The Australian 2009/10 Federal Budget – The Main Expatriate Tax Changes
Last week's Australian 2009/10 Federal Budget contained an expatriate tax bombshell. Now that the dust has settled, we would like to give you a brief and simple explanation of its main implications. In the Budget, the Treasurer announced that the valuable section 23AG tax exemption (for Australian residents working overseas on rotation or for more than 90 days in a row) will be cancelled as of 6 weeks' time (i.e. effective 1 July 2009) for almost all employees (except, broadly, aid workers, charity workers, soldiers and police working overseas).
This Budget announcement, which we assume will pass successfully through both Houses of Parliament, will lead to very large additional tax costs for international assignments, both for employees and employers. Most companies are unaware of the additional costs they will face. Your costs will be even higher if you "tax equalize" or "tax protect" your assignees. The cancellation of 23AG will potentially cause double taxation and even triple taxation because of the knock-on effects of Fringe Benefits Tax and unavailable foreign tax credits (see below).
1. Australian PAYG implications
As such formerly tax-exempt assignees will now be subject to Australian tax on their foreign assignment remuneration (with a foreign tax credit for some of the foreign tax they have personally paid or suffered), you will firstly need to start withholding Australian PAYG from their cash remuneration from 1 July 2009 onwards. We recommend you discuss your PAYG obligations immediately with Activpayroll to avoid PAYG penalties.
If your employees remain tax resident of Australia while working overseas, you must withhold PAYG. Please note, rotators who are based in Australia will always remain tax resident of Australia, no matter how long they rotate for. There is a common myth that if an employee works for more than 183 days outside Australia in a tax year, he or she will be non-resident. That is simply not true. To become non-resident, an Australian national must leave Australia for at least 24 months, take their spouse/partner and dependent children with them, and substantially shut down their social ties with Australia (e.g. rent out their home and sell their car).
The cancellation of 23AG may result in double withholding (i.e. Australian PAYG and foreign PAYE) on the same income, depending on the foreign country's withholding tax laws. We can assist by applying for Australian PAYG variations to a suitable lower or nil rate.
2. Australian FBT implications
In addition, the cancellation of 23AG will mean any assignment fringe benefits (e.g. private medical insurance) you provide to your employees who are working outside Australia, that are currently exempt from Australian Fringe Benefits Tax (because of section 23AG), will suddenly become subject to FBT (at the effective FBT rate of 87%) from 1 July 2009. For example, if you provide private medical insurance to your assignees and are paying say $100,000 pa in premiums, you will now have to pay around $87,000 pa in FBT as well ($100,000 pa x 87% = $87,000 pa additional FBT). Likewise, if you pay the foreign tax or Australian tax liability of your employees, you will now also have to pay Australian FBT (at 87%) on that amount as well.
As you may be aware, FBT is a tax payable by the employer and not by the employee. The elimination of the 23AG exemption will result in an effective almost-doubling of your cost of providing such taxable benefits. However, some benefits, such as certain relocation benefits and certain LAFHA (i.e. Living Away From Home) benefits, will still be exempt from FBT by other continuing provisions of the FBT laws.
3. Australian Foreign Tax Credit implication
The next issue is that an assignee will not be able to claim a foreign tax credit (a "foreign income tax offset") in their Australian tax return for any tax that their employer has paid or borne, only the tax that they themselves have suffered or paid. This will make "tax equalisation" particularly expensive. Further tax costs will arise where the foreign country (e.g. the UK or China) taxes the employee personally on their fringe benefits. Australia will not allow the assignee a FTC for the foreign tax they have personally paid on those benefits and this can lead to double taxation. We can advise on how to minimise the costs and maximise your assignees' foreign tax credits.
4. Other implications - State Payroll Tax, HR and Finance
State Payroll Tax (at 5.5% in WA) is often payable by the employer in the first six months of an assignee's assignment overseas. Where State Payroll Tax is payable on an assignee's "wages", the cancellation of the section 23AG income tax exemption will increase your State Payroll Tax liability. This is because the definition of "wages" always includes the grossed-up value of fringe benefits. Where you pay a tax equalized employee's foreign tax obligation, this will be a taxable fringe benefit for FBT purposes and Payroll Tax will be payable on the grossed-up value of this benefit. We can, however, eliminate State Payroll Tax from day one of any foreign assignment so please contact us to arrange a tax meeting if this can help you.
The cancellation of 23AG also becomes an HR issue as many Australian assignees will decide that the risks and negative family impact of working overseas on rotation are no longer worthwhile since a foreign assignment no longer provides an Australian tax saving. It also becomes a Finance issue if you have contracted to provide your assignees with a net global remuneration (i.e. if you pick up their additional foreign or Australian tax burden), as now your own employment costs, and hence your project costs, will increase substantially.
5. Employee Shares and Share Options
The other main expatriate tax change from the Budget, but with immediate effect, is the taxation of the discount on all employee shares and share options up-front at the date of grant, with no possibility of deferring the tax charge to the later vesting date, exercise date, sale date or employment termination date. This change will have substantial tax and cost implications, particularly for executives.
6. Summary
In summary, as of 6 weeks' time, almost all Australian assignees working overseas will be taxed at the higher of the two countries' tax rates, with frequent double taxation of most non-cash fringe benefits. However, there are ways we can reduce the negative tax implications, particularly by restructuring assignee remuneration packages to maximise the Australian foreign tax credits. This FTC planning will now become extremely important in reducing your and their tax costs. Alternately, an assignee could become a non-resident of Australia so that their remuneration is not subject to Australian income tax, PAYG or FBT, but that will require them and their family to leave Australia for at least 2 years, which may not be practical.
If you have any questions, or if you would like to discuss these issues further, please contact :
Andy Carmichael, Senior Manager (International Tax) - activpayroll Global Employment Solutions Pty Ltd, Perth, Australia - Tel. : +61-(0)403-912 565 (mobile) - Email :
Graham McKechnie, International Tax Senior Manager - activpayroll Ltd, Edinburgh, UK - Tel: +44 (0)131 473 2322 / Email:
