Tax returns and compliance

Tax rates

Residence rules

Termination of residence

Types of taxable income

Tax-exempt income

Expatriate concessions

Salary earned from working abroad

Taxation of investment income and capital gains

Additional capital gains tax (CGT) issues and exceptions

General deductions from income

Tax reimbursement methods

Calculation of estimates/prepayments/withholding

Relief for foreign taxes

General tax credits

Sample tax calculation 

When are tax returns due? That is, what is the tax return due date?

Tax returns are due by 31 October following the tax year-end. If you use a tax agent to lodge your return, an extension is automatically available through to 31 March or 5 June the following year depending on the taxpayer’s prior lodgment history.

What is the tax year-end?

30 June.

What are the compliance requirements for tax returns in Australia?

Tax returns are required to be filed by a resident individual whose total income derived from sources in and out of Australia is more than the minimum threshold (AUD18,200 for 2019/20). For temporary residents, non-employment income derived from sources outside of Australia is generally ignored for this purpose. Furthermore, employment income derived from sources outside of Australia, prior to arrival in Australia, is generally ignored for this purpose.

Spouses file separate tax returns. There is no joint filing in Australia.

The tax-free threshold will be available only on a pro-rata basis in the year where a taxpayer:

• becomes an Australian resident (for tax purposes) or
• ceases to be an Australian resident (for tax purposes).

Tax returns are required to be filed by non-residents who derive any Australian-sourced income (other than franked dividends, interest, managed investment trust income or royalties, and departing Australia superannuation payments which are subject to a final withholding tax).

What are the current income tax rates for residents and non-residents in Australia?

Income tax table for 2019/2020

Income tax table for 2017/2018

For the purposes of taxation, how is an individual defined as a resident of Australia?

A resident is defined as a person who resides in Australia and includes:

• a person who is domiciled in Australia, unless the Commissioner is satisfied that their permanent place of abode is outside Australia
• a person who has been in Australia continuously or intermittently during more than one-half of the year of income, unless the Commissioner is satisfied that their usual place of abode is outside Australia and that they do not intend to take up residence in Australia or
• a person who is a member of specific government superannuation plans, or the spouse of a person who is a member of specific government superannuation plans.

Generally, individuals who come to Australia with an intention of living in Australia in a routine manner for 6 months or more would be treated as tax residents of Australia from the date of arrival.

A temporary resident is a person who is a resident of Australia (using the definitions noted earlier) and who is the holder of a temporary visa. Persons who are Australian citizens, permanent visa holders, or holders of special protection visas (or the spouse of one of these) cannot be considered temporary residents of Australia.

Is there, a de minimus number of days rule when it comes to residency start and end dates? For example, a taxpayer cannot come back to the host country/jurisdiction for more than 10 days after their assignment is over and they repatriate.

No. When a tax resident departs Australia whether they become a non-resident from that date depends on their longer-term intentions with regard to remaining abroad and returning to Australia, as well as whether they have ongoing ties with Australia, rather than the actual number of days absent.

What if the assignee enters the country/jurisdiction before their assignment begins?

The assignee may become a tax resident of Australia on the date they enter Australia, rather than the date their assignment begins, if earlier.

Are there any tax compliance requirements when leaving Australia?

A final income tax return will be required for the tax year in which they departed.

What if the assignee comes back for a trip after residency has terminated?

The residency tests above need to be considered each time the assignee returns to Australia. In addition, if the trip back is anticipated at the time that they departed Australia, this may defer the date that they become a non-resident for tax purposes.

Do the immigration authorities in Australia provide information to the local taxation authorities regarding when a person enters or leaves Australia?

The Department of Immigration and the Australian Taxation Office have initiated a data- matching program to ensure taxpayers are correctly meeting their taxation obligations.

Will an assignee have a filing requirement in the host country/jurisdiction after they leave the country/jurisdiction and repatriate?

The assignee will be required to file a tax return for the year of departure, and also any subsequent year in which they have income which is taxable in Australia.

Do the taxation authorities in Australia adopt the economic employer approach¹ to interpreting Article 15 of the OECD treaty? If no, are the taxation authorities in Australia considering the adoption of this interpretation of economic employer in the future?

