Potential Changes To Australia’s Personal Tax Residency Laws

Matthew Marcarian   |   16 Mar 2022   |   4 min read

On 11 May 2021, the Australian Government announced that it is considering replacing Australia’s existing residency rules with a new ‘modernised framework’.

This update is intended to be based on a report by the Board of Taxation from March 2019.

The changes have not been passed into legislation at publication of this article.

Our Principal, Matthew Marcarian, analyses the changes and what it might mean for Australian expats in his – Australia To Change Personal Tax Residency Laws – article.

Below is a summary of the article.

Why might the Rules be Changing?

The Government has indicated that the rules are changing in order to:

  • make them easier to understand and apply in practice
  • deliver greater certainty
  • lower compliance costs for globally mobile individuals

 What is Changing?

Under the current rules an individual is a tax resident if they:

  • reside in Australia
  • have their domicile in Australia
  • live in Australia for at least 183 days of the year, or
  • are a member of certain Commonwealth Government superannuation funds.

Unfortunately, due to the lack of measurable criteria in these tests there is a lot of grey area when it comes to the more complex situation involving travellers and individuals with more ambiguous mobile living situations.

The intended change will update these rules to focus on a framework that centres on three things:

  • Physical presence in Australia
  • Australian connections
  • Objective criteria

While the precise nature of the intended update is not yet known, the Board’s recommendation has indicated specific, measurable tests that an individual should pass to meet the residency test. To this end there are three proposed tests to be considered.

1: The 183 Day Physical Presence Test

It is expected that the new primary test will be as simple as determining that an individual has spent at least 183 days physically present in Australia during the given tax year.

2: Commencing Residency Test

When an individual moves to Australia and is only here for between 45 and 183 days they would also need to satisfy at least 2 of the following factors

1. The right to reside in Australia (citizenship or permanent residency)

2. Australian accommodation

3. Australian family

4. Australian economic connections such as:

     a. Employment in Australia

     b. Actively involved in running a business in Australia

     c. Interests in Australian assets

Ceasing Residency Test

To cease residency an Australian would need to spend less than 45 days in Australia during the year, as well as the preceding two years. However, residency would cease immediately where the individual moves overseas to take up overseas employment and the individual:

1. Was an Australian resident for three previous consecutive income years

2. The overseas employment is for at least two consecutive years

3. Has overseas accommodation for the duration of their overseas employment

4. Is physically outside of Australia for less than 45 days in each year they are living overseas

Summary

The proposed rule changes are intended to simplify and clarify the law around determining residency. However, there is still work to do to develop the tests and factors. Further consultation in drafting the legislation is encouraged.

Australia To Change Personal Tax Residency Laws has been written by our Principal, Matthew Marcarian

When it comes to providing tax advice, Matthew believes it is about more than the simple tax consequences. It is about gaining a deep understanding of the client’s situation to formulate clear, robust tax and business advice that deals with both current and potential tax concerns.

With over 20 years of experience providing international tax advice to a wide range of clients, Matthew is well adept at helping clients manage and plan for the tax outcomes and opportunities, both domestically and abroad.

With extensive qualifications in international taxation and personal experience living as an expat, Matthew is a leader in his field with specialist expertise in relation to trusts, controlled foreign companies, international taxation and advising Australian businesses expanding overseas.

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The New Requirement for Director IDs

Daniel Wilkie   |   10 Dec 2021   |   4 min read

In June 2020 new legislation was passed that changes how directors are required to identify themselves. This change was the first step made in an effort to modernise business registrations. It means that all directors are now required to obtain a unique Director Identification Number (Director ID).

What is a Director ID?

A Director ID is a unique 15 digit number that all directors will soon be required to have. This identification number will help ensure that an individual can be correctly identified across all their roles as a director. The unique Director ID will stay with an individual regardless of name changes, location, or how many companies they become a director of.

Why is the Director ID being introduced

The Director ID is being introduced to mitigate the risk of fraudulent director nominations. It also increases the ability to trace relationships with directors and their companies. This is part of a broader plan to improve data integrity and security around company registrations and regulation.

What the Director ID means for you

If you are already a director it means that you will need to apply for a Director ID within the next year. If you are planning to become a director you will need to apply for a Director ID as part of your appointment as a director.

             New companies and new director appointments

Until 5 April 2022, any director appointed since 1 November 2021 has 28 days from the date of their appointment to verify their identity and apply for a Director ID.

From 5 April 2022 all individuals with new director appointments will need to apply for a Director ID prior to their appointment as a director. Anyone who is intending to become a director within the next 12 months is eligible to apply for a Director ID.

             Existing company directors

All existing directors (appointed prior to 1 November 2021) have until 30 November 2022 to identify themselves and apply for a Director ID.

In preparation for the application it is important to ensure that all existing company details relevant to your position as a director are up to date. If any personal details need to be corrected then Form 492 should be lodged to request corrections. This includes correcting errors in names, shortened forms of names, inaccurate dates or place of birth, or other information that may not have been submitted accurately with your initial nomination.

How do I apply for a Director ID?

Directors can only apply for a Director ID themselves. This is not something you can appoint an agent or representative to do on your behalf. You can make an application for your Director ID through one of the following methods:

  1. Apply through the myGovID app (preferred method). Please note that myGovID is different to myGov.
  2. Providing proof of identification documents over the phone.
  3. Completing a paper application and mailing in the form.

To complete the digital application you will need to install the myGovID app on a smart device. Note that myGovID is a separate app to your personal myGov app that you use to manage your personal tax and other government related matters. You will then need two forms of identification, such as your driver’s license, Australian passport, birth certificate, visa, citizenship certificate, ImmiCard or Medicare card.

For more detailed information on how to set up your myGovID please see here:

https://www.mygovid.gov.au/set-up

If you do not have relevant Australian identification documents (for example, due to being a non-resident) or do not have an email address, then you will need to use the alternative forms of application.

