In Australia, there are specific tax rules that apply to individuals classified as temporary residents. These rules govern how income earned by temporary residents, particularly income from sources outside Australia, is taxed.
Who is a Temporary Resident?
Temporary residents are individuals who enjoy certain tax exemptions on foreign source income or capital gains in Australia. They are treated similarly to non residents for tax purposes, even if they might otherwise be classified as residents under standard tax rules. Additionally, they are exempt from interest withholding tax.
Qualifications for Temporary Residency
To qualify as a temporary resident for tax purposes, individuals must meet three essential criteria:
- Hold a temporary visa issued under the Migration Act 1958. A temporary visa allows the individual to stay in Australia for a specified period, until a specific event occurs, or while holding a special status.
- Not be classified as Australian residents according to the Social Security Act 1991.
- Have a spouse who is not an Australian resident under the Social Security Act 1991.
Exclusions from Temporary Residency
It’s important to note that certain individuals cannot be classified as temporary residents.
- Australian resident citizens
- Permanent residents
- Holders of protected special category visas (e.g., some New Zealanders)
- Individuals whose spouses are residents for social security purposes
- Those who are residents under the Social Security Act 1991 criteria
Special Consideration for New Zealand Citizens
There are special provisions for New Zealand citizens who held a Special Category Visa under Migration Act 1958 but left Australia. Even if their Special Category Visa ceased upon departure, the tax officials still treats them as temporary residents as long as they retain the ability to re enter Australia using their New Zealand passport.
Policy Rationale Behind the Tax Rules
The underlying policy rationale for these tax rules is based on the idea that temporary residents have a less permanent connection to Australia compared to other residents. As a result, they are taxed more like non residents for tax purposes.
Additionally, temporary residents do not enjoy the same level of entitlements to Australian public benefits, such as Medicare, social security payments, or free public education, as permanent residents. Therefore, they are not required to contribute as extensively to public spending through the tax system.
Duration and Recurrence of Temporary Residency
here is no specific time limit on how long an individual can maintain their temporary resident status. Additionally, a person can be a temporary resident more than once, even if they have held this status previously.
A critical restriction to note is that a person cannot be classified as a temporary resident if, at any point after July 1, 2006, they have been a resident who failed to meet the visa requirements.
Exemptions for Foreign Source Income
Foreign source income is generally exempt for temporary residents in Australia. This exemption applies to various types of income, such as foreign source dividends, interest, rental income, and even foreign source pension income.
Exceptions to the Exemption
There are exceptions to this exemption. It doesn’t apply to income earned as remuneration for employment or services while an individual is considered a temporary resident.
The rationale behind this exception is that both permanent and temporary residents should be on an equal footing when it comes to competing for overseas employment opportunities.
Alienated personal services income assessable under Division 86 and net capital gains are also not covered by this exemption, although they are treated separately.
It’s important to note that the fact that these types of income are not covered by the general exemption does not necessarily mean they are taxable.
In specific circumstances, a temporary resident who qualifies as a resident for tax purposes and is employed overseas for at least 91 days may still be eligible to claim exemptions.
From a technical standpoint, the income included in the exemption is referred to as non assessable non exempt income. Essentially, this means that it is not considered part of assessable income and is not factored in when calculating a taxpayer’s losses.
The exemption also implies that expenses incurred while generating this income cannot be claimed as tax deductible, and foreign tax offsets cannot be applied to foreign taxes paid on this income.
Non Assessable Non Exempt Income
Starting from the 2006/07 income year, certain amounts of income are categorized as non assessable non exempt income. This classification applies to:
Ordinary income derived, either directly or indirectly, from a source outside Australia by a person who is a temporary resident when they earn this income.
Statutory income, excluding net capital gains, earned from a source outside Australia by a person who is a temporary resident at the time of earning this income.
Timing of Statutory Income
Statutory income for a temporary resident is considered to be derived at the time a specific circumstance occurs, or when the last of multiple circumstances occurs if applicable.