Australian taxation authorities can adopt the economic employer approach. They consider a number of circumstances to determine the economic employer, for example which entity bears the risk or has control/responsibility over the employee. Thus, in cases where an employee works in the business and is under the control of the Australian entity, the Australian entity might be considered as the economic employer even if no costs are recharged to it.

Are there a de minimus number of days before the local taxation authorities will apply the economic employer approach? If yes, what is the de minimus number of days?

No.

What categories are subject to income tax in general situations?

• earned income*
• income from employee share or option plans
• income from self-employment
• trade or business partnership
• dividends
• interest
• rental income
• capital gains
• foreign exchange gains.

*Employment income is taxable when received or when the employee is entitled to receive it, if earlier. Employment income is generally subject to tax to the extent it was earned/derived during a period of Australian residence, or in the case of income earned/derived while non- resident, to the extent it was earned in respect of duties performed in Australia.

Intra-group statutory directors
 

Will a non-resident of Australia who, as part of their employment within a group company, is also appointed as a statutory director (i.e. member of the Board of Directors in a group company situated in Australia trigger a personal tax liability in Australia, even though no separate director's fee/remuneration is paid for their duties as a board member?

It depends, see outline below.

a)   Will the taxation be triggered irrespective of whether or not the board member is physically present at the board meetings in Australia?

In general, a tax liability will arise where the income is considered Australian sourced. This will generally be driven by the physical location of the director for each board meeting, however the relevant clause of the Double Tax Agreement (if applicable) in place between Australia and the individual’s home country/jurisdiction must also be taken into account.

b)   Will the answer be different if the cost directly or indirectly is charged to/allocated to the company situated in Australia (i.e. as a general management fee where the duties rendered as a board member is included)?

No.

c)   In the case that a tax liability is triggered, how will the taxable income be determined?

Refer to part a) above.

Are there any areas of income that are exempt from taxation in Australia? If so, please provide a general definition of these areas.

Living away from home allowance

• Australian citizens and permanent residents can be provided tax-exempt accommodation and a food and drink allowance for a maximum period of 12 months per work location provided they meet certain conditions as follows.
  • They are required to live away from their usual place of residence solely for the purpose of their employment.
  • Their usual place of residence is available to them for immediate use and enjoyment.
  • Accommodation expenses are substantiated by either the employee or employer. Food and drink expenditure is not required to be substantiated up to certain limits based on family structure, however any amounts in excess must be substantiated.
  • An annual declaration is made.
• Employees working on a rotational basis (regardless of immigration status) are not required to meet the requirement of maintaining their usual place of residence for immediate use and enjoyment and can be provided the above benefits for an unlimited period.
• These changes were introduced during 2012 and transitional measures apply in respect of existing arrangements in place at 8 May 2012 which have not been renewed or materially varied.

Other:

• Reimbursement by the employer of the actual cost of relocation will generally be exempt from both income tax and FBT.
• An interest subsidy is not taxable to the employee but FBT may be payable by the employer (even if the loan is provided by an overseas related company). If the employee uses the loaned money for purchasing assets that produce assessable income, for example, no FBT will be payable.
• Bonuses received by a temporary resident after arrival in Australia will not be subject to Australian tax on that part of the bonus that relates to services performed prior to arrival in Australia.

Are there any concessions made for expatriates in Australia?

Temporary residents must maintain a home for immediate use and enjoyment in Australia to access the concessions detailed above for Living Away From Home benefits, unless they work on a rotational basis.

Is salary earned from working abroad taxed in Australia? If so, how?

If the recipient is a tax resident of Australia at the time then yes, it is taxable in Australia with a credit allowed for foreign taxes paid on that income.

If the assignee is a tax resident of both Australia and the country/jurisdiction where the services were performed then any relevant double tax treaties need to be considered to determine which country/jurisdiction has the right to tax the income.

Bonuses received by a temporary resident after arrival in Australia will not be subject to Australian tax if they relate to services performed prior to arrival in Australia.