The link to access the paper application form is here:

https://www.abrs.gov.au/director-identification-number/about-director-id

This link will also give you more information about the proof of identity documents that you are required to provide.

What happens if I don’t apply for a Director ID?

If you are required to have a Director ID and fail to apply for one within the required timeframe then you may be liable for penalties. Failing to apply for a Director ID when required can leave you exposed to both civil and criminal penalties.

Australian Business Registry Services

The requirement for all directors to obtain a Director ID is the first step in modernising and streamlining Australian business registry services. Phase 2 will commence in 2023 and will involve linking of Director IDs to their respective companies.

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COVID-19 Financial Support for Individuals and Businesses – August 2021 Update

Daniel Wilkie   |   23 Aug 2021   |   7 min read

While the Federal Government’s Jobkeeper and Cash Flow Boost have wrapped up, the ongoing pandemic and resulting lockdowns continue. This means that businesses and individuals right across the country, particularly in the capital cities, continue to face income loss. As of August 11th 2021, additional economic assistance packages have been announced as a direct result of the most recent lockdowns and restrictions.

FEDERAL GOVERNMENT

At present the government has not reinstated the JobKeeper initiative. Instead, they have provided a payment directly for individuals who have lost work hours.

             COVID-19 Disaster Payment

On 3rd June 2021, the Federal Government announced a COVID-19 disaster payment. This is now a tax-free, non-assessable, non-exempt income payment for the individual recipient. At the time this payment was made in response to the Victorian lockdown in May/June, however it was also made available to future Commonwealth declared hotspots.

This payment is aimed at individuals who have lost paid work hours due to the restrictions imposed by lockdowns. The support provided is based on the number of working hours lost:

  • Over 20 hours = $750 a week payment
  • 8-20 hours = $450 a week payment
  • JobSeeker, Austudy, Age pension recipients who have lost at least a full day’s work in a week may also be eligible for a payment of $200 a week.

NEW SOUTH WALES

NSW has a number of measures available to provide economic support due to the current wave of lockdowns.

The NSW 2021 COVID-19 Business Grant and NSW 2021 JobSaver payments are available for NSW businesses (including non-profit organisations and sole traders) with a turnover between $75,000 and $50 million in the 2020 financial year, and have had under $10 million in wages.

             NSW COVID-19 Business Grant

Eligible businesses can apply for grants of between $7,500 and $15,000. The amount of the grant depends on the extent to which the business turnover declined during the first 3 weeks of the Greater Sydney lockdown (26 June to 17 July 2021) compared to:

  • The same period in 2019; or
  • The same period in 2020; or
  • The 2 week period immediately before the Greater Sydney lockdown.

The amount of the grant will depend on the decline in turnover:

  • 30% or more decline = $7,500 grant
  • 50% or more decline = $10,500 grant
  • 70% or more decline = $15,000 grant

These grants are likely going to be declared to be tax-free grants. Applications can be made until 13 September 2021.

             NSW 2021 JobSaver

The JobSaver cashflow boost is a cashflow boost for eligible businesses available from week 4 of the current NSW lockdown. It is to help businesses maintain their employee headcount. This payment is made in fortnightly amounts based on 40% of their NSW payroll payments, with a minimum of $1,500 a week and a maximum of $100,000 a week.

To receive the payment, the business must maintain their staff levels through the lockdown. Non-employing businesses (sole traders) may receive a payment of $1,000 a week.

             Micro Business Grants

For smaller businesses, with turnovers between $30,000 and $75,000 (in the 2020 financial year), who have experienced a decline of at least 30% of their income, but are not able to apply for the previous two grants, the Micro Business Grant is available.

Applications for this grant close on 18 October 2021.

             NSW Payroll Tax Concessions

Businesses with under $10 million in payroll for the 2021/2022 financial year, who have experienced a 30% decline in turnover will have their annual payroll tax liability reduced by 25%. 

Businesses will also have the option to defer their 2020/2021 annual payment as well as the July and August monthly payments until 7 October 2021. 

             NSW Land Tax Concessions

Up to 100% relief may be available to residential or commercial landlords who have provided rent reductions to eligible tenants. Note that the property owner cannot apply for this concession as well as the Residential Tenancy Support Payment.

             Residential Tenancy Support Payment

Residential landlords with eligible properties may be eligible for grant up to $3,000 if they provide rent reductions to their tenants. They will be eligible for either this grant, or up to 100% land tax concession.

             Short Term Eviction Moratorium and Other Tenant Safe Guards

An eviction moratorium is in place until 11 September 2021. Where a residential tenant has lost at least 25% of their income due to COVID-19 (along with other eligibility criteria), the landlord will not be able to evict the tenant prior to mediation.

             Targeted Industry Support

Other targeted industry support applies to some of the most hard hit industries (such as tourism and entertainment industries).

VICTORIA

The Victorian government has issued a range of grants to assist businesses impacted by the shutdowns.

             Business Costs Assistance Program Round Three (BCAP3)

Eligible businesses who received the Round Two payments (BCAP2) for business costs assistance were automatically paid this additional grant.

Businesses who missed the Business Costs Assistance Program Round Two may be able to apply for the “BCAP2 July Extension” grant instead.

             Small Business COVID Hardship Fund

Businesses who were not eligible for support under existing programs but experienced a turnover reduction by at least 70% (and have a payroll of under $10 million) may be able to access pay grants of up to $5,000. A second round of funding under this grant was announced on 6 August 2021. This grant enables Small Businesses to access grants of up to $8,000.

             A New Business Continuity Fund

This is an additional grant announced on 28th July 2021, that will be automatically applied to any business that was eligible for the BCAP2 or BCAP2 July Extension, where their business was impacted by capacity limits in the CBD.

             Specific Industry Funds

Licensed Hospitality Venues, Alpine Businesses, and Events organisers, have specific grants available for their Industry, due to recognition of the particular hardships that these industries have faced during lockdowns. These grants are between $5,000 and $25,000 for eligible businesses located in areas impacted by the lockdowns.

