For Australians interested in travel, one of the appeals of working on a super yacht or cruise ship could be the idea that their income becomes tax-free once they leave Australia.

Unfortunately Australian citizens, and potentially permanent residents, may find themselves still obligated to pay Australian taxes.

The situation has become even more complicated this year, with travel restrictions bringing people to shores they weren’t intending to live on.

The following gives a basic overview of Australian tax residency, with particular regard to individuals working on super yachts or cruise ships. However, since every situation is unique, this information is of a general nature only. You should speak to a qualified tax professional to determine your own situation. 

Australian Tax Residents

In simple terms this means that Australian citizens, or long-term residents, who start working on a super-yacht and cruising around the world, will usually be treated as an Australian tax resident. 

We note that the Australian government has indicated that it will introduce new residency rules, which among other things will do away with the permanent place of abode test and will introduce a 45 day rule for Australian citizens instead. However, despite being announced these changes are yet to be legislated (as of the date of this blog post) and therefore the question of whether a person has an overseas permanent place of abode continues to be relevant. 

Non-Resident for Tax Purposes

Non-residents are only required to pay Australian taxes on income earned from Australian sources. This means that non-residents who are working on superyachts will not be subject to Australian taxes.

While the default may be to assume that anyone who isn’t an Australian citizen is automatically a non-resident once they start working on a ship that cruises around the world, this isn’t necessarily the case either. If their permanent abode is still in Australia, and they continue to hold Australian residency, then they may continue to be an Australian resident for tax purposes as well. 

Living in Australia due to COVID-19

One of the factors further complicating issues is the travel restrictions due to the coronavirus pandemic.

Australian citizens have returned to Australia, despite permanently residing in other countries. Australian residents who were travelling have found themselves stuck in other countries. Non-residents who were not planning to stay in Australia have been stuck living on Australian shores. Individuals who have been travelling around in cruise ships may find themselves particularly susceptible to these issues. 

The Australian government has indicated that anyone living in Australia solely because of coronavirus, will continue to hold their previous residency, as long as they plan to, and actually, return to their place of residency as soon as practical once travel restrictions have been lifted. However, this is not a concession in law and a lengthy stay in Australia could trigger Australian residency, for example if there is an intention to reside here, regardless of the reason for that intention.

Place of “abode”

Living on a cruise ship or superyacht is usually not considered to be sufficient to establish a permanent home. The situation could be different if you have legal rights to reside in a particular country and you do so on a cruise ship. 

This means that Australians who simply start working on such ships will typically continue to be Australian residents, no matter how long they stay on such ships or how long they are employed overseas in these roles.

If an Australian has moved overseas and clearly established and used their permanent place of abode in another country before, or perhaps during, their time employed on cruise ships or super yachts, then their situation may be different. 

Example of an Australian citizen with ties to various countries, who is working on a Superyacht 

To understand how the situation can get a little tricky, consider this example of an Australian citizen.

Scott is an Australian citizen who moved to Singapore in 2000 and became a non-resident for Australian tax purposes by virtue of living in Singapore on a permanent basis. In 2005 he started working on international yachts and was paid in USD. After commencing this job he has rarely been back to Singapore.

Since his yacht licence was not recognised in Australia, Scott had no intention of returning to Australia to work. He still kept an Australian bank account with a reasonable amount of money that he could use during holidays in Australia to visit with family every year or so. He also holds bank accounts in various other countries and visits various other countries in between working as well. 

In 2019 Scott was granted permanent residency in France, however work commitments meant that he had not actually spent much time in France.  

Scott became, and continues to be involved in a romantic relationship with a Samoan national who also works on the superyachts. She is not an Australian citizen and has never lived in Australia. She has only visited Australia once with Scott and likewise, he has only visited her home in Samoa on one occasion. The couple began to spend most of their free time together in Malaysia and Indonesia. They have not purchased or contracted a home in either location and appear to treat their visits to Malaysia and Indonesia as holidays. 

In this situation Scott ceased residency back in 2000 when he moved to Singapore. However, at some point, since starting to work on the yachts, he appears to have severed ties with Singapore. He no longer appears to consider that his home, he has no assets there, does not return there in between work trips, and ultimately applied for residency in France.

Although he has been given residency in France, Scott has not purchased a home there, and does not regularly spend time there. Scott and his partner choose to spend most of their non-work time in Malaysia and Indonesia, however they show no indication that these places provide a permanent place of abode either, preferring to treat their trips as vacations in between working at sea.

