Edited version of private advice

Authorisation Number: 1051581633577

Date of advice: 3 October 2019

Ruling

Subject: Foreign income

Question 1

Will you be subject to tax on the salary sacrifice contributions your employer intends to make on your behalf to the employee pension insurance plan?

Answer

No.

Question 2

Are you entitled to a Foreign Income Tax Offset (FITO) for the public health insurance premium deducted from the gross salary paid in Country Y?

Answer

No.

Question 3

Are you entitled to a deduction for the employment insurance premium paid in Country Y?

Answer

Yes.

Question 4

Will the salary sacrifice contributions the employer of the taxpayer intends to make to the Employee Pension insurance Plan that is a foreign government managed pension plan on behalf of the taxpayer be considered to be a fringe benefit?

Answer

Decline to rule. Specific advice relating to Fringe Benefits Tax (FBT) can only be provided to an employer, not an employee, as it is the employer which has the FBT liability.

General advice is given.

This ruling applies for the following period:

Year ending 30 June 2020

Year ending 30 June 2021

Year ending 30 June 2022

Year ending 30 June 2023

Year ending 30 June 2024

The scheme commences on:

1 July 2019

Relevant facts and circumstances

You are a Country Y national.

You arrived in Australia in the 2014 income year on a temporary visa.

You are a Temporary Resident within the meaning of the Income Tax Assessment Act 1997.

You are on a secondment from your foreign employer in Country Y (parent company) to their Australian subsidiary company.

You and your foreign employer intend to implement a Salary Sacrifice Arrangement (SSA) where you agree to forego part of your total foreign remuneration that you would otherwise expect to receive as salary, in return for your employer to make your contribution amount which would be otherwise required to be paid by you to the Employees' Pension Insurance plan.

In order to be considered as an Effective SSA, you will agree to receive the reduced total amount of salary before you start to earn the entitlement to receive that amount as salary or wages.

You and your foreign employer intend to enter into an agreement for such arrangement before the beginning of the month when you shall start to perform your employment services to be considered effective.

Throughout your assignment period your salary and wage are paid in both Country Y and Australia.

In respect to your gross salary paid in Country Y, the following amounts are deducted for Country Y social security contributions purposes:

·        Employees' Pension Insurance Contribution

·        Public Health Insurance Premium

·        Employment Insurance Premium

Under the public health insurance system in Country Y the premiums are funded by deduction from employees' gross salaries.

Under the public health insurance system the premiums are directly collected by the municipality government. The premium payments consist of income-based portion and household size based portion.

Lastly, the premiums are deducted from the pensions paid to the elderly under the medical care system.

Some of the key features of the employees-based Public Health Insurance are:

·        Employees are all covered by one of three types of public interest entity depending on the size of employer or the occupation:

1)          Public-corporation-run Health Insurance (for salaried employees of SMEs);

2)          Society-managed, employment-based Health Insurance (for salaried employees of Large Corporation); or

3)          Mutual aid association (for civil officers).

·        Health Insurance Premiums are shared by employers and employees based on rates on salary;

·        Amount of healthcare benefits is standardised and is not related to amount of premium paid;

·        Healthcare benefits is also funded by the general budget of the government;

The Country Y pension system is providing benefits to insured persons or their survivors, when they retire from their working-lives, become handicapped, or die. The Country Y pension system is consisting of government pension plans and private pension systems and is also called "three-tier" system.

The first tier is Basic Pension, the second one is earning-related Employees' Pension Insurance, and the third one is the private corporate pension.

The Employees' Pension Insurance is a public plan as it is operated by the government. Participation in this plan is mandatory to all corporations over a certain size, and is earning-related in both insurance contribution and the pension benefit on top of the Basic Pension which is a non-earning-related universal coverage for all working-age residents and provides a defined pension benefit in their older age.

Under the bilateral social security agreement between Australia and Country Y, your employer is exempt from the Australian legislation concerning the superannuation guarantee on the basis that you and your employer continue to participate in the Employees' Pension Insurance plan in Country Y throughout your temporary assignment period in Australia.

