5th December 2007
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