Where is Scott a tax resident?

Luke is an Australian citizen who moved to the UK in 2000 with his wife, who is also an Australian citizen. Luke and his wife purchased a home in the UK and started a family there. In 2017 Luke was employed on a cruise ship. In between work shifts Luke always returns to the UK to be with his family. 

Luke and his wife visit their families back in Australia most years. They usually travel together, with their children, for these visits, except where the visit is based on an opportunity that has arisen due to the cruise ship docking on Australian shores.

Luke has a bank account, investments, and social ties in the UK. He maintains an Australian bank account, which he and his family use on their visits to Australia. 

In March 2020 Luke’s ship docked on Australian shores, and the Australian government advised Australians to return to Australia for the duration of the pandemic. Due to the pandemic and the Australian government’s travel announcements, Luke’s wife and children decided to fly over to join Luke in Australia. The family planned to return to the UK once travel restrictions were lifted. However they decided to remain in Australia while the pandemic worsened in the UK and things were still up in the air with Luke’s employment.

At this point in time Luke is not an Australian resident. He has established a permanent home in the UK with his family. They are staying in Australia with other family members or may be in temporary accommodation, not having established a home of their own here. They currently plan to return to the UK when it becomes practical to do so.

However, if Luke and his family decide to make Australia a permanent home their situation would change. This could happen if they decided to rent out a house for themselves, instead of continuing to stay with family, if they enrolled their children in Australian schools, and if they resigned from their employment to take up permanent positions in an Australian job. They could also face a deemed change of residency for the duration of their stay in Australia if the family continues to live in Australia after Luke returns to work on the yachts and he starts coming back to Australia instead of their home in the UK. 

Australian Residency While Working on a Super-Yacht or Cruise Ship

In general an Australian resident continues to be an Australian resident after taking up employment on a superyacht. This is because the ATO considers that their residence on the yacht is of a transitory nature. 

An Australian citizen who was living overseas may also become an Australian resident for tax purposes again, if they commence working on a superyacht and do not maintain ties with an alternative permanent place of residence. On the other hand, an Australian citizen who has clearly established themselves as a non-resident by setting up a permanent home overseas, will not automatically resume Australian tax residency if required to stay in Australia due to the coronavirus pandemic. 

Since the issue of residency for people working and essentially living on cruise ships and superyachts can be quite complex, it is important to discuss your unique situation with a tax agent who is experienced in residency issues.

If you’re moving to the United States then you’ll need to understand how tax laws apply to your current and future superannuation account.  You should also obtain financial advice from a qualified financial planner before seeking access to your super.

Moving to the US on a Permanent Basis

If you are an Australian moving to the United States on a permanent basis then you are likely to be considered a non-resident for Australian tax purposes. This means that you will, by and large, be considered a tax resident of the US. 

In this situation Australia’s tax laws will continue to apply to your Australian superannuation in terms of how your superannuation earnings are taxed. However you should seek US tax advice in relation to how the IRS would seek to tax your Australian superannuation account or fund. CST Tax Advisors in the US can assist you with that. 

If you have an Australian self managed superannuation fund you should seek advice in Australia before you leave to avoid your SMSF being deemed non-complying, as generally the SMSF cannot be run by non-residents and should usually not accept contributions from foreign members. If your SMSF becomes non-complying because of your move, substantial additional tax may be levied by the ATO on your SMSF.

Accessing your Superannuation

Basically this means that your superannuation will continue to remain preserved in your Australian superannuation fund until you reach retirement age. If you continue to work for an Australian employer, they may continue to be required to contribute to your superannuation fund. 

When you are eligible to withdraw your Superannuation, if you are still living in the US, then you may find that these payments count as taxable income in the US. 

Contributing to your Superannuation

If you are eligible, and choose to continue to make contributions into your Australian superannuation fund to support your retirement, then you will likely find that these contributions do not count as tax deductions against your US assessable income. You should obtain specific tax advice from a US tax advisor or CPA.

While these payments may count as tax deductions in your Australian tax return to reduce any Australian sourced taxable income, superannuation contributions cannot be used to create a tax loss. This means that contributions that you choose to claim as a tax deduction may be wasted if you don’t have other Australian income to offset.

Since making superannuation contributions may not be a tax effective option, it is important to understand the full financial impact of your choice by talking to an appropriately experienced US tax agent, as well as an Australian tax agent. 