             Commercial Tenancy Relief for Victorian Businesses

This relief involves the reintroduction of the Commercial Tenancy Relief Scheme. Support is also being provided to landlords who provide rent relief. This relief is generally available where the business has a turnover below $50 million and their revenue has reduced by at least 30% due to coronavirus.

QUEENSLAND

Queensland also has a range of grants available, primarily for small to medium businesses. To be eligible, the business must have a turnover of at least $75,000, an annual payroll of under $10 million and a reduction in turnover of at least 30%.

             2021 COVID-19 Business Support Grants

Eligible small businesses within areas that were locked down may apply for a $5,000 business support grant. Larger businesses in hospitality and tourism have now been added to this grant, subject to meeting relevant criteria.

             Queensland Tourism and Hospitality Package

A range of measures specific to the tourism and hospitality industry includes:

  • Deferral of payroll tax liabilities
  • Waiving, refunding, or deferring certain fees and licensing costs
  • A cleaning rebate to aid eligible businesses and nonprofit entities impacted as potential exposure sites

OTHER

State assistance has also been offered in South Australia, Western Australia, and the Northern Territory.

With lockdowns continuing to be announced, particularly in the Eastern States, it is likely that further extensions, top ups or additional grants will continue to be announced.

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Tax Obligations for Australian Residents Working for a Foreign Employer

Daniel Wilkie   |   16 Jul 2021   |   7 min read

There is one fundamental principle that guides what income you are assessed on when you lodge your Australian tax return: 

Tax residents of Australia are taxed on their worldwide income, while non-tax residents of Australia are only taxed on Australian sourced income. 

If you live and work in Australia, it is likely that a majority of your income will have an Australian source. But what happens when you reside in Australia while working for a foreign based employer?

Tax Resident

For the most part, your residency is usually determined by the place where you live. If you are an Australian who permanently lives in Australia, then, even while working for a foreign based employer, you will remain an Australian tax resident.

Technology has made it possible for many Australians to continue to live in Australia while working for a foreign employer. The ongoing pandemic has quickly pushed even more taxpayers into situations where they can reside in one country while working for an employer who has no physical presence in the country where they live.

If you have found yourself back in Australia, but still working for a foreign employer, then there are a number of matters that require consideration.  

Double Tax Agreements

Since both the source country and the country of residence typically have jurisdiction to assess taxes, Double Tax Agreements (DTA) operate to ensure that you are not taxed twice on the same income. 

Typically, a double tax agreement will contain a clause providing the basis as to who has the taxing rights with regards to employment or independent contracting income. One country will typically enable the other country to exclusively tax the income if that person has lived in that country for more than 183 days in a twelve month period.

If there is no tax treaty, then the country from which the employer is located may subject the income to their tax system, whether through withholding taxes on each payment, or through the annual assessment system.

While agreements can vary between countries, they typically ensure that foreign tax paid on foreign sourced income by a tax resident of the other country to the agreement can be claimed as a tax credit in the taxpayer’s tax return. A DTA typically also limits the amount of taxation that the foreign source country can impose on certain types of income. 

How Foreign Tax Offset Limit the Total Tax Paid

The foreign income tax offset is designed to ensure that an Australian resident taxpayer avoids double taxation where they pay foreign tax on foreign income that is also taxable in Australia. The offset is based on the total foreign income tax paid, but is limited to the amount of the Australian income tax that would be payable on the income. Any excess foreign tax that remains is non-refundable.

Example where Australia has the Higher Tax Assessment:

Peter is an Australian who works remotely from Australia for a Hong Kong based company.

For the 2020 financial year Peter is paid AUD $150,000 from his Hong Kong employer. The Hong Kong tax he paid on this income is AUD $26,000. 

The paid Hong Kong tax can be applied as a foreign income tax offset in Peter’s tax Australian return.

Peter has other income to declare in his tax return, resulting in a tax liability of $67,500, assessed on the taxable income.

If he was required to pay the Australian tax on top of the Hong Kong tax then he would be paying a total of $93,500 in taxes between the two countries. However, he can apply the $26,000 already paid in Hong Kong as a credit against the $67,500 Australian assessment. This means he will only need to pay the additional difference of $41,500 to the ATO, bringing his net total tax paid to the Australian assessment of $67,500.

Example where the Foreign Country has the Higher Tax Assessment:

Julie is an Australian working remotely for a company based in Portugal . 

In the 2020 financial year she is paid the equivalent of AUD $50,000. She pays AUD $15,000 in Portuguese taxes for this income.

Julie has no other taxable income to include in her Australian tax return. This means she is only assessed for $8,797 in her Australian tax return. She can only apply the $15,000 in foreign tax paid as foreign tax credits up to the point where it reduces the Australian assessed tax on her foreign income to nil. She is not entitled to a refund for the excess foreign tax she has paid. This means that her total tax liability is the amount paid to the Portuguese tax authorities and she is not required to pay any tax in Australia.

Medicare Levy

Medicare levy is generally paid by Australian tax residents. Excess foreign tax credits can be used to offset the medicare levy and the medicare levy surcharge. 

The Tax Impact of Relying on Foreign Sourced Income

As you can see from the above examples, while a double tax agreement will limit the impact of being taxed from both the source country and the country of residence, you, as the taxpayer, are liable for the higher amount of tax that is assessed. 

Many countries tax their foreign residents at a flat tax rate, denying them any tax free or lower tax threshold concessions. The underlying assumption behind this method is that if you are a foreign resident then you are not earning your primary income from a foreign country. However, as indicated earlier, for some taxpayers this is not necessarily the case. 

If you are an Australian who lives in Australia but works permanently for an overseas based company, your primary, or even sole, source of income may be this foreign sourced income. If you’re one of the many taxpayers who came home for the pandemic but retained your overseas employment, then this is your potentially unenviable position. 

