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This is not advice. Items herein are general comments only and do not constitute or convey advice per se. The information contained in these articles is for guidance only and should not be relied upon without obtaining professional advice having regard to your direct circumstances.

 

Stints abroad attract more tax

A change in the rules means contract work overseas will be less appealing for Australians.

Australians working overseas on "rotation" or short-term contracts are hurriedly redoing their household budgets and talking to their accountants about tax strategies after an exemption that applied to their foreign income disappeared as of July 1.

Accountants specialising in expatriate tax work say others are packing their bags to move overseas because if they become non-residents they'll no longer come under the Australian tax system.

A minority unwisely, in the advisers' opinion will be considering more "exotic" strategies to minimise or avoid Australian tax on income, which is treated more favourably in the places it is earned.

The Federal Government announced in its May budget that Section 23AG of the Tax Act was to go. Under this section, Australian residents who worked overseas for at least 91 days in the tax year didn't have to pay Australian tax on the income they earned overseas as long as they were liable for tax in the country where they'd worked.

These people typically work for Australian or foreign employers on mining, construction or oil and gas projects in places such as Dubai in the United Arab Emirates. They remain residents for tax purposes because they haven't permanently left the country.

Rami Brass, Perth-based director of tax services with accounting firm RSM Bird Cameron, gives the hypothetical example of an Australian working on a gold mining project in the West African nation of Ghana and paying tax there at, say, 15 per cent. Under the old rules, the worker would have paid $15,000 in tax on the $100,000 he earned while on contract in Ghana.

Under the new rules, he'll be assessed at his Australian tax rate and probably (if this isn't his only income) be liable for the top rate of 46.5 per cent on that $100,000, or $46,500. If he can prove he paid $15,000 tax in Ghana and that's easier said than done in some countries he'll have to pay a further $31,500 here. The outcome is that his net income from the contract will fall from $85,000 under the old rules to $53,500.

"He's not going to be happy about that," Brass says. These people work rosters such as 42 days on, 21 days off, for 12 hours a day, and are away from their families for prolonged periods. He's going to say: 'For $53,500, I'm not going to do that."'

Advisers say these workers have limited options: become a non-resident by moving overseas permanently, renegotiate their salary package, or find a job at home at a time when the Australian resources industry is being affected by the economic downturn.

The director of Perth-based accounting firm M Squared, Peter Moltoni, says about half of his clients are affected by the rule change. Many are asking for advice on what it requires to become a tax non-resident. "Obviously, the ones with young families can't do it but the ones with more mature families are seriously looking at basing their homes elsewhere," he says.

Brass says he knows of single workers heading for Singapore. Moltoni adds Thailand and Indonesia to the list of possible bases, along with Europe and the Middle East.

To become a non-resident, an Australian has to leave the country permanently, the advisers say. "That doesn't mean forever but it does mean other than on a temporary basis," Brass says.

A rule of thumb is that your intention must be to live for at least two years in a country where it's possible to qualify for permanent residency. You'll need to pack up your belongings and find a permanent home overseas. "You can't be living out of a hotel or a suitcase," Moltoni says.

What if your family wants to stay in Australia? "A husband and wife are separate taxpayers so it's technically possible to have different tax residences," he says. "But the problem is proving that's the case."

If you start going backwards and forwards, as you did when you were working contracts on a "fly in, fly out" basis, the Tax Commissioner will deem you a tax resident, Moltoni says.

The Tax Office looks at whether you still have bank accounts, a car and property here, Moltoni says. "The less you have here, the greater the certainty you have in being a non-resident."

If you satisfy the Tax Office, you'll be a non-resident for tax purposes from the day you step on the plane.

For those who decide to stay in Australia, the options for softening the impact of the loss of 23AG are limited, the advisers say.

The obvious step is to try to renegotiate your salary to compensate for the higher tax you'll be paying. This may or may not be possible, depending on how valuable you are to your employer and how much room they have to move.

"If [the Government] had done this two years ago, I don't think that would have been an issue," Moltoni says. "But at the moment the oil and gas industry internationally is affected by the global financial crisis."

The other option is to just stay at home, to simplify both your tax return and your life. "I was talking to a number of employers [at an oil and gas conference] and they've already had a number of requests from people to be relocated back on Australian rigs," Moltoni says.

At the edges, some people may resort to questionable strategies such as having their pay go into an overseas bank account, and not declaring it, or taking part of their salary as cash, bringing it back to Australia bit by bit to stay under the $10,000 threshold where it must be reported to Customs.

These tactics were employed to avoid tax in the days before the 23AG exemption and were one of the reasons the exemption was introduced, Moltoni says.

In other byproducts of the rule change, workers will face higher bills from their tax agents because of the increased complexity of their tax returns, Brass says, as well as cash flow issues because of the differing tax years around the world.

By Lesley Parker
July 8, 2009, Sydney Morning Herald

 


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