For example, if a person becomes an attributable taxpayer for a controlled foreign company, their statutory income is considered to be derived at that point.
Exceptions to Non Assessable Non Exempt Income
There are exceptions to what qualifies as non assessable non exempt income for temporary residents. Specifically, income related to employment or services performed by the temporary resident falls outside this exemption.
Additionally, capital gains and losses of temporary residents can be disregarded under certain conditions.
Treatment of Income Derived Through Partnerships or Trusts
Temporary residents’ income derived through partnerships or trusts is considered non assessable non exempt income. However, this treatment does not extend to income derived by other taxable entities, such as trusts with no presently entitled beneficiary.
Exemption Exclusivity for Australian Source Income
It’s important to note that the exemption for non assessable non exempt income does not apply to income from Australian sources. Furthermore, expenses or losses incurred in generating this non assessable non exempt income cannot be deducted against income earned from Australian sources.
Consequences of Non Assessable Non Exempt Income
When income is classified as non assessable non exempt income, several consequences follow:
- No tax liability arises from the derivation of this income.
- Expenses incurred in generating this income are not tax deductible.
- Capital gains and losses generally do not apply when disposing of assets used exclusively to produce non assessable non exempt income.
- This income does not count toward reducing prior year losses that can be deducted in the current year or reducing tax losses carried forward to future years.
CGT for Temporary Residents
As per Australian tax laws, there are certain individuals who can ignore capital gains or losses they make in specific situations. This rule applies to events that trigger capital gains tax (CGT).
It applies when two conditions are met:
- The individual is classified as a temporary resident as defined by the tax law.
- The individual would not have incurred a capital gain or loss from the CGT event, or if they would have, it would have been treated as if they were a foreign resident when it happened.
Exception for Employee Share Schemes
There’s a special case where this rule doesn’t apply, and that’s when it comes to certain employee share scheme interests in start up companies. These interests have their own tax treatment.
Exclusion for Beneficiaries of Resident Trusts
If a temporary resident is a beneficiary of a trust that is classified as a resident for tax purposes, any capital gains generated through that trust cannot be ignored for tax purposes. This applies regardless of how the trust is structured or organized.
Basically, the gains made through these trusts are still subject to taxation even if the beneficiary is a temporary resident. This is different from the general rule that allows temporary residents to disregard certain capital gains and losses.
Australia has specific tax rules for temporary residents, treating them more like non residents for tax purposes. Special Capital Gains Tax (CGT) rules apply when a temporary resident ceases to be a temporary resident but remains an Australian resident.
Conditions for Application
These special CGT rules apply to each CGT asset that meets the following criteria:
- The person owned the asset just before they ceased to be a temporary resident.
- The asset is not considered taxable Australian property.
- The person acquired the asset on or after 20 September 1985.
What is Taxable Australian Property
Taxable Australian property includes assets related to Australian real property or assets connected to a business carried out by a foreign resident through a permanent establishment in Australia.
Exclusions: These rules do not apply to Employee Share Scheme (ESS) interests under specific circumstances:
- When the rulings of employee share schemes applies, and the deferred taxing point for the interest hasn’t occurred.
- When the start up concession mentioned in employee share scheme applies to the interest, provided the ESS interest was acquired from 1 July 2015.
Application of Special CGT Rules
When the conditions are met, the following rules come into play:
- The cost base and reduced cost base of the asset at the time the person ceases to be a temporary resident are both set to the asset’s market value at that time.
- The general and special CGT rules apply to the asset as if the person had acquired it at the time they ceased to be a temporary resident, without any concessions.
Because the asset is not taxable Australian property, the regular CGT rules only apply from the time the person ceases to be a temporary resident and begins to be treated, for CGT purposes, as an Australian resident.
Controlled Foreign Companies
When an individual is classified as a temporary resident, they are considered not to be an attributable taxpayer concerning a controlled foreign company (CFC) or a controlled foreign trust (CFT).
In simpler terms, temporary residents are not subject to the rules that require them to include income attributed under the CFC rules in their assessable income.