Given that Australia has one of the highest rates of income tax in the world, high income earners are more likely to find themselves subject to paying some additional tax on top of the foreign tax payments. This is particularly true if the foreign country caps their foreign resident tax at a lower rate than Australia’s higher tax margins. 

Things can get more complicated, and result in higher amounts of tax being paid, if you are compensated for your employment in benefits that are in addition to regular wages. 

The Impact of Tax Payable Assessments

One other thing to note is that where you are assessed on foreign income, the ATO may implement PAYG Instalment obligations. This means that you would be required to lodge and pay PAYG Instalments through Instalment Activity Statements over the year. This helps ensure that expected tax obligations are covered when it comes time to lodging the income tax return. 

Tax Consequences of Working for an Overseas Employer

In summary, if you are an Australian earning employment income from an overseas employer, then you may be subject to taxes in both the country of employment, and your country of residence. A DTA can help limit the potential for such income to be double taxed.  

Since Australia has one of the highest tax rates in the world, most individuals in this situation are likely to find that if they pay taxes in the country that employs them, they may need to pay additional taxes on lodgement of their Australian tax return. 

The actual overall impact of working for an overseas employer will depend on which country your employer is situated in and whether Australian has a DTA with the country where your employer is located.

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Understanding the Differences Between Australian Citizenship, Visa Residency and Tax Residency

Daniel Wilkie   |   18 May 2021   |   10 min read

It can understandably be confusing to determine the difference between being an Australian tax resident for tax purposes compared to visa residency.

If you’re an Australian citizen who was born and continues living in Australia, then it’s pretty straightforward. You are an Australian for both citizenship and tax purposes.

But what about when things aren’t so clear? Can you be an Australian citizen but not an Australian tax resident? Can you be an Australian tax resident without being an Australian citizen? And what about Visa status? How does this change things?

Citizenship and visa residency are pretty clear cut. You are either a citizen or you aren’t. You either have an Australian residency visa, or you don’t. Tax residency, whilst linked to some degree to having visa residency or citizenship, is not as straightforward.

Australian Citizenship

You are an Australian citizen when Australia is legally your home country. This could be because you were born in Australia, or because you were born to Australian parents, or because you applied for citizenship. As an Australian citizen, Australia is considered to be your default country for all purposes, including taxation. This is why an Australian citizen may, in certain situations, continue to be treated as a tax resident, despite living in another country.

However, what about for those citizens from another country, living in Australia?

Australian Visa Residence 

People who are citizens of other countries are only permitted to stay in Australia per the terms of their Visa. There are many different types of visas, ranging from short-term holiday visas, through to permanent residency visas.

The type of visa you hold will play a part in your circumstances when determining tax residency. For instance, individuals on short-term visas are less likely to be considered Australian tax residents, while individuals on long-term or permanent residency visas are more likely to be considered Australian tax residents.

Australian Tax Residency

Despite what your citizenship and visa status is, tax residency is a matter of fact and intention. There is no application form to be completed nor automatic rule to become a tax resident.

When considering whether you are an Australian tax resident the primary factor is whether you, the individual, is living in Australia (see the “resides test” below). Conversely, you may be a foreign resident for tax purposes if you live outside of Australia. Living in Australia is distinguished between having a holiday in Australia, or staying in Australia for an extended period, whether temporary or permanent.

To help distinguish “permanency”, an individual must typically be living in Australia for at least six months to be considered a tax resident. Conversely, Australian citizens who are living overseas are typically still considered to be Australian tax residents if they are living overseas for less than 2 years. Indeed an Australian citizen may be living overseas for up to 5 years and continue to be considered an Australian tax resident if there are sufficient ties remaining in Australia to demonstrate that the nature of their overseas stay is “temporary”.

In order to determine tax residency specific residency tests are considered.

Tests for Australian Residency

To determine whether an individual is a tax resident there are a number of tests that can be applied. Passing any one of these tests will determine residency status.

             Resides Test

The first test for residency is the ‘resides test’. If you are physically present in Australia, intending to live here on a permanent basis, and have all the usual attachments in Australia that one would expect of someone living here, then you are a tax resident.

Factors considered include whether your family lives in Australia with you, where your business and employment ties are, where you hold most of your assets and what your social and living arrangements are. If you pass this test then there is no need to consider further tests. 

It is possible to be found to be a resident of more than one country. In cases where you are found to be a dual resident, you may need to consider tie breaker rules in any relevant Double Tax Agreement. 

If you don’t pass the resides test then you may still be a tax resident if you satisfy one of the three statutory tests instead.

             Domicile Test

The domicile test states that you will be found to be an Australian tax resident unless you have a permanent home elsewhere. An Australian citizen will have Australia as their domicile by origin. This means that even if an Australian citizen is living or travelling overseas their default home will be Australia. 

In such situations residency only changes when there is an intention to permanently set up a new domicile overseas. (For this reason people holidaying overseas or living overseas on a short-term basis can continue to be Australian tax residents even if they don’t step foot in Australia for years). Individuals who were domiciled in Australia but who do not cut their connection with Australia, will continue to be Australian residents.

             183-Day Test

The ‘183 day test’ is the day count test. This test is typically to capture foreign residents coming to Australia, rather than applying to Australians moving overseas. Individuals who come to Australia from overseas for at least 183 days may find themselves being Australian tax residents. Note that being in Australia for 183 days of the year does not automatically make such an individual a tax resident. Non residents who come to Australia for more than 183 days but do not have any intention of taking up residence in Australia may, depending on their intent and actions, be considered visitors or holiday makers, and therefore not qualify as tax residents.

             The Commonwealth Superannuation Test

Australian Government employees in CSS or PSS schemes, who work in Australian posts overseas, will be considered Australian residents regardless of other factors. 

Examples of Tax Residency and Foreign Tax Residency

To understand the difference it might help to look at a few examples of different scenarios.

