The object of this paper is to identify the tax consequence of foreign residents in Australia. Tax treatment differ from what it is for Australian residents and how foreign residents are treated when it comes to taxation. Basically, this paper gives a detailed report of how foreign resident are treated in case of income tax under the current Australian tax system. Here foreign resident does not only mean individual but also foreign business entities. The tax treatment will of course differ between residents of Australia and non-residents of Australia earning income in Australia. But anyone earning income in Australia, either a resident or a non-resident has to pay tax for any gains made from transactions. Australian residents may have provisions for taxation relief but when it comes to non-residents very less or almost no relief is given by the Australian tax laws. Further, we have a detailed report on the implications of different tax treatments for the non-residents.
According to section 995 of ITAA 1997, a resident of Australia is a person who stays in Australia and in a resident of Australia to do income tax assessment and who ever does not fall under the ambit of this definition is a Foreign resident. Now of course there are tests to determine the residential status of an individual as given in the taxation laws under section 995 of the said act. So to find out that an individual is a resident of Australia or not, we have different rules as prescribed by the statute. So those rules are: i) the ordinary concept rule, ii) the domicile rule, iii) the 183 days rule, iv) the commonwealth superannuation fund rule. For the purpose of this act, a foreign resident is needed to include any ordinary income in the computable income under section 6-5 of ITAA 1997. It says that any income generated either directly or indirectly from sources in Australia during the economic year . A non-resident for tax related issue must declare any income generated in Australia, including:
• Income from employment
• Income from rent
• Earning from pension and annuities
• Income from CGT event
Explanation of four rules in determining residential status:
I)Ordinary concept rule: This basically means a person who normally resides in Australia and in order to declare yourself as an Australian citizen one must pass the ‘Common Law test’.
II)Domicile Rule: In this rule, the duration of actual stay in Australia is considered. The word domicile represents the geographical location. Thus, in order to determine the status, the actual physical stay of an individual in the Australian land is considered . The ‘Domicile Rule is applicable principally to individual domiciled in Australia, and the Commonwealth Superannuation Fund Rule is principally objected to determine that Australian ambassadors and other Commonwealth government bureaucrats who are working in Australian posts outside Australia are taken in to account to be residents for Australian financial purposes.
III)183 days rule: In the case of “FCT v Pechey”, it was decided that an individual is a resident if the person has stayed for a considerable time period. This stay can be continuous or intermittent during one half of a year.
IV)Commonwealth superannuation fund: This rule was made with the object Australian ambassadors and other commonwealth government bureaucrats registered in Australian post outside the country are considered to be resident for purpose of income tax calculation.
A foreigner who makes up his mind to start trade in Australia must keep in mind things that are important in doing business there and for income tax purpose. Australia has its own policy of meeting its labour requirement and allows. This being the situation, he should acquire a fitting visa before his take-off. The visa will present lawfulness on the outside person’s quality in Australia, however won’t as such give Australian living arrangement. The tax collection regulations of most nations require a specific level of connection or association between the person to be burdened and the region specified. The term ‘living arrangement’ itself suggests a specific proportion of changelessness to a person’s essence in a specific place, in spite of the fact that at customary law it is a less extreme idea than home .
As this paper considers not only individual but business entities too, In Australia, living arrangement is one of the two basis which bring a person inside the jurisdictional territory of the administration for financial purposes.
Indeed, the Commonwealth government may force Australian income laws onto pay inferred under an agreement went into and completed in another nation, gave that the individual concerned is an Australian occupant. As such, habitation is a trial of additional regional purview. Subsequently, the topic of regardless of whether an outside person is under contract to work together in Australia will be considered to be an inhabitant for expense arising in Australia purposes will drastically influence the measure of duty exacted on the wage produced by the exchange. An occupant from Australia is subject to assess on his overall pay, while a non-occupant is just at risk to charge on his salary generating in Australia. Then again, just Australian inhabitants are qualified for certain statutory discounts and concessions.
1)The main difference resident and non-resident in tax status is that, non-residents cannot claim for low tax threshold. Thus, for foreign resident income is taxed for every dollar they earn whereas for ordinary resident there are scopes of deduction and exemption.
2)A foreign resident is taxed on the income they earn in Australia and not outside Australia where as in case of residents they are taxed for every income they earn, whether within Australia or outside Australia which they later bring into Australian land .
3)People who are resident pays for Medicare and can claim medical expense when required but in case of a foreign resident, there is not Medicare liability and cannot claim for medical expenses.
