or
  • The tax laws of the foreign country.

In these circumstances, the Australian resident’s liability to pay Australian income tax is reinstated.

As such, the operation of a double tax agreement will directly impact on many Australian residents working overseas, particularly if they are on secondment (and thus are ultimately paid by their Australian employer). Australia currently has 43 concluded double tax agreements. Therefore, the operation of a double tax agreement will be relevant for the majority of Australian residents working overseas.

Double tax agreements may also exempt certain categories of income from being subject to tax in the foreign country.

Australian residents working overseas may also need to go beyond an applicable double tax agreement and examine the income tax laws of the foreign country. If these laws exempt foreign income tax liability, the Australian resident may become liable to pay Australian income tax.

Taxation and the La Trobe Australian Mortgage Fund

All income from the Fund that investors receive (including reinvested interest payments) during a financial year should be included as part of investors' assessable income in the year to which the income relates.

It is not compulsory to provide your Tax File Number (TFN) to La Trobe or any other fund manager where you may have funds invested. However it is important to note that if you choose not to quote your TFN the fund manager will be required by the Australian Taxation Office (ATO) to withhold tax on earnings at the highest marginal tax rate (currently 47% plus Medicare levy currently 1.5%).

Investors who are non Australian residents for taxation purposes, will normally have tax deducted from their earnings before distributions are paid. The rate of tax will depend on the country the non Australian resident resides in. In general terms, however, non-residents who invest in the Fund will have 10% non-residential withholding tax deducted from all interest distributions and paid to the ATO.

This information is for general purposes only and it is advisable to seek the advice from a qualified tax adviser as each individual’s circumstances are unique and taxation legislation is complex.

Source: Employment, Remuneration & Benefits Bulletin July 2007

Best regards,
Chris Andrews


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Chris Andrews
Head of Funds Management

t  +61 3 8610 2811
e  candrews@latrobefinancial.com.au

Chris Andrews is the Head of Funds Management for the La Trobe Group and has responsibility for the La Trobe Australian Mortgage Fund.
Read full profile here.

La Trobe is one of Australia's leading independent specialist mortgage Financiers. Its business includes residential mortgages, commercial mortgages, and investment services operating one of Australia's largest Mortgage Funds under AFSL 222213. It employs over 115 staff and has raised over AUD$10Billion to assist over 100,000 customers since inception in 1952.

Copyright 2010 La Trobe Financial. All rights reserved. No portion of this may be reproduced, copied, or in any way reused without written permission from La Trobe Financial. Disclaimer

* La Trobe Financial Asset Management Limited ABN: 27 007 332 363 and AFSL No: 222213 is the issuer and manager of the La Trobe Australian Mortgage Fund. It is important for you to read the Product Disclosure Statement for the Fund before you make any investment decision. You can get a copy of the PDS by calling 1800 818 818. You should consider carefully whether or not investing in the Fund is appropriate for you.
(1) The rates of return from the Fund are not guaranteed and are determined by future revenue of the Fund, and may achieve lower than expected returns. Past performance is no guarantee of future performance. Investors risk losing some or all of their principal investment.
(2) Withdrawal rights are subject to liquidity and may be delayed or suspended.
(3) As at 30/11/10 the La Trobe Australian Mortgage Fund had received a Morningstar RatingTM of 5 stars. The Morningstar Rating is an assessment of a fund's past performance - based on both return and risk - which shows how similar investments compare with their competitors. A high rating alone is insufficient basis for an investment decision. © 2010 Morningstar, Inc. All rights reserved. Neither Morningstar, nor its affiliates nor their content providers guarantee the above data or content to be accurate, complete or timely nor will they have any liability for its use or distribution. Any general advice has been prepared by Morningstar Australasia Pty Ltd ABN: 95 090 665 544, AFSL: 240892 (a subsidiary of Morningstar, Inc.), without reference to your objectives, financial situation or needs. You should consider the advice in light of these matters and, if applicable, the relevant product disclosure statement, before making any decision. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/fsg.pdf
(4) 3.75 star rating out of a possible 5 star rating indicates that Adviser Edge believes that La Trobe has performed in line with its peers and exceeded its peers on some fronts.
(5) The Standard and Poors rating of 4 out of 5 stars indicates that S + P has high conviction that La Trobe Financial will consistently generate risk-adjusted fund returns in excess of its relevant investment objectives and relative to its peers.
(6) The award was given to the La Trobe Australian Mortgage Fund, Pooled Mortgages Option.
Research Ratings are subject to change. To view the latest research information please visit www.adviseredge.com.au or www.standardandpoors.com.au. Ratings issued by Adviser Edge Investment Research AFS Licence No. 236783 and Standard & Poors Information Services (Australia) Pty Ltd AFS Licence No. 258896 are solely statements of opinion and not statements of fact or recommendations to purchase, hold, or sell any securities or make any other investment decisions. The ratings are only one factor to be taken into account in deciding to invest. Research Houses receive a fee from La Trobe for rating the product. The Adviser Edge rating is generally a measure of the rated entity's capacity to meet its repayment obligations in all market circumstances.
IMPORTANT: This message, together with the La Trobe Financial website (www.latrobefinancial.com.au) and all its contents have been prepared for general information only and should not be taken as legal or financial advice, and as such the specific needs, investment objectives or financial situation of any particular user have not been taken into consideration. Individuals should therefore talk with their financial planner or advisor before acting on any information present on this message or the La Trobe website.