02 February 2007
Key Points:
The taxation benefits for persons working temporarily in Australian should reduce costs for firms that would otherwise make normalisation payments to their employees to offset Australian taxation costs.
The narrowing of the categories of taxable Australian property (which we look at in this edition) means that individuals also benefit from the capital gains tax reforms. Foreign residents who do not become Australian residents (temporary or permanent) will not be taxable on any capital gains from taxable events affecting any asset outside the reduced list. In effect, the main areas of possible exposure are Australian real property and any interests in entities that might be indirect interests in Australian real property (or options or rights to acquire the foregoing).
Other amendments in 2006 introduced a new code of tax reforms applicable to inbound individuals who are, or who become, "temporary residents" of Australia for tax purposes (regardless of the time spent in Australia). The object of the measures is to provide tax relief for persons who work temporarily in Australia. Without the amendments, such persons might have been treated as residents and taxed in Australia on worldwide income and gains. The reforms provide a tax treatment more like that applicable to non-residents.
Who is a temporary resident?
The new rules apply to individuals who fall within a specific tax definition of "temporary resident". The primary requirement is that the individual must hold a temporary visa granted under the migration legislation. Exclusions apply to individuals who hold a permanent visa or who have an Australian resident spouse. The tax relief is not conditional on any time limit or period over which the temporary visa may be held.
The key feature of the changes is that a temporary resident is exempt from Australian tax on all income from sources outside Australia derived while they are a temporary resident. (The exemption does not apply to Australian sourced income.) A specific exception applies to all foreign source income and gains that are remuneration for or relate to employment or services while a temporary resident of Australia. This exception extends to employee share or option scheme benefits earned while a temporary resident.
In addition, capital gains (and losses) of eligible temporary residents from their foreign assets (assets that are not taxable Australian property) are not recognised for Australian tax purposes. Because temporary residents are treated in a manner similar to non-residents, their only potential exposure arises in respect of assets that are taxable Australian property (under the narrower list of categories).
Employee shares or options - special rules
Special rules apply to gains from employee shares or options attributable to employment or services in Australia, or to employment or services before becoming a temporary resident. Where all or part of a relevant employment is performed in Australia, employee share or option discounts benefits may be partially taxable or exempt, depending on the nature and timing of the discount benefits, and of any gains from the shares or options and other factors, including the narrower definition of taxable Australian property.
The capital gains tax regime has specific rules that apply when entities either become Australian tax residents or cease to be tax residents. Generally, these will not apply to temporary residents but care will be needed if a temporary resident becomes a permanent resident or where an individual becomes resident but falls outside the temporary resident category. Care is also needed when ceasing to be a tax resident, particularly in relation to any indirect Australian real property interests held at the time.
Conclusion
Temporary residents stand to benefit significantly from these changes and the benefits should flow on to their employers in the form of reduced employment costs. However, the amendments focus increased attention on the precise migration status of inbound workers. The treatment of employment income, particularly employee shares and option schemes may also be beneficial but the rules are far from straightforward and advice will be required regarding every individual's precise circumstances.
For further information, please contact Allan Blaikie and Brendon Lamers.