As a result of this provision:
- Income Attribution Exclusion: Temporary residents are exempt from having income attributed to them under the CFC rules. This means that the income earned by CFCs or CFTs is not added to their assessable income.
- Compliance Relief: Since temporary residents are not considered attributable taxpayers in this context, they are relieved from the compliance burden associated with calculations related to controlled foreign companies and trusts. This includes record keeping requirements and other obligations tied to CFCs.
Thus, this ruling ensures that temporary residents are not taxed on income attributed to CFCs and CFTs, providing them with certain tax advantages and simplifying their tax obligations in this specific area.
Temporary Residents in Non Resident Trust Estates
Temporary residents are exempt from certain tax rules related to transferor trust measures during their temporary resident status.
Income Attribution Exclusion
This means that temporary residents are not required to include any income from the trust while they are classified as temporary residents.
Thus, the income generated by the trust during the period of temporary residency is not attributed to the temporary resident’s taxable income. This provides temporary residents with a tax advantage, as they are not taxed on trust income during their temporary stay.
Record Keeping Obligation
Despite the income attribution exclusion, temporary residents are still obligated to maintain records. These records should be relevant to any period when they are not classified as temporary residents.
This means that even though temporary residents are exempt from certain tax obligations during their temporary stay, they must still keep records for future reference, particularly for the periods when they are no longer temporary residents.
Interest Paid by Temporary Residents
In Australia, residents who make interest payments to foreign lenders are generally obligated to deduct and remit a 10% interest withholding tax. However, there is an exemption for temporary residents from this withholding tax requirement. This means, temporary residents are not subject to the usual interest withholding tax rules.
Treatment of Interest Income
Moreover, under this section, interest received by a temporary resident is considered non assessable non exempt income. This classification applies when the interest income is derived by a foreign resident and is not connected to conducting business in Australia through a permanent establishment.
Reduced Compliance Costs
This exemption carries significant benefits for temporary residents. It not only reduces the compliance costs associated with interest payments but also eliminates a compliance burden.
Typically, resident borrowers would need to account for and compensate foreign lenders for the additional costs resulting from interest withholding tax. However, this exemption simplifies the process for temporary residents, making it more convenient and cost effective for them when dealing with interest payments to foreign lenders.
FBT Concessions for Temporary Residents
The tax laws in Australia offer certain FBT concessions and exemptions for individuals who are temporarily posted to Australia. These concessions aim to reduce the tax burden on such individuals.
Holidays and Trips Home
Under the Fringe Benefits Tax Assessment Act (FBTAA), concessional FBT treatment is applicable to free holiday travel provided to employees who are posted to Australia but have their usual residence in a foreign country.
This concession involves a 50% reduction in the taxable value of the benefit, subject to specific limits.
To qualify for this benefit, the travel must be provided either through an industrial award or in accordance with industry customs. Eligible expenses cover travel, accommodation, and meals during the journey.
If the trip is not to the employee’s home country, the annual reduction is limited to 50% of the cost of a return economy class airfare to their usual residence.
However, when the trip is to the home country, the annual reduction is capped at 50% of the actual travel costs, especially if these costs exceed the return economy airfare expense.
This occurs, for instance, when the employee travels in first class. Similar concessions are available for holiday travel provided to family members, regardless of whether they live with the employee.
Living Away From Home Allowances
A LAFHA benefit arises when an employer provides an allowance to an employee to compensate for additional expenses or disadvantages incurred because the employee has to reside away from their usual place of residence for work purposes.
The FBTAA, a LAFHA benefit is generally exempt from FBT if the amount reasonably covers accommodation or increased food expenses caused by the relocation.
The reasonable compensation for accommodation costs depends on the specific circumstances. However, a set amount of $42 per week ($21 for children under 12) is specified as the presumed expenditure for food. The acceptable food component amounts are outlined in an annual determination.
Concessional treatment for LAFHA has certain limitations. It applies only when the taxpayer maintains a residence for personal use in Australia and is required to work away from that residence for employment purposes.