Talk to your tax agent about the tax consequences on your Superannuation plan before you move

Moving overseas can create a large number of potentially complex taxation issues to consider, particularly for those who have self managed superannuation funds. 

It is important to speak to an appropriately qualified and experienced tax agent about your specific situation. Planning ahead ensures you have the information necessary to make informed choices, and prevents you from being surprised with unexpected tax costs. 

It may also be advisable to speak to a financial planner so as to make the most appropriate plan in relation to investing for your future.

On 11 May 2021, the Australian Government announced that it is considering replacing Australia’s existing residency rules with a new ‘modernised framework’.

This update is intended to be based on a report by the Board of Taxation from March 2019.

The changes have not been passed into legislation at publication of this article.

Our Principal, Matthew Marcarian, analyses the changes and what it might mean for Australian expats in his – Australia To Change Personal Tax Residency Laws – article.

Below is a summary of the article.

Why might the Rules be Changing?

Under the current rules an individual is a tax resident if they:

• reside in Australia
• have their domicile in Australia
• live in Australia for at least 183 days of the year, or
• are a member of certain Commonwealth Government superannuation funds.

Unfortunately, due to the lack of measurable criteria in these tests there is a lot of grey area when it comes to the more complex situation involving travellers and individuals with more ambiguous mobile living situations.

The intended change will update these rules to focus on a framework that centres on three things:

• Physical presence in Australia
• Australian connections
• Objective criteria

While the precise nature of the intended update is not yet known, the Board’s recommendation has indicated specific, measurable tests that an individual should pass to meet the residency test. To this end there are three proposed tests to be considered.

1: The 183 Day Physical Presence Test

It is expected that the new primary test will be as simple as determining that an individual has spent at least 183 days physically present in Australia during the given tax year.

2: Commencing Residency Test

When an individual moves to Australia and is only here for between 45 and 183 days they would also need to satisfy at least 2 of the following factors

1. The right to reside in Australia (citizenship or permanent residency)

2. Australian accommodation

3. Australian family

4. Australian economic connections such as:

     a. Employment in Australia

     b. Actively involved in running a business in Australia

     c. Interests in Australian assets

Ceasing Residency Test

To cease residency an Australian would need to spend less than 45 days in Australia during the year, as well as the preceding two years. However, residency would cease immediately where the individual moves overseas to take up overseas employment and the individual:

1. Was an Australian resident for three previous consecutive income years

2. The overseas employment is for at least two consecutive years

3. Has overseas accommodation for the duration of their overseas employment

4. Is physically outside of Australia for less than 45 days in each year they are living overseas

Summary

The proposed rule changes are intended to simplify and clarify the law around determining residency. However, there is still work to do to develop the tests and factors. Further consultation in drafting the legislation is encouraged.

Australia To Change Personal Tax Residency Laws has been written by our Principal, Matthew Marcarian

Download the Australia To Change Personal Tax Residency Laws Paper Now

When it comes to providing tax advice, Matthew believes it is about more than the simple tax consequences. It is about gaining a deep understanding of the client’s situation to formulate clear, robust tax and business advice that deals with both current and potential tax concerns.

With over 20 years of experience providing international tax advice to a wide range of clients, Matthew is well adept at helping clients manage and plan for the tax outcomes and opportunities, both domestically and abroad.

With extensive qualifications in international taxation and personal experience living as an expat, Matthew is a leader in his field with specialist expertise in relation to trusts, controlled foreign companies, international taxation and advising Australian businesses expanding overseas.

Singapore is often chosen as a regional business hub for Australian companies looking to expand into Asia or beyond. This is largely because Singapore is one of the countries where there are limited restrictions on foreign businesses setting up. Accordingly it is possible for a fully Australian owned company to operate a business in Singapore. 

This blog considers the potential tax implications of running a business in Singapore through an Australian resident company.

What is an Australian Resident Company?

A company may be an Australian company due to one of three possibilities: 

• Incorporation in Australia
• Central management and control being exercised from Australia, or 
• Voting power is controlled by shareholders who are Australian residents.

This means that even if the decision is made to incorporate a company in Singapore to oversee the business, the company may still be considered an Australian company if the business is managed in Australia, or if the controlling shareholders are Australian residents.

Singapore Company

A company is considered a Singapore tax resident when the control and management of the company is in Singapore. This means that even if a company is incorporated in Singapore, if it is controlled and managed in Australia, then the company will simply be an Australian resident company. 

