Erin Holland, Deputy Commissioner and Peter Nash, Assistant Commissioner, MEI led the discussion on income tax exemption for Australians working overseas.
Members questions
From 1 July 2009 the changes to section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936) - the income tax exemption for Australians working overseas, requires employers of Australian residents working offshore to:
- withhold pay as you withholding (PAYGW) at the prescribed rate regardless of the level of withholding in country of source
- start calculating fringe benefits tax (FBT) liability for benefits provided to Australian residents working offshore for BAS purposes, and
- make the 9% superannuation contribution in respect of those employees.
Professional associations recommend that the Tax Office should provide self-guidance to taxpayers on the range of administrative issues resulting from the changes to section 23AG of the ITAA 1936.
Response
We have identified a range of administrative issues resulting from the changes to section 23AG of the ITAA 1936 that apply from 1 July 2009 (exemption rules for foreign employment income derived by Australian residents who are engaged in foreign service for a continuous period of 91 days or more).
We are aware that these issues are of concern to advisers, employers and affected individual taxpayers and we are working to develop administrative solutions that minimise the impacts of the law change where possible. Some of the issues may raise policy issues not amenable to a purely administrative response. Currently we are considering the following broad categories of issues.
1. Withholding obligations for Australian employers and the claiming of foreign income tax offsets by employees
We have issued the Notice of variation to enable employers to reduce the amount of pay as you go withholding required by an employer on certain payments to the extent the employer pays an amount of income tax to a foreign country on behalf of an employee. This addresses the potential for 'double withholding'
We understand that the 'double withholding' issue can further manifest due to the timing of the payment of tax by the individual in the overseas jurisdiction and the consequences of timing differences when claiming the foreign income tax offset in the relevant income tax return. Income tax returns may be due prior to payment of the foreign tax is made or evidenced and may result in tax debts that will ultimately be extinguished once the withholding amount becomes available as a foreign income tax offset (which is subject to a four year amendment period). Taxpayers may wish to seek extensions of time to pay the tax owing in these circumstances.
We're also investigating the potential instalments issue that might also arise in these circumstances.
We understand that further practical guidance on some matters, such as the required evidence of payment of foreign tax, may also be useful.
2. Impacts of the changes for foreign employers of Australian residents
Section 12-35 of Schedule 1 to the Taxation Administration Act 1953 (TAA) (the provision which requires an entity to withhold in certain circumstances) does not refer to the residency of the entity. In 2001 at the NTLG the Tax Office advised that the section requires a non-resident employer to withhold from an employee working in Australia where Australia has taxing rights in respect of that income. We have not identified a previous Tax Office view as to in what circumstances a non-resident employer is required to withhold from an employee working outside Australia where Australia has taxing rights in respect of that income. Accordingly the issue of the potential application of the PAYGW provisions to foreign employers requires development of an ATO view.
3. Impacts of the changes for employers and Australian residents in foreign service in respect of other tax obligations such as fringe benefits tax, compulsory superannuation contributions
We are aware that the amendment of income tax provisions can have flow on impacts for other tax obligations.
The nature of fringe benefits raises a number of additional issues to that considered at 2), above. For example, fringe benefits may be paid either overseas or in Australia (to a spouse) and may be subject to different tax treatment in the overseas jurisdiction.
4. Guidance for the employers of employees delivering official development assistance
The new provisions that retain the exemption in respect of foreign service directly attributable to certain activities raise some issues for the providers of the services. For example, does an employee remain a 'member of a disciplined force' when they perform different duties when posted overseas.
5. Potential superannuation guarantee issues
Advisors have raised with us an issue where under certain agreements they have with their Australian resident employees working offshore, employers could now be exposed to a potential superannuation guarantee issue. This issue is still being considered.
6. Appropriate communication of the administrative arrangements to employers (including foreign employers) and affected Australian residents
The Tax Office has to date used Exempt foreign employment income - Changes to qualifying conditions effective from 1 July 2009 found on the www.ato.gov.au website to publish information on the new legislation and the administrative initiatives developed to assist employees and employers manage the administrative issues arising from the changes to section 23AG. However we're also aware that given the issues that have arisen other communication strategies may be required.
7. Other issues
We're aware that there may be other administrative impacts of concern to practitioners, employers and employees, and we would welcome any advice from members on these so that we can consider whether we're able to provide support and assistance to reduce these impacts.
Meeting discussion
Written response provided with agenda papers was discussed.
The Tax Office advised that when the measure was announced it would raise administrative issues impacting employees and employers. The taxpayers impacted were always in the tax system however they will now move from exempt to taxable.
The Tax Office acknowledges that there are issues we may not have identified, given the broad range of issues. The written response provided aims to capture the key issues. The Tax Office asked the members if there are any other issues to work through, and given the broad range of issues, whether there are any specific areas to focus on.
A member suggested the Tax Office needs to send information out to Australian residents working overseas. The Tax Office advised that it is working on identifying foreign employers impacted and how to communicate to this group.
The chair suggested that as the professional associations have affiliation with associations overseas, could information be disseminated through these groups. The professional associations supported this suggestion and will work with the Tax Office in communicating this information through their overseas affiliations.
Action item
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ATPF0908/16
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Description
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Tax Office to provide the professional associations with information on the changes in the rules for income tax exemption for Australians working overseas. Professional associations will disseminate this information through their overseas affiliations.
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A member also suggested that more information is required so individuals can confirm if they are an Australian resident or not. The member highlighted the need to remove the myth that 'if I am overseas for two years then I will be classed as a non-resident'.
The Tax Office acknowledged the comments and suggestions made by members. The Tax Office will further work with the professional association representatives to test products and disseminate information.
A member asked if Australian residents working overseas will be exposed to penalties for incorrectly estimating the PAYGW variation amount. The Tax Office advised that as long as the taxpayers are trying to do the right thing, there will be an exemption from penalties.
Following the meeting
A member asked if the Tax Office will provide information on the penalties foreign residents maybe subject to will receive for incorrectly estimating the PAYGW variation amount.
Action item
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ATPF0908/17
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Description
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The Tax Office to provide information explaining if penalties will be applied to foreign residents for incorrectly estimating the PAYGW variation during the early stages of the change in section 23AG ITAA 1936 - the income tax exemption for Australians working overseas.
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Response
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The Tax Office will include this information, explaining if penalties will be applied to foreign residents for incorrectly estimating the PAYGW variation during the early stages of the change in section 23AG ITAA 1936 - the income tax exemption for Australians working overseas, in communication products.
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Sections within Agenda items
Last Modified: Tuesday, 9 March 2010