4)For residents, income is calculated at a marginal tax rate but for a non-resident interest rate is flat 10% and 45% if no tax file number is provided .
5)A resident of Australia is liable for Capital gain tax on assets a person owns worldwide but a foreign resident is liable for capital gain tax for properties within Australia only.
6) As mentioned earlier, for residents there are scopes for exemption or tax offset and allowances but for non-resident there are no scope for any leniency or tax offset .
Here are some situations when an individual is treated as foreign resident for tax purpose:
• When an individual is staying Australia for less than six months and mostly during that time period he is travelling and employed in various part of Australia.
•When an individual is having a vacation in Australia or visiting Australia for any purpose when he earns money in less than six months.
•When an individual leaves Australia permanently.
Tax Rates for Foreign Residents:
Taxable income Tax on this income
0 – $90,000 32.5c for each $1
$90,001 – $180,000 $29,250 plus 37c for each $1 over $90,000
$180,001 and over $62,550 plus 45c for each $1 over $180,000
1)Removal for Capital Gain tax exemption for foreign residents- For claiming exemption on CGT event there has to be main residence or permanent dwelling, which, in case of a foreign resident is absent and thus cannot claim for the same. In 2017-18 budget the Australian government declared that outside residents are not eligible to claim the main residence exemption where they sell property in Australian land. Such exemption was valid till 9th May 2017 after which amendment of law took place .
2)New rule for foreign resident capital gains withholding (FRCGW) is applicable to individuals selling property in Australia under contract. When seller of such property is a foreign resident the buyer must pay 10% or 12.5% of the price towards the ATO as a FRCGW .
3)The most important factor of being a resident is the intention to stay which is a valid law in most of the countries. Thus the physical presence is necessary under provision 6-5 of ITAA 1997. In the case of “FCT v Applegate”, the issue was whether the resident is indeed a resident for the purpose of tax. Justice Fisher said that, the intention to return is important.
4)Tax consequence- a foreign resident is someone who has stayed outside Australia for a period of less than 183 days in that financial year as prescribed by the statute.
This kind of residents are treated in following ways:
• They are taxed on Australian source of income and Australian taxable property.
• Have a tax rate of 45%
• Pays and gets no capital gain tax exemption on the disposal of assets.
• Special rule for foreign resident requires foreign resident to repay their HELP debts at the same rate at which ordinary resident assess their worldwide income. This makes sure that the foreign resident who may earn substantial amount of income overseas .
Conclusion
Taxable income is generated whenever there is earnings or gains, be it for a resident under section 6 of ITAA or a foreigner under section 995 of ITAA 1997. The treatment of course differs for a resident and non resident but in case of foreign resident the tax laws are more punishing as they are not entitled to a lot of benefits which can be claimed by being a resident. The principle difficulty in applying ordinary rules to a foreign resident is the doubtfulness of intention to stay. Thus considering the rules of 183 days and Domicile rule given in the ITAA 1997, it is easy to determine whether an individual will be taxed as an ordinary resident or a foreign resident .
There are complications in treating foreign resident for tax purpose. There are various provisions that gives rules regarding treatment of a foreign resident such as section 83.235 of ITAA 1997, section 118.435 of ITAA 1997 which talks about rules relating investment as a foreign resident in Australia. Both individual and business entities have prescribed rules to deal with various situations in case of foreign entities. It is clear that foreign residents are taxed on income earned in Australia under section 6-5(3) which talks about Australian source and how someone is considered a foreign resident by applying the given tests in the statute. Even the new ATO rule prohibits foreign resident from acquiring certain kinds of property .
When it comes to business entity, a company is considered Australian if it is registered in Australia and operates business in the same land and even has the central control and management in Australia . However, there is tiny scope for foreign business to claim exemption under section 855-10 of ITAA 1997, where foreign resident does not consider capital gain or loss event and a similar rule is applied to temporary resident also. Under section 118-110 if ITAA 1997, the exemption of main resident cannot be claimed by foreign resident as per the new government regulation in the budget of 2018, but whoever holds property at 7.30 pm on 9th May 2017 is allowed to claim exemption until June 2019 as the law is prospective in nature and not retrospective . The main provision of section 855-10 of ITAA 1997 which says that foreign resident is only entitled to capital gain event if the same event asset is taxable Australian property. Lastly under subsection 802-A of ITAA 1997, foreign residents are exempted from paying tax on their conduit foreign income.
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