However, if the company is incorporated in Australia but controlled and managed in Singapore then both Australia and Singapore will consider the company to be a resident company. When this situation occurs the company will need to consider the double tax agreement between Australia and Singapore.

For the purposes of this blog we are looking at a company that is an Australian resident company operating a business in Singapore through a subsidiary incorporated in Singapore.

Australian Taxes

An Australian resident company is subject to Australian taxes on income from worldwide sources. This means that all business income and any capital gains, will need to be reported in an annual income tax return.

Singapore Taxes

If the company is not a resident company in Singapore but it operates a business in Singapore  then the company is usually only taxed on the Singapore-sourced income that is generated through the business. 

The Singapore company tax rate is a flat 17%, but many concessions can apply to reduce the effective tax rate. 

The company may also be required to register for GST in Singapore. Other local taxes may also be payable. 

Double-Taxation

Under the double-taxation agreement between Australia and Singapore an Australian resident company only has to pay taxes in Australia. However, where the Australian company runs a business in Singapore through a permanent establishment in Singapore then Singapore has taxation rights over the profits generated through this permanent establishment.  

As a business operating in Singapore the company will be required to pay income tax on such business income at a rate of 17%. 

When the income is reported in the Australian tax return the company will be eligible to claim the foreign tax paid as a credit against the Australian tax assessment. This ensures that the company will only be paying taxes at the higher Australian tax rate. 

When you decide to expand your business into Singapore it is important to ensure that you get your structuring right, and that you understand the full tax implications of your various options. There are a range of questions that need to be addressed including profit repatriation to Australia, withholding tax, transfer pricing, debt/equity and foreign currency issues. 

Make sure that you speak to an experienced international tax expert before making your move. 

Australian Treasurer Josh Frydenberg presented the Australian Budget on 11th May 2021. 

Our Principal, Matthew Marcarian outlines the key budget announcements that may affect our clients. 

Changes to Australia’s personal tax residency rules

The Government has announced that it will adopt a new framework for personal tax residency which will be based on the recommendations of the Board of Taxation made in March 2019. 

The Budget papers indicate that the objective of the change is to make personal tax residency laws ‘easier to understand and apply in practice, deliver greater certainty and lower compliance costs for globally mobile individuals.’ 

The question is whether the amending legislation will actually achieve that objective.

Essentially the government proposes a ‘bright line’ test of 183 days. However, just how bright that line actually is will depend on the drafting and the overall framework of the laws when they are introduced. 

It also seems to be the case that under the new proposed laws, an Australian expat could be found to be a resident even if they spend less than 183 days in the country, where there are other residency indicators present.

In essence this mirrors the existing common law position, but elevates certain common law tests into tax legislation. 

This may result in the removal of uncertainty in some situations – but if not handled carefully, will risk creating other interpretational problems that the common law can more flexibly deal with.

The Government is also likely to introduce specific tests in relation to ‘commencing residency’ and ‘ceasing residency’ in an attempt to increase certainty in the law. 

CST would like to see that the exposure draft process for the new legislation gives the tax community extensive time to provide feedback given how sensitive this area of tax law is to interpretation, how fundamental tax residency is and how far reaching legislative changes are likely to be.

The changes to residency laws will only be effective from the start of the tax year after which the proposed legislation receives Royal Assent. 

This means that if the amending legislation can receive Royal Assent before 30 June 2022 then it will be effective from 1 July 2022.

CST will stay at the forefront of these legislative developments and will be providing feedback to the government on exposure draft legislation, based on our extensive advisory experience in these areas. 

Patent Box

The Government has announced a limited Patent Box regime which will apply a concessional 17% company tax rate to income derived from Australian medical and biotechnology patents. 

We are not sure why 17% was the chosen rate – but we note that it is identical to Singapore’s general company tax rate.

If we are absolutely committed to encouraging this industry in Australia, we would like to see a bolder policy approach here with a more meaningful reduction in the applicable tax rate to 10%, if not lower. That would be much more competitive on the global stage.

The Government has committed to consulting industry before settling on the detailed design of the Patent Box.

Self Managed Superannuation Fund – relaxing residency requirements

The Government has announced that it will permit people who are temporarily overseas to continue to contribute to a Self Managed Super Fund beyond the current 2 year period and upto 5 years. 

However if someone is overseas for up to 5 years they would normally be considered to be non-resident, which would imply that they are not ‘temporarily overseas’ and would therefore not be eligible to keep contributing to a Self Managed Superannuation Fund. 