             An Australian Citizen who is a Tax Resident

Tom is an Australian citizen who was born in Australia. He has lived in Australia his whole life, and intends to continue living here. During the year he goes on a 6 month holiday, travelling around Europe. At the end of his 6 months he decides to take advantage of another opportunity and stays in Africa for 3 months. After this time, he returns home to Australia. 

Tom’s tax residency never changes. Despite travelling overseas for 9 months of the year, he continues to be an Australian resident for tax purposes. This is because Australia is always his home, and his time overseas is not in the nature of a permanent move.

             An Australian Citizen who is not a Tax Resident

Jill is an Australian citizen who was born in Australia. She has lived in Australia for her whole life. However, in 2019 Jill accepts an opportunity to take a job in England. The position is a permanent position and requires Jill to move to England on a permanent basis. After acquiring the necessary visa to work and live in England, she sells her home and uses the proceeds to make the move to England, where she buys a new home and settles down. Jill brings her son to England with her, and closes down her Australian bank accounts. She does not expect to return to Australia, other than for occasional holidays.

On the day that Jill departs Australia she becomes a foreign resident for tax purposes. The fact that she is an Australian citizen does not change this. This is because it is clear from her actions and intentions, closing off ties to Australia, and establishing a new home in England,  that she is moving to England on a permanent basis. 

             A Tax Resident Living in Australia on a Permanent Residency Visa

Bob is from the United States of America. While in Australia on a working holiday visa, where he travels around the country, his final stop is at a small country town that feels like home to him. He makes friends and is even offered a permanent job there. Bob’s visa is almost up, so he goes back to the United States as planned, then takes the necessary steps to return to Australia and apply for a permanent residency visa. Bob effectively cuts his ties with the US and intends to make this small country town his new home and moves into a room with one of his new mates.

On Bob’s initial time in Australia under his working holiday visa, he will be considered a non-resident, or a temporary resident, depending on his visa. Even though he started thinking about making a permanent move at this stage, he had yet to take any steps to show this intention. However, on his return, which was made with all the actions necessary to show that this was a permanent move to Australia, he then becomes an Australian tax resident. 

             A Foreign Tax Resident with an Australian Permanent Residency Visa

Jane is a British citizen who has been living in Australia on a permanent residency visa for the past ten years. She just received news that her parents were in a bad accident and both need permanent care. Jane decides to pack up and move back home to care for her parents. She sells off her assets, closes her Australian bank account, and returns home to live with her parents. She also finds a part time job overseas.

Even though Jane has a permanent residency visa in Australia, she is no longer living here on a permanent basis. This means she is now a foreign resident for tax purposes.

Permanent and Temporary Residents

Even if an individual is deemed to be a tax resident, the ATO further distinguishes between temporary residency and permanent residency. Temporary residency typically occurs when an individual is genuinely residing in Australia on a “permanent” basis, however, are only in Australia on a temporary Visa, as opposed to living in Australia on a permanent residency Visa or obtaining Australian citizenship.

Temporary residents are only taxed on their Australian-sourced income.

Tax Residency is based on your Permanent Residence

As you can see from the above examples, tax residency is based on where an individual is permanently residing. If you are in Australia on a holiday, or only for a short time (less than 6 months), then you would not be considered an Australian resident for tax purposes.

However, holding a permanent residency visa, does not necessarily mean you are a tax resident. If you actually live in another country on a permanent basis, having your social and economic ties in another country, then you will be a foreign resident for tax purposes. 

It is important to note that there must be a permanent home elsewhere. If an Australian resident decided to travel the world for several years, although they may think they have departed Australia permanently, as they do not have a permanent home elsewhere, this would not constitute a decision to permanently reside in another country. Australia would continue to be their home, even though they are absent from Australia for a prolonged period of time. 

Since determining tax residency can be quite complex, it is important to speak to a tax specialist to understand your situation.

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Tax obligations of expats living in Australia on a “Distinguished Talent Visa”

Daniel Wilkie   |   23 Apr 2021   |   5 min read

There are many pathways that you can take when coming to live in Australia on a permanent basis. The “Distinguished Talent Visa”, subclass 858, is one of them. This Visa allows you to stay in Australia on a permanent basis, and permits you to work and study in Australia.

As an individual living in Australia on a “Distinguished Talent Visa”, you need to be aware of your tax obligations. Below we outline the most common questions clients on the “Distinguished Talent Visa” want to know.

Is a person living in Australia on the Distinguished Talent Visa an Australian tax resident?

An individual living in Australia on a Distinguished Talent Visa is most likely an Australian tax resident. 

This visa allows you to live in Australia on a permanent basis. If you choose to live in Australia on a permanent basis and take actions to make this move, then you would be considered to be an Australian tax resident. 

However, if you simply use the visa to stay in Australia on a short term basis while continuing to live in your usual country of residence, then you would remain a foreign resident for tax purposes. 

This means that the Visa itself is not evidence of tax residency, however it is a pathway that could allow you to become an Australian permanent resident, and accordingly, an Australian tax resident. You would still need to actually move to Australia and begin residing here.

If your intentions and living situation changes whilst in Australia, your tax residency status can also change. 

What are the tax implications of moving to Australia on a Distinguished Talent Visa?

Assuming you are coming to Australia on a permanent basis, then moving to Australia on a Distinguished Talent Visa will mean you become a temporary Australian tax resident. This will mean that in Australia you may: 

  • be taxed on your worldwide income, including income that comes from your former home country
  • need to obtain market valuations on any overseas assets you own in order to establish their cost base for capital gains purposes
  • Be required to consider any double taxation issues with the country that you are departing from
  • As a temporary resident you will not be subject to capital gains tax on property you hold overseas.

Since the Distinguished Talent Visa alone is not sufficient to confirm that you are becoming an Australian resident, it is important that you get your residency assessed and obtain adequate tax advice for your specific circumstances. 

Should I sell my assets prior to moving to Australia?

