On 11 May 2021, the Treasurer announced his second budget during the COVID pandemic. There were a number of measures which impacted on individuals, expatriates and employers of expatriates, some of which are briefly explained below.
In 2019 the Board of Taxation released a report on the reform of the individual tax residency rules with a key recommendation of using ‘physical presence’ in Australia as the primary measure of residency.
In line with this and other recommendations in the Board of Taxation Report, the Government will replace the individual tax residency rules with a new modernised framework.
The primary test will be a ‘bright-line’ test where, a person who is physically present in Australia for 183 days or more in an income year, will be an Australian tax resident.
Those individuals who do not meet the primary test will be subject to secondary tests that depend on a combination of physical presence and measurable objective criteria.
The Board of Taxation recommend a day count test together with a new four factor test. The four factors referenced in the Report include:
It is still unknown how the secondary test will operate, however it was the Board’s recommendation that where two of the above four factors were satisfied the individual would be a resident under the four factor test.
The change to the rules should make it easier for expatriates and employers to determine whether or not an individual will be considered a resident of Australia for tax purposes and ensure the correct tax is being remitted to the authorities.
The low and middle income tax offset (‘LMITO’) has been extended for a further year to the 2021-22 income year. The LMITO provides a reduction in tax of up to AUD 1,080 for those earning less than AUD 90,000 and will be received on assessment after individuals lodge their tax return.
Employers should consider the tax offset when performing the year-end gross up salary calculations for expats.
The Government is proposing to remove the AUD 450 per month minimum income threshold which determines whether employees have to be paid the superannuation guarantee by their employer.
This will begin from the first financial year after the proposed legislation receives Royal Assent. The superannuation guarantee refers to the minimum percentage of earnings an employer needs to pay into their employee’s superannuation fund.
The superannuation guarantee is currently 9.5%, but will increase on 1 July 2021 to 10%
Unless there is a Certificate of Coverage in place or a superannuation exemption is available, a super obligation may arise for even one day of work in Australia. Further, employers should consider the increase in superannuation rate and whether this will reduce expatriate’s gross salary (and come out of the employee’s gross remuneration package) or whether this will increase costs for the employer.
Currently, under Australia’s deferred taxing rules of ESS, an employee can, under certain circumstances, defer tax until a later taxing point. The deferred taxing point is the earliest of four events, the main of which are:
‘Cessation of employment’ has been removed as a taxing point under the deferred taxation rules. However, the change will only apply to ESS interests issued to employees in the income years commencing after the amending legislation is passed.
This is great news for foreign Companies where their domestic tax rules allow concessions for retired employees, with the proposed amendment likely to more closely align Australian’s tax rules with the expatriate’s home country rules. However, the cessation of employment deferred taxing point will still have to be considered for the next 10 years or so under pre amendment ESS plans.
Although these changes have not yet been legislated, employers should consider how the measures may impact their expatriate programs in Australia.
Eng Hua Ng