Tax hit on employees working offshore

The tax advantage for Australian employees on secondment in lower taxed countries is gone as a result of tax changes effective from 1 July 2009.

Previously, Australian residents working offshore for more than 90 days would pay tax in the foreign country on their foreign earnings, which were exempt from tax in Australia. But now, Australia will also tax that income, providing a foreign tax offset for the tax paid overseas. This means that employees going to lesser taxed countries, such as Hong Kong and Singapore, will pay a “top up tax” in Australia. This will bring the amount of tax payable for these employees in line with employees who work in higher taxed countries, be that Australia or overseas, such as the UK.

For example, say an Australian employee earns the equivalent of $100,000 whilst working for nine months overseas and works in Australia for the remaining three months of the year, earning $30,000. The treatment under the old and new tax rules for an employee going to the UK or Singapore (after making a few assumptions) would look like this:

A number of other issues also arise as a result of the changes:

• Employees who extend their secondments to two years or more can become non-residents of Australia and are therefore not impacted by the changes, being taxed on their employment income only in the foreign country.
• The changes are not applicable to aid and charitable workers who remain exempt from Australian tax on their foreign income.
• Timing issues arise in relation to payment of taxes and lodgment of returns. In some cases, amended assessments may be required, for instance, where the amount of foreign tax offset was not known or paid at the time of lodging the Australian return.
• Where the employees are paid via a foreign entity’s payroll, the ATO will have significant difficulty in identifying whether the employer has met its Australian tax compliance obligations and may also have difficulty in enforcing such obligations in the foreign jurisdiction.
• Employers may have FBT liabilities relating to benefits provided to employees who are subject to tax in Australia on their foreign earnings. This can result in double tax where the benefit is subject to income tax in the employee’s hands offshore. This creates an incentive for employers to cash out any benefits provided.
• Employees may now wish to consider salary packaging and negative gearing strategies where there was no need to before.

For further information on how these changes could effect your business, contact your usual Grant Thornton advisor or the author of this article:

Author: Elizabeth Lucas, September 2009

Want advice or more information on this topic?
Click here to contact the author

Alternatively, phone Elizabeth Lucas directly
T +61 3 8663 6349