Some of the key features of the Employees' Pension Insurance plan are:

·        The Employees' Pension Insurance contributions are shared equally by employers and employees based on a fixed rate on each employee's salary;

·        Contributions are pooled into the Reserve Fund of the Government Pension Plans and invested into cash, bonds, shares, etc.;

·        The Reserve Fund is entrusted by Minister of Health, Labour and Welfare to and managed by the GPIF (Government Pension Insurance Fund The main component of Employees' Pension benefit is paid based on individual's contributions history and not funded by the government budget;

·        who is responsible for managing the investment and accountable for remitting profits of investment;

·        Each insured person's contributions history is tracked by the individual basic pension number issued for each person and everyone will receive an annual statement indicating the accumulated contribution amount made by the insured person every year;

·        Lump-sum Withdrawal Payments from the Employees' Pension Insurance are not available, except to Non-Country Y Citizens only after the insured person left the country permanently.

The Employment Insurance System is an obligatory insurance managed by the government. It is a system which has comprehensive employment-related functions. The Employment Insurance System operates to provide three main benefits as follows:

1)                  Grant unemployment benefits;

2)                  Service for employment stabilization;

3)                  Service for developing human resources.

Various cash allowances are provided to individuals who have lost their jobs. The unemployment benefits reserve fund is founded by Employment Insurance Premiums (shared equally between employers and employees) and government tax revenue.

The services of employment stabilisation and developing human resources aim to prevent unemployment, increase employment opportunities or promoting reemployment, and assist both employed and unemployed person to acquire occupational skills. These two services are financed by employers' contribution only.

Some of the key features of the Employment Insurance are:

·        The insurance applies to any enterprise which employs more than one worker in principle;

·        Employment Insurance Premiums paid by employers and employees are pooled into the reserve for payments of Unemployment Benefits;

·        Unemployment Benefits are provided to job seekers and/or unemployed individuals with different types of cash payments as below:

1)                  Basic allowance for job seekers

2)                  Lump-sum payment for job seekers (old-age)

3)                  Lump-sum payment for job seekers (seasonal workers)

4)                  Per diem for job seekers (casual labourers)

5)                  Promotion allowances for reemployments

6)                  Education and training expense reimbursements

7)                  Subsidy for income loss (reduced wages) for old-age workers

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 8-1.

Income tax Assessment Act 1997 section 770

Reasons for decision

Subsection 6-5(2) of the Income Tax assessment Act 1997 (ITAA 1997) provides that Australian residents are assessable on ordinary income derived directly or indirectly from all sources, whether in or out of Australia.

Salary and wages are ordinary income under subsection 6-5(2) of the ITAA 1997. As an Australian resident, the taxpayer's world-wide employment income is assessable in Australia under section 6-5 (2) of the ITAA 1997, and 768-910 (3) of the ITAA 1997 specifically include the following income derived by a Temporary Resident in relation to employment undertaken/services provided while the individual was a Temporary Resident as assessable:

(a)         the ordinary income derived directly or indirectly from a source other than an Australian source to the extent that it is remuneration, for employment undertaken, or services provided, while the individual is a Temporary Resident; or

(b)         The statutory income (other than a net capital gain) from a source other than an Australian source to the extent that it relates to employment undertaken, or services provided, while the individual is a Temporary Resident.

Subsection 6-5(4) of the ITAA 1997 provides that taxpayers have derived an amount of ordinary income when they are taken to have received the amount as soon as it is applied or dealt with in any way on their behalf or as they direct.

Salary sacrifice arrangement

The Commissioner's view on the taxation implications of salary sacrifice arrangements is discussed in Taxation Ruling TR 2001/10.

A salary sacrifice arrangement is an arrangement between an employer and an employee whereby the employee agrees to forgo part of their future remuneration entitlement in return for a benefit of a similar value. The consequence of such an arrangement is that the employee is assessed on the reduced amount of the salary actually received and the employer is liable for any fringe benefits tax payable on the benefit provided.

Taxation Ruling TR 2001/10 states that an effective SSA details the amount of income to be sacrificed, and must be entered into before the employee becomes entitled to be paid.

An ineffective SSA involves an employee directing an entitlement to receive salary or wages that has been earned to be paid in a form other than as salary or wages. Benefits provided under an ineffective salary sacrifice arrangement are generally regarded as assessable income.