Non-residents are not subject to tax on salary earned from working abroad.

Are investment income and capital gains taxed in Australia? If so, how?

Investment income (such as dividends, interest, and rental income) and capital gains are assessed to tax in the year in which they are derived. They are included in total taxable income. Tax is levied at personal income tax rates, and a claim may be made to offset foreign taxes paid on foreign-source income.

Assignees who meet the temporary resident definition discussed earlier are generally exempt from tax on foreign investment income and gains.

Following a number of recent legislative changes to the taxation of employee share schemes in Australia, the Australian tax implications associated with these arrangements for employees who relocate internationally between grant and vesting are extremely complex.

The ultimate Australian tax treatment of employee share scheme income can be influenced by factors including, but not limited to, the terms of the plan, the type of instrument, the date of grant, the date of vest, the other country/jurisdiction or countries/jurisdictions of residence, and the Australian visa status of the employee.

Transient employees should seek advice that is specific to their facts and circumstances.

From 1 July 2015 there are new tax rules for the treatment of employee share schemes including a concession for start-up companies. The key change is in relation to the deferred taxing point for ESS interests which will help realign the Australian tax treatment of employee share scheme income with international best practice.

Certain foreign currency gains and losses are brought into account. These can include, among other items:

• transactions on a foreign currency bank account
• re-payment of foreign currency debt.

There are a number of elections that can be made within statutory time limits, including:

• the limited balance election – gains/losses from transactional accounts with an aggregate balance of AUD250,000 or less may be disregarded
• retranslation method – gains/losses calculated by reference to the opening and closing account balances and the total additions to, and withdrawals from, the account over the period.

The Australian taxation system includes a capital gains tax (CGT), which in broad terms applies to certain assets acquired, or deemed to have been acquired, after 19 September 1985 upon their realization (or deemed realization). Gains taxed under the CGT provisions are not taxed separately but are included in assessable income and taxed at the individual’s marginal rates.

• Where assets are held for 12 months or more, the gain on disposal is calculated in one of two ways.
• Discounted method - the amount of the nominal gain may be discounted by 50 percent.

Indexation method - the asset cost base can be indexed in accordance with the rate of inflation for periods of ownership up to 30 September 1999.

Where the asset was purchased prior to 21 September 1999 and disposed of after this date, the taxpayer may calculate the gain using either the discount or indexation method. Where the asset is purchased and sold after 21 September 1999, the taxpayer is only able to calculate the capital gain using the discount method.

For assets held for less than 12 months, the gain cannot be discounted or indexed.

The 50 percent discount is not available to non-residents or temporary residents for any disposals after 8 May 2012. It will remain available for capital gains accrued prior to this time when non- residents and/or temporary residents choose to obtain a market valuation of assets as of 8 May 2012.

Capital losses are offset against gross gains realized in the current year (pre 50 percent discount, if available) with the balance carried forward and offset against realized capital gains in subsequent years. Capital losses cannot be increased by indexation.

Disposal of an asset by gift is a realization event, with the disposal consideration and cost of acquisition by the person receiving the property being taken to be the fair market value of the gifted property.

Are there capital gains tax exceptions in Australia? If so, please discuss?

CGT does not apply to an individual’s principal residence (including a reasonable amount of land (up to two hectares)) provided the house or land is not used for the purpose of gaining or producing assessable income.

This exemption is not available for individuals who are non-resident of Australia for tax purposes at the time of disposal.

The CGT provisions do not apply to assets acquired prior to 20 September 1985.

At the time of becoming a resident, the CGT legislation deems a person to have acquired assets, other than taxable Australian assets, for their fair market value on that date. Where a resident breaks Australian residency, the person is deemed to have disposed of all assets for their market value at that time except for certain taxable Australian assets which remain subject to the CGT provisions.

When a person ceases to be an Australian resident, they may elect to treat all assets as Taxable Australian assets until the assets are disposed of or until they resume resident status in Australia. This election effectively operates to defer CGT on such assets until they are actually disposed of, subject to the operation of a double tax treaty.

