Migration Institute of Australia

Tax issues for Migrants:

Introduction for Migration Agents

MIA National Conference Presentation

17 November 2016, Brisbane, Queensland, Australia

James Meli - Director of Tax, Economos Group

PART I –

AUSTRALIAN RESIDENCE

Overview of Australia’s tax system

• Tax residence ≠ Immigration residence;

• Australia taxes:

– residents on worldwide income;

– non-residents on Australian income;

• However:

– temporary residents not taxed on foreign income; and

– foreign residents not taxed on certain capital gains.

Before leaving home country

• Many countries have ‘exit tax’, i.e. deemeddisposal of assets @ MV;

• Get advice prior to departure to determine:

– tax implications of ceasing to be resident of homecountry;

– how income will be taxed on assets in home countryand elsewhere going forward, for example:

tax returns; or

final withholding taxes – dividends, royalties, interest.

Before leaving home country

• Understand impact of becoming Australian resident;

• Worldwide assets fall within Australian tax net;

• Deemed acquisition @ MV (except ‘taxableAustralian property [‘TAP’]);

• Evidentiary burden always on taxpayers – OBTAINVALUATIONS!

• Personal residency can impact on residency of:

– foreign companies; and

– foreign trusts.

Before leaving home country

• Even if foreign entities remain foreign tax-resident, Australian resident individuals may betaxed personally on income derived by:

– controlled foreign companies (“CFC’s”);

– certain foreign trusts

After arriving in Australia

• Based on assets and their location:

– are any foreign entities taxed as Australian residents?

– if not, are any foreign entities subject to accrualstaxation (e.g. CFC rules)?

• How will source country tax income/gains?

• Does Australia have Double Tax Agreement(‘DTA’) with other country?

• If so, who has primary/secondary taxing rights?

After arriving in Australia

• If not, will Australia provide a foreign tax credit?

• What is the effective tax rate on foreign income?

• Should client consider selling assets?

• Former main residence:

– is client eligible for CGT main residence exemption?

– foreign property may be leased for up to 6 years;

– ‘6-year’ rule may apply to former main residence inhome country prior to arriving in Australia;

After arriving in Australia

• Former main residence (cont):

– potentially full CGT exemption in Australia (thoughmay be tax in home country!);

– alternatively, partial CGT exemption;

– cannot have more than one main residence at sametime.

PART II –

TEMPORARY RESIDENCE

Special regime for certain temporary visa holders• Australian residents taxed on worldwide income;

• However, temporary residents only taxed on:– Australian source income;

– certain foreign source employment income;

• Temporary residents exempt from Australian CGT(except in relation to TAP assets);

• Most common temporary residents – 457 visaholders and NZ SCV holders;

What is a temporary resident?

• You are a temporary resident if:– hold a temporary visa under Migration Act; and

– not a social security resident (“SSR”), that is:o reside in Australia; and

o one of the following: Australian citizen;

holder of permanent visa;

protected special category visa holder; and

– spouse is not a resident under SSR.

• Exception – tax resident and any condition failedon or after 6 April 2006.

What happens when temporary residence ends?

• If individual returns to home country or relocateselsewhere – nothing;

• If individual applies for permanent residency:

– worldwide assets come within Australian tax net @MV on that date;

– evidentiary burden on taxpayers – OBTAINVALUATIONS!

• See diagram on next page

What happens when temporary residence ends?

Arrival in Australia

Deemed acquisition @ market value

Ordinary resident Temporary

resident

Cessation of temporary

residence

Temporary residence

delays bringing (non-

TAP) CGT assets into

the Australian tax net.

PART III –

ISSUES FOR SHORT-TERM ASSIGNMENTS

Short-term assignments

• Unlikely to become Australian tax residents(although watch 183-day rule);

• Non-residents taxed on Australian source income;

• Employment in Australia has Australian source;

• Foreign-residents taxed from

‘Day 1’ unless DTA applies;

Short-term assignments - employees

• Australia has DTA’s with 45 countries, includingChina, India, US, UK, NZ, Singapore and Germany;

• Specific terms differ but based on OECD Model;

• For employment income, resident of Country Xonly taxed in Country X:

– individual in Australia < 183 days; and

– remuneration paid by/on behalf of non-residentemployer; and

– remuneration not deductible in determining profits ofPE.

Short-term assignments - employers

• Foreign companies sending employees toAustralia – PAYG requirements even if no taxpresence in Australia;

• Employee resident of non-DTA country – PAYGwithholding from ‘Day 1’;

• Employee resident of DTA country – no PAYGwithholding unless Employment Article of DTAfailed (e.g. 183-day period exceeded and liabilityrelates back to ‘Day 1’).

PART IV –

BACKPACKER TAX

Backpacker tax – what’s the issue?

• Australia has higher tax rates for foreignresidents:

• Backpackers self-assess as residents and many donot earn over the threshold (note LITO).

Income Range Resident Rates Foreign-Resident Rates

$0-$18,200 Nil

32.5%$18,201-$37,000 19% over $18,200

$37,001-$80,000* $3,572 + 32.5% over $37,000

$80,001*-$180,000 $17,537 + 37% over $80,000 $26,000 + 37% over $80,000

$180,000+ $54,547 + 45% over $180,000 $63,000 + 45% over $180,000

Backpacker tax – history of reforms

• 2015 Budget:

– Government proposal to deem backpackers as foreignresidents (i.e. no tax-free threshold);

– ‘Savings’ of $540m over 4 years;

– Backpackers subject to 32.5% rate up to $37,000 from1 July 2016;

• Agricultural and tourism

sectors voice opposition;

Backpacker tax – history of reforms

• Government announced that it will review itsposition and introduce fresh measures from 1January 2017 if re-elected;

• Government re-elected;

• Draft legislation before Parliament proposing a19% tax rate up to $37,000;

• Lambie/Labor want 10.5%;

• Watch this space . . .

Questions

Disclaimer – This presentation does not constitute specific advice and cannot be relied upon as such. Itcontains general information subject to myriad qualifying criteria, exceptions and/or exemptions and bothemployers and employees should only proceed based on specific advice tailored to their particularcircumstances based on the relevant law at that time.