Additionally, the concessional treatment is typically limited to a maximum period of 12 months when the employee is away from home. There are transitional provisions for permanent residents who had LAFHA arrangements in place before May 8, 2012.
An exception to the 12 month limit exists for employees who work on a regular and rotational basis as fly in fly out (FIFO) or drive in drive out (DIDO) workers. This rule doesn’t require these employees to maintain a home in Australia for personal use.
Fringe benefits related to the full time education of employees’ children who are temporarily posted to Australia are exempt from FBT, provided the expenses relate to a school term during the employee’s time away from their home country. This exemption applies when the benefit is provided under an industrial award or industry custom.
Exempt Relocation Expenses
Fringe benefits provided for the relocation of employees posted to Australia enjoy an exemption from FBT. This exemption includes various aspects of relocation, including:
- Relocation Travel Costs Costs incurred for the relocation journey are exempt.
- Furniture Leasing for Temporary Accommodation
- Removal and Storage Expenses related to the removal and storage of furniture and personal effects are exempt.
- Temporary Accommodation Costs
- Utility Services Costs for connecting telephone, electricity, or gas services enjoy an exemption
- Meal expenses at hotels, motels, and similar establishments are exempt.
- Advances provided to cover rental bonds, electricity, and gas deposits.
- Costs related to selling and purchasing homes are exempt.
- Engagement of relocation consultants is also exempt.
For employees posted to Australia, this exemption applies from the time the employee leaves their usual overseas place of residence until they commence residing at or near the place where employment duties will be performed.
The exemption can also apply when an employee undertakes a journey to arrange suitable accommodation before the actual employment relocation.
However, the tax officials generally considers the exemption inapplicable in cases where, for instance, an employee living in Melbourne regularly commutes between their Melbourne residence and a Sydney residence during the working week.
Additionally, it does not apply to the cost of applying for a visa that enables a non resident already in Australia to remain here.
Compensation for Damage to Household Effect
Payments from employers aimed at compensating for damage to an employee’s household effects during relocation are treated as assessable allowances rather than fringe benefits.
This treatment applies when the employee is entitled to retain any excess amount paid over the actual costs incurred.
Migrant Language Training
FBT exemptions may apply to migrant language training provided to an employee or an employee’s family member.
To qualify for this exemption, the individual attending the course must be, or intend to be, an immigrant to Australia, not merely a visitor. The course should target individuals whose first language is not English and must be designed to:
- Teach English, or
- Impart an Understanding of Australian Citizenship Rights and Duties and the way of living of the Australian people.
Superannuation Payments to Former Temporary Residents
People who have come to Australia on certain temporary visas and then permanently leave the country are entitled to receive their superannuation benefits in the form of a departing Australia superannuation payment (DASP).
These payments are not considered part of the recipient’s taxable income, but they are subject to withholding tax. The tax rates for DASP vary depending on the components of the superannuation benefit:
- The tax free component is not taxed.
- The element taxed in the fund is taxed at a rate of 38%.
- The element untaxed in the fund is taxed at a rate of 47%.
From July 1, 2017, former working holiday makers are subject to a 65% tax rate on both the taxed and untaxed elements of their superannuation benefits. Before this date, they were taxed at the rates mentioned earlier for former temporary residents.
Tax is typically withheld by the superannuation fund that makes the payment. The tax laws has provided guidelines regarding situations in which penalties for rule breaches may be waived.
If a temporary resident who has left Australia doesn’t claim their superannuation entitlement within six months of their visa expiring, the entitlement is transferred to the tax officials.
The former temporary resident can still claim it later or request it to be transferred to another superannuation fund, but the amount claimed back will be subject to tax withholding at the specified rates.
These rules do not apply to Australian or New Zealand citizens, current holders of permanent or temporary visas, or those applying for permanent residency. Their superannuation remains in their fund and is not transferred to the authorities.
This article is for general information only. It does not make recommendations nor does it provide advice to address your personal circumstances. To make an informed decision, always contact a registered tax professional.