The Government needs to re-assess this change. We believe the best approach would be to introduce a direct link to the actual tax residency of the member, rather than rely on the notion of ‘temporary’ absence.

Change to Employee Share Scheme Rules

The government has announced that it will amend the Employee Share Scheme (ESS) rules so that the end of a person’s employment will not be a taxing point for individuals any longer under the ESS regimes. 

For clients who are able to keep unvested ESS interests at the end of their employment, this change is excellent.

In the past the law has been problematic for clients where a taxing point has arisen because of employment ending – even though the shares or options had not actually vested, resulting in unfunded income tax bills and heavy compliance costs.

Moving forward, for a deferred ESS scheme, the taxing point will essentially be earlier of the time when there is no risk of forfeiture and no restrictions on disposal, or 15 years.

Removal of the Work Test for Voluntary Superannuation Contributions

In a welcome change, the Government will allow individuals aged 67 to 74 to make non-concessional contributions subject to the existing caps.

However for concessional contributions (i.e personal deductible contributions) the work test still applies. 

We think that the law should have been simplified further so that irrespective of the type of contribution the work test should not apply – particularly given the caps on concessional contributions are quite low being $27,500.

This change is expected to be implemented in time for application for the 30 June 2022 tax year.

Removal of $450 per month threshold for superannuation eligibility

In an excellent measure the government will remove the current $450 monthly threshold meaning that all Australian resident employees will receive superannuation.

Under the current law someone who earned $300 per month missed out on superannuation and given that technology allows employees to so easily make contributions given the onset of single touch payroll – this change is welcome to enhance fairness in our system.

Like any overseas move, moving from Australia to the United States will mean that you will encounter a brand new taxation system. 

If you’re used to the Australian tax system, the US system may seem a lot more complicated. For a brief overview of the differences see this comparison table:

As you can see, there are a number of key differences in the way taxes are levied and collected in the US. Much of this is due to the additional authority of the states to impose both income and sales taxes for their own jurisdictions. This means that the exact amount of taxes you will be faced with will, ultimately, depend exactly where in the states you are moving to.

If you’re an Australian who is moving to the United States, there are many tax issues to be aware of. Here’s a basic overview of what you need to know before considering the move. 

You can also download our guide: Moving to USA, here.

Tax Residency

When moving to another country, the first consideration should be your tax residency. From an Australian perspective, you will be taxed very differently depending on whether:

 i) you remain an Australian tax resident, 

ii) you remain an Australian tax resident, but also become tax resident of the United States, or 

iii) you become a non-resident of Australia and become tax resident of the United States.

As an Australian tax resident you are taxed on your worldwide income, whereas a non-resident is only taxed on Australian sourced income.

For Australian tax purposes, there are a number of tests that determine whether you are treated as a tax resident. Just simply moving to the US does not automatically mean you become a non-resident of Australia. Usually an Australian citizen, or permanent resident, will remain an Australian tax resident unless they move overseas on a permanent basis. While there is no one specific factor that will determine what makes a move permanent, factors that will be considered include the length of time living overseas (minimum 2 years), purchasing or leasing a home overseas, selling Australian assets, and where your personal family ties and business ties lie.

The US, on the other hand, has its own set of rules to determine whether an individual is considered a tax resident in the US. Foreign nationals that are Greencard holders, and those that have been in the USA for over 183 days are generally regarded as ‘resident aliens’ and taxed like US citizens on their worldwide income. Non-resident aliens in the US are only taxed on their US-sourced income.

It is possible that you could be considered a tax resident of Australia under Australia’s rules, and a tax resident of the US under the US rules. In this case, the Double Taxation Agreement (DTA) between Australia and the US will need to be referred to. This tax treaty exists to help avoid double taxation in both countries.

As the rules and tax treaties in both Australia and the US can be quite complex, it is important to talk to a tax advisor who is experienced in cross border residency issues in order to understand your tax residency status, and to be aware of when your residency status may change.

Living In The US Temporarily – Taxation As An Australian Resident For Tax Purposes

If you remain an Australian tax resident after moving to the United States, then you will continue to be required to lodge an Australian tax return each year. As an Australian tax resident, you are required to declare income from worldwide sources in your Australian tax return. 

The Australia – US DTA will need to be referred to,  to see which country has the taxing rights over certain income categories. The DTA also explains circumstances when foreign income tax offsets are available to offset Australian tax. 

US Tax Return

You will also need to lodge a US tax return as a US non-resident, for any US sourced income. The US has the right to tax non-residents on US