Whether or not you sell your property and investments prior to moving to Australia is a personal decision that you should make based on your investment and financial needs and goals. You should always take financial advice from a qualified financial advisor.

From a tax perspective, you will only need to declare capital gains from the sale of your overseas assets if you become a resident and are not also a Temporary Resident before you sell them. 

In this situation your assets are valued and taken to have been acquired at the time that you become a resident and are not still a Temporary Resident.

Assets that are subject to capital gains tax will be eligible for a 50% discount on the amount that is assessed, once they have been held for at least 12 months.

Getting adequate advice on the tax consequences of choosing when to sell your assets is something that should be done as soon as possible, so that you are able to make more informed decisions.

What happens with the taxes I am required to pay in my home country?

After moving to Australia on a permanent basis it is possible that you will still be required to pay income tax in your former country of residence. 

If there is a Double Tax Agreement (DTA) between Australia and your former country of residence, then the DTA will contain provisions that minimise the potential of being taxed twice on the same income. 

DTAs can minimise the amount of foreign tax that is paid on investment income such as interest. They also include tie breakers for situations where you are deemed to be a resident of both countries. 

Paying Tax in Australia

Whether you are a permanent resident, a temporary resident, or a non resident of Australia, you will be required to lodge an Australian tax return on an annual basis while earning income in Australia. 

Non residents are only required to include income that is sourced from Australia. 

Permanent residents are required to include income from worldwide sources.

Under the Australian tax system your employer withholds some tax from your pay, known as PAYGW (pay as you go withholding). The PAYGW is remitted to the ATO who then offset this against your assessed tax liability for the year. Any excess PAYGW is refunded at this time, or a notice of payment is issued where you owe additional tax. 

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Changes to Foreign Surcharge: Discretionary Trusts with property in NSW or VIC

Daniel Wilkie   |   22 Mar 2021   |   4 min read

Discretionary trusts provide flexibility in relation to revenue and capital distributions. This is one of the reasons they are a common choice for families. However, when there is a potential foreign beneficiary, the discretionary trust can find itself facing additional costs in the form of foreign surcharges. Foreign surcharges are additional fees that various state jurisdictions impose on the duties and/or land taxes over and above the original impost.

The 2020 changes to foreign surcharge requirements mean that administration for Australian discretionary trusts became a lot more complex.  

Foreign Surcharges are subject to a complex array of rules

Each state and territory has its own rules for determining when a beneficiary is a “foreign person”. They also have their own rules for governing foreign surcharges, with some states even imposing clawback rules in the event a beneficiary later becomes a foreign resident. For this reason it is important to obtain specific advice for the relevant state or territory when a discretionary trust intends to purchase property. 

Ultimately, any discretionary trust that is determined to have foreign beneficiaries will be required to pay both the ordinary state duties and/or land tax, as well as the relevant foreign surcharge. For this reason most discretionary trusts aim to avoid having foreign beneficiaries. Where this is not practical for the purpose and primary aim of having the trust in the first place, the trustee must be aware of how having foreign beneficiaries will impact their financial considerations.

Changes for NSW discretionary trusts that own residential property

On 24 June 2020 the State Revenue Legislation Further Amendment Act 2020 came into effect in NSW. This Act changed the foreign person surcharges for both land tax and duties where residential land located in NSW was owned by a discretionary trust. 

The change means that a trustee is deemed to be a foreign person unless the trust deed explicitly excludes all foreign persons from being beneficiaries or potential beneficiaries. This clause in the trust deed must be irrevocable. This means an individual beneficiary who has children overseas, who are defined as foreign persons, would not be able to amend the deed to include their foreign child as a beneficiary. 

Non-compliant trusts, i.e. trusts that do not exclude both foreign persons, and potential foreign persons, as beneficiaries, will deem the trustee to be treated as a foreign trustee. The trust then becomes subject to the foreign surcharge rate of duty. 

In NSW the rate of foreign surcharge is presently 8% of dutiable transactions relating to residential land while for land tax the rate is 2%. These charges are payable in addition to ordinary rates. 

Retrospective Impact of the change in NSW

One of the most concerning things with the change in NSW is that the law applies retrospectively from 21 June 2016 for dutiable transactions, and from 2017 for land tax surcharges. 

If you don’t have any foreign beneficiaries then you have until 31 December 2020 to amend your trust deed to irrevocably remove both foreign persons and potential beneficiaries who could be foreign persons, if you wish to avoid the foreign surcharge. 

If you have previously not had foreign beneficiaries, but you do not wish to amend the trust deed because you will, or potentially will, have foreign beneficiaries, then you will need to consider if you are liable for any retrospective duties and land taxes.

Victorian changes

Victoria has also implemented some changes as of 1 March 2020. While these changes essentially have the same impact as in NSW, the law does not apply retrospectively.  

What should you do if you have a discretionary trust with property?

If you have a discretionary trust that holds property, or is intended to hold property then you need to assess the importance and likelihood of having beneficiaries who are foreign persons, or could potentially be foreign persons. This includes assessing your current trust deed, evaluating the goals and purpose of the trust, and reviewing the financial impact of having, or potentially having, foreign beneficiaries.

This may result in a change to your trust deed in order to intentionally exclude any foreign, or potentially foreign beneficiaries, or it may involve a change in your investment strategy. 

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Employee Share Schemes: Overview of Tax Concessions and Considerations

Matthew Marcarian   |   29 Jan 2021   |   7 min read

Employee Share Schemes (ESS) involve an employer giving employees a benefit through the provision of shares in the company that the employee is working for.

This can include giving employees the ability to purchase shares at a discounted price and giving employees options to buy shares in the future. 

While employees are often eligible for tax concessions on the benefit they are given, it is important to be aware of the potential tax consequences that can occur. This is particularly true in situations where a taxpayer can be assessed for taxes on hundreds of thousands of dollars of assessable income, without the cash income being available to them to pay for those taxes.