For non-residents and temporary residents, gains accrued after 8 May 2012 no longer qualify for the 50 percent discount. Non-residents/temporary residents retain access to the full CGT discount for capital gains in respect of increase in value of assets up to 8 May 2012 (subject to conditions). Where an individual was partly a non-resident/temporary resident during the period after 8 May 2012, the discount percentage is apportioned based on Australian residency period.

Further, where a person leaving Australia was in Australia on 6 April 2006 and has held Australian resident status for less than 5 of the 10 years preceding their departure, they will be exempt from Australian CGT on non-Australian assets owned prior to becoming a resident and retained at the date of departure.

The deemed disposal and acquisition rules do not apply to temporary residents, however, are activated at the time the temporary resident becomes a permanent resident.

What are the general deductions from income allowed in Australia?

A deduction is permitted in relation to all losses and outgoings to the extent that they are incurred in gaining or producing assessable income, except to the extent to which they are losses or outgoings of a capital nature. In addition, deductions are specifically permitted for certain types of expenditure such as:

• costs incurred in the course of employment (for example subscriptions to professional associations and journals)
• gifts to charities registered as deductible gift recipients in Australia
• interest expenses incurred on borrowings to acquire an income-producing asset
• tax agent fees
• expenses relating to business use of an employee-owned vehicle.

What are the tax reimbursement methods generally used by employers in Australia?

Current year gross-up is the normal method of recognizing tax reimbursements paid by the employer.

How are estimates/prepayments/withholding of tax handled in Australia? For example, pay- as-you-earn (PAYE), pay-as-you-go (PAYG), and so on.

Withholdings from employment income are covered under the PAYG system.

When an individual is paid by their employer, the employer will be required to withhold tax from their salary and wages and remit the tax to the Australian Taxation Office (ATO).

When an individual commences employment, they will be requested to quote their Tax File Number (TFN) to their employer. While quoting a TFN is not compulsory, if not done, the employer will be obliged to make PAYG withholdings at the top marginal income tax rate.

At the end of the year the employer will provide the individual with a payment summary which shows the income earned and tax withheld during the year.

The employee should retain a copy of the payment summary to assist in the preparation of their income tax return.

Under the PAYG system, an individual may be subject to PAYG instalment tax payments if they received investment or business income in their last income tax return of AUD4,000 or more. Wages and salary income is not included for PAYG instalment purposes. The instalments are payable either annually or quarterly.

An individual will not be obliged to pay PAYG instalments unless notified by the ATO to do so.

Is there any relief for foreign taxes in Australia? For example, a foreign tax credit (FTC) system, double taxation treaties, and so on?

Under the foreign income tax offset (FITO) system all assessable foreign-source income, including dividends, interest, and royalties derived by Australian residents (excluding temporary residents), will be subject to Australian income tax with a credit allowed for foreign tax paid on that income.

An FITO is only available where both:

• a resident taxpayer’s assessable income includes foreign income
• the taxpayer has paid foreign tax in respect of that foreign income, being tax for which the taxpayer was personally liable.

The offset cannot exceed the amount of Australian tax payable on the foreign income.

What are the general tax credits that may be claimed in Australia? Please list below.

Tax offsets, as opposed to tax credits, may be available for:

• dependent spouse
• low income

Tax offsets differ from tax credits as they can only be used to reduce the employee's tax liability; any excess cannot be refunded.

This calculation assumes a married taxpayer resident in Australia with two children whose 3-year assignment begins 1 July 2015 and ends on 30 June 2018. The taxpayer’s base salary is 100,000 US dollars (USD) and the calculation covers 3 years.

Exchange rate used for calculation: USD1.00 = AUD1.40

• All earned income is attributable to local sources.
• Bonuses are paid at the end of each tax year and accrue evenly throughout the year.
• The employee does not meet the conditions for exemption in respect of accommodation and cost of living benefits.
• The company car is used for business and private purposes and originally cost USD50,000.
• The employee is resident throughout the assignment.
• Tax treaties and totalization agreements are ignored for the purpose of this calculation

Calculation of taxable income

* Taxed as fringe benefits and not included in this calculation.

Calculation of tax liability²

*This does not include the Medicare levy.