You intend on entering into an arrangement with your employer to forego part of your salary, in return for your employer to make the contributions to the pension insurance plan.

The arrangement will be an effective SSA if you agree to the reduced total amount of salary before you start to earn the entitlement to receive that amount as salary or wages and the amount sacrificed will not be taxable in Australia.

Public health insurance premium and foreign income Tax Offset (FITO)

A taxpayer whose assessable income in Australia is also subject to foreign income tax and who has, or is deemed to have, paid the foreign income tax in the income year may be entitled to a foreign income tax offset (FITO) in Australia.

The concept of 'foreign income tax' is intended to cover foreign taxes imposed on a basis that is substantially equivalent to income tax imposed under Australian law. 'Foreign income tax' is defined in section 770-15 of the Income Tax Assessment Act 1997 (ITAA 1997) as a tax imposed by a law other than an Australian law that is:

·        tax on income; or

·        tax on profits or gains, whether of an income or capital nature; or

·        Any other tax, being a tax that is subject to an agreement having the force of law under the International Tax Agreements Act 1953.

The concept of 'foreign income tax' is intended to cover foreign taxes imposed on a basis that is substantially equivalent to income tax imposed under Australian law.

The Country Y agreement is a relevant agreement under the International Tax Agreements Act 1953.

Article 2(1) of the Country Y Agreement states the existing taxes to which the Agreement shall apply, as follows:

·        Country Y taxes that are specifically identified in the Country Y Agreement are income tax and corporation tax.

·        Australian taxes that are specifically identified in the Country Y Agreement are income tax and the petroleum resource rent tax.

In interpreting the wording of a tax treaty, the Commissioner accepts in TR 2001/13 that it is appropriate to have reference to the OECD Model Commentary.

The OECD Commentary on Article 2 provides that:

·        'It is immaterial on behalf of which authorities such taxes are imposed; it may be the State itself or its political subdivisions or local authorities (constitutes States, regions, provinces, department, cantons, districts...municipalities or groups of municipalities, etc.)'

·        'Social security charges or any other charges paid where there is a direct connection between the levy and the individual benefits to be received' shall be excluded from the list of taxes covered by the Convention.

Therefore, in considering whether an amount deducted from your salary is a 'foreign income tax', it is necessary to consider the basis on which the amount is deducted and any future benefit you might derive in respect of the amount. Substantial, not exact, equivalence to Australian income tax is required.

An amount withheld from the taxpayer's salary may not be foreign income tax but may be incurred by the taxpayer in gaining or producing the assessable salary income. To determine if a withheld amount is deductible for the purpose of determining Australian taxable income, the ordinary tests of deductibility apply.

Employees are generally required to join Employees' Health Insurance and Employees' Pension Insurance, together referred to as 'social insurance'.

The premium is shared equally between employer and employee.

The medical treatment fees are covered from 70% to 90% (co-payment) depending on the age of individual, and the maximum expense amount per month is capped based on the income level of the individual to ensure that the medical expenses do not become the financial burden of the patient.

Where a person makes a compulsory contribution to a levy (or a social insurance scheme as is the case here) which will be used to provide benefits to that person in the future, that contribution is more akin to a payment for a benefit rather than a tax.

However, it is recognised that an element of Australian income tax is Medicare Levy.

Medicare gives Australian residents access to a range of medical services, lower cost prescriptions and free care as a public patient in a public hospital. It is partly funded by taxpayers who pay a Medicare levy of 2% of their taxable income.

However, all Australian residents are eligible for Medicare benefits regardless of whether they pay the levy or not. Also, the level of benefits Australian residents are entitled to has no bearing on the amount of Medicare levy they pay.

It is considered that Employees' Health Insurance is more akin to private health insurance in Australia, both in relation to the quantum of the premiums and benefits provided under the scheme. 'Health Insurance' is not substantially equivalent to a tax on income such as the Medicare levy.

Therefore, 'Health Insurance' is not considered to be a 'foreign income tax' paid when working out the taxpayer's entitlement to a FITO.

As private health insurance premiums are not deductible in Australia, these amounts are likewise not deductible.

Employment insurance

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income.

Generally, all employers in Country Y are required to enrol their employees in the Employment Insurance scheme.

Employment insurance provides three main benefits to employees for unemployment benefits, service for employment stabilization and service for developing human resources.

To receive employment insurance, employees must pay insurance premiums which are set at a percentage of their total wage. The premium is shared between the employer and employee.

'Employment insurance' contributions appear to be similar in effect to income protection insurance in Australia, though compulsory. Premiums for income protection insurance which provides periodic benefits are deductible under section 8-1 of the ITAA 1997.

It is accepted that, as the 'Employment insurance' contributions are analogous to income protection insurance premiums, they are deductible from assessable income to the extent that they may provide the taxpayer with future periodic (that is, not lump sum) benefits.

Therefore the employment insurance premiums are deductible under section 8-1 of the ITAA 1997.

General Advice

The definition of 'fringe benefit' is provided in subsection 136(1) of the Fringe Benefits Tax Assessment Act (FBTAA):

in relation to an employee, in relation to the employer of the employee, in relation to a year of tax, means a benefit:

(a) provided at any time during the year of tax; or

(b) provided in respect of the year of tax;

being a benefit provided to the employee or to an associate of the employee by:

(c) the employer; or

(d) an associate of the employer; or

(e) a person (in this paragraph referred to as the arranger) other than the employer or an associate of the employer under an arrangement covered by paragraph (a) of the definition of arrangement between:

(i) the employer or an associate of the employer; and

(ii) the arranger or another person; or

(ea) a person other than the employer or an associate of the employer, if the employer or an associate of the employer:

(i) participates in or facilitates the provision or receipt of the benefit; or

(ii) participates in, facilitates or promotes a scheme or plan involving the provision of the benefit;

and the employer or associate knows, or ought reasonably to know, that the employer or associate is doing so;

in respect of the employment of the employee, but does not include:

...

(j)(ii) the making of a contribution to a foreign superannuation fund (within the meaning of the Income Tax Assessment Act 1997) where:

(A) the contribution is for the purpose of making provision for superannuation benefits for the employee (whether or not the benefits are payable to a dependant of the employee if the employee dies before or after becoming entitled to receive the benefits); and

(B) the employee is a temporary resident (within the meaning of the Income Tax Assessment Act 1997) when the contribution is made:

The making of a contribution to a foreign superannuation fund is therefore an exempt benefit.

A 'foreign superannuation fund' is defined in subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997) as follows:

(a) a superannuation fund is a foreign superannuation fund ta a time if the fund is not an Australian superannuation fund at that time: and

(b) a superannuation fund is a foreign superannuation fund for an income year if the fund is not an Australian superannuation fund for the income year.

An 'Australian superannuation fund' is defined in subsection 995-1(1) of the ITAA 1997 to have the meaning given by section 295-95 of the ITAA 1997.

Subsection 295-95(2) of the ITAA 1997 defines 'Australian superannuation fund' as follows:

A superannuation fund is an Australian superannuation fund at a time, and for the income year in which that time occurs, if:

(a) the fund was established in Australia, or any asset of the fund is situated in Australia at that time; and

(b) at that time, the central management and control of the fund is ordinarily in Australia; and

(c) at that time either the fund had no member covered by subsection (3) (an active member) or at least 50% of:

(i) the total market of the fund's assets attributable to superannuation interests held by active members; or

(ii) the sum of the amounts that would be payable to or in respect of active members if they voluntarily ceased to be members;

is attributable to superannuation interests held by active members who are Australian residents.

A 'superannuation fund' is defined in subsection 995-1(1) of the ITAA 1997 to have the meaning given by section 10 of the Superannuation Industry (Supervision) Act 1993 (SIS Act) as follows:

(a) a fund that:

(i) is an indefinitely continuing fund; and

(ii) is a provident, benefit, superannuation or retirement fund; or

(b) a public sector superannuation scheme;

In general terms, if an effective SSA is entered into, enabling an employer to make contributions to a superannuation fund which is not an Australian superannuation fund, and the employee is a temporary resident within the meaning of the ITAA 1997, the benefit is exempt from FBT under paragraph (j)(ii) of the definition of 'fringe benefit' in subsection 136(1) of the FBTAA.