In essence, unless the ‘start-up’ concessions apply, you are required to include the ‘discount’ on the shares you acquire, with the discount determined by comparing the price you pay for the shares to the market value.

This discount is a benefit that is included as assessable income in your tax return. The terms of when the market value is measured, and whether tax concessions may apply, vary depending on the exact nature of the ESS.

Basic example:

Employer company issues you shares that are worth $100,000
You only pay $80,000 for the shares.
This means you received a discount of $20,000.

You are required to include that $20,000 benefit as assessable taxable income in your income tax return.

Tax Concessions

For concessional tax treatment both the general condition and specific conditions of the particular ESS must be met.

The general condition is: 

That after acquiring your shares through the ESS, you must not:

  • Hold over 10% ownership of the company
  • Control more than 10% voting rights in the company

(Including ownership/rights held by associates and additional ownership/rights that would be held if any other ESS interests were exercised). 

The specific conditions depend on the type and particulars of the ESS that the employer offers.

Potential tax concessions include:

  • Rollover relief
  • Start-up concession (where the employer is a start-up company)
  • $1,000 discount on taxed-upfront schemes (explained further below)
  • Deferred Taxing point (discussed further below)

Taxed-Upfront Scheme

In a taxed-upfront scheme the employee is taxed on the discount that they receive in comparison to the market value at the time of acquisition. In certain situations a very small benefit of $1,000 is available.

Provided your taxable income is under $180,000 (and you meet the general condition ownership/voting rights test), then shares that are acquired under the taxed-upfront scheme are eligible for a reduction in assessable income by up to $1,000.

For example:

Jack has a total taxable income of $50,000.

His employer provides him with $999 worth of shares in the employer company. After receiving these shares Jack will have less than 1% ownership/voting rights in the company.

The $999 value of the shares is required to be reported as assessable income in Jack’s income tax return. However, as he meets the concessional requirements he is able to apply the discount and will not be taxed on the $999. 

If Jack was provided with $1,999 worth of shares then he would be able to discount $1,000 of those shares and only be assessed on the remaining $999.

Tax-Deferred Scheme

Under a tax-deferred scheme the timing of when the employee is taxed on their discount is deferred to a specific “taxing point” in the future, rather than being the time they initially receive the benefit. 

There are a number of different types of tax deferred schemes and specific conditions must be met for each arrangement. 

When it comes to deferred taxing schemes it is important to follow the specific terms of the actual scheme itself, as this will play a big part in determining when the deferred taxing point occurs. 

In general, the deferred taxing point is the earlier of the following events: 

  1. The time when there is no risk of the ESS interest being forfeited and there are no restrictions on selling the shares.
  2. Where the interests are rights (options), usually the point when the employee exercises those rights and there is no risk that they can forfeit the share and no restriction stopping them from selling that share. 
  3. When the employee ceases employment with the employer who provided the ESS.
  4. 15 years after the acquisition of the ESS interests.

However, if an ESS interest is disposed of within 30 days of the deferred taxing point, then the date of the disposal becomes the taxing point instead.

For example:

Max’s taxing point occurs on 1 March 2020, when he exercises his rights and acquires shares at a $100,000 discount compared to market value. 

On 15 March 2020 Max decided to sell those shares. By this time the market has dropped and he sells his shares for only $80,000 more than he paid for them.

If he was required to include the discount at the point of acquiring the shares he would have to declare the $100,000 discount as  income in his tax return and then declare a capital loss of $20,000 from the sale 15 days later. 

However, because he has sold them within 30 days of the deferred taxing point, he will only need to include the $80,000 discount that applied at the time of sale. 

However, if Max hangs on beyond the 30 day window and the share price drops he will get a capital loss but will be stuck paying income tax on the higher value.

Capital Gains Tax

Deferred Taxing Schemes

An ESS interest that is acquired under a deferred taxing scheme is taken to have been “re-acquired” immediately after the deferred taxing point.

For example:

Wilma is issued with options to acquire shares in her employer’s company on 1 January 2018. 

On 1 May 2020 Wilma exercised those options and acquired shares with a market value of $500,000. She only paid $300,000 for the shares, which means she included $200,000 of assessable income in her 2020 tax return for the discount realised at her deferred taxing point. 

On 1 December 2020 Wilma sells those shares for $600,000.

The $500,000 market value is her cost base, which means she has realised a $100,000 capital gain. 

Since 1 May 2020 is the acquisition date, she has not held the shares for over 12 months and is unable to apply the 50% CGT discount to that $100,000 gain. This means she will need to declare $100,000 in capital gains in her 2020 tax return. 

Forfeiture or Loss of ESS Interests

If an ESS interest is forfeited or lost then there are provisions to ensure that a person is not stuck with a tax bill, however the rules are highly technical and if you are in this position you should seek further tax advice. but they do not necessarily operate as some people may expect.

Being Prepared with ESS Interests

Managing your tax in relation to ESS interests can become complex and can result in cash flow difficulties.

Understanding and accessing any eligible tax concessions can also help reduce the tax burden. For instance, there can be significant tax incentives for early stage investors.

Because ESS discounts are a tax assessable benefit that is provided in the form of discounts on acquiring shares in the employer company, there is no cash income seen by the employee at the time the income becomes assessable to them. 

Since ESS discounts can see individual taxpayers with hundreds of thousands of dollars in assessable income, it is important that the taxing points are adequately prepared and planned for. 

In the event of termination of employment, this can be a double edged sword. 

Since employment termination is one of the triggers for determining the deferred taxing point, and loss of employment can also mean loss of income, some taxpayers can find themselves being assessed for high levels of tax, with low levels of cash to cover their tax requirements.

It is important to talk to your tax and finance specialists when receiving ESS interests, so you can be aware of contingencies and make necessary plans for tax and cashflow considerations. 

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Why Living Abroad For Six Months Doesn’t Automatically Mean You’re No Longer An Australian Tax Resident

Daniel Wilkie   |   19 Jan 2021   |   5 min read

When it comes to tax residency, the six month rule is quite simple to understand: live in a country for at least six months, or 183 days, and you’re considered a tax resident of that country. 

The simplicity in this rule explains why it is a common way of determining when an individual taxpayer is considered to be a tax resident of the country they are living in. In fact, for some countries, this is exactly how they determine tax residency.

For this reason it can be natural to assume that if you live overseas for at least six months then you are a tax resident of that country and no longer a tax resident of Australia. This is particularly the case if that country specifically states that they consider you to be a tax resident when you are living in their country for at least six months.

See here for a brief overview of the key differences between a Permanent Resident and Temporary Resident.

Why You May Still Be Considered An Australian Resident While Living Overseas

If you are an Australian citizen then Australia is your default home country in relation to tax residency. This means that it’s not just about meeting the tax requirements of the other country to be classed as a foreign tax resident for Australian tax purposes.

Under Australian tax laws an Australian citizen, who has been living as a tax resident, continues to be an Australian tax resident until they make a permanent move overseas. A permanent move overseas requires them to effectively cut ties with Australia. Typically the move overseas must be for a minimum of two years, and you must be setting up a permanent home in your new country (not just travelling around, or staying in hotels).

The Impact Of Double Tax Agreements

A double tax agreement (DTA) between two countries may contain provisions that help determine which country has taxation rights when an individual’s tax residency status is not clear cut.

For example, this might happen when an individual goes to a country that treats them as a tax resident after six months living there, however, under Australian tax laws they are also still treated as a tax resident. The DTA, through the tie-breaker provisions, helps determine in which country the individual taxpayer should be treated as a tax resident.

DTA typically gives weight to the country where the person has their permanent home, by virtue of birth or choice. In practice this means there is an expectation that the country in which an individual is a citizen, particularly if they clearly intend to return to their home country, retains more rights than a country they are temporarily living in. Beyond this, DTAs tend to consider where an individual’s personal and economic ties are stronger.

Unclear Situations

Most people find themselves in clear situations. They are either an Australian tax resident or a foreign tax resident, based on the country that they are a permanent resident. However, since individual circumstances can be very unique, there are plenty of situations that are not so clear cut.

Consider a situation where an individual lives in multiple countries, moving from one to another through the year. Or there are situations where an individual moves to one country, intending to remain there permanently, only for an unexpected issue to arise that results in them changing their mind and relocating to another country.

The Pandemic

COVID-19 has resulted in many people staying in countries for significantly longer periods than they ever planned. Conversely, many Australian expats have returned home to Australia to ride out the pandemic, despite previously intending to remain living overseas.

Since each situation is different, it is impossible to give clear, generic advice on these grey areas. The special circumstances of COVID-19 mean that even some Australians who were holidaying overseas have been unable to return home to Australia as planned. Their time overseas does not automatically cause them to become a foreign tax resident, especially where their intent and actions remain to return to Australia as soon as they are able to.

Others who have been living overseas for many years have returned to Australia for a prolonged period due to the pandemic. Their time in Australia does not automatically mean they resume Australian tax residency, however this requires them to be intending to return to the country they consider home as soon as possible. As the pandemic continues, it becomes more difficult to ascertain what “as soon as possible” means, and what actions would indicate a change in circumstances and intent.

Six Months Living Overseas

We cannot treat six months living overseas as automatically resulting in a change of tax residency. It should be understood that a change of tax residency will only occur if an Australian moves overseas for a period no shorter than six months, and a permanent place of abode is established. The subtle difference means that a stay of less than six months can clearly be understood to be temporary and would not change tax residency, while an overseas move that is expected to last more than six months requires review to determine if, and when, there is an actual change in tax residency. 

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What To Consider When Trading In Cryptocurrency

Daniel Wilkie   |   13 Nov 2020   |   3 min read

This year has seen the ATO crack down on individuals who have been trading in cryptocurrencies, such as bitcoin. This is a reminder for those dealing in such transactions to be well aware of the taxation obligations that come about with any resulting financial gains and losses. It is imperative to ensure accurate and complete cryptocurrency tax reporting.

How the ATO considers Cryptocurrency

Cryptocurrencies are considered by the ATO to be a form of property and are therefore a CGT (capital gains tax) asset for tax purposes.

As is the case with any asset that is subject to capital gains tax, it is necessary to maintain detailed records of transactions, including receipts of purchase or transfer, exchange records, digital wallet records and keys, as well as the value of the cryptocurrency in Australian dollars at the time of the transaction.

Transactions with Cryptocurrency during a CGT Event

Typically, a CGT event will occur when a cryptocurrency is sold, gifted, traded, converted to a fiat currency (such as Australian dollars) or used to obtain goods or services. Given the number of cryptocurrency transactions subject to tax, it is a danger that some of these could unwittingly slip through the cracks, so tax implications must be kept in mind whenever transacting with cryptocurrency for any purpose.

Conversely, it is also important to consider whether the cryptocurrency has been purchased for personal use (as opposed to any profit-making endeavour), as this is will exempt it from capital gains tax.

An exception arises to the treatment of cryptocurrency as a CGT asset when it is held as trading stock, or is used for business transactions. In these cases, it is considered to be held on revenue account, and its value in Australian dollars will be included as part of an entity’s ordinary income. That means that either normal personal tax rates will apply, or normal business tax rates will apply.

Tracking Cryptocurrency Transactions

Record keeping for cryptocurrency transactions may appear to be burdensome and unclear at times but there are a number of resources available to assist us, including official online exchanges which offer reliable Australian dollar values of the cryptocurrency at the time of transaction.

Individuals who have traded cryptocurrencies of any amount should ideally have a system in place to track these, as the ATO has shown that it will not overlook even the most seemingly small or insignificant transactions.

CST can assist clients who trade or invest in cryptocurrencies as part of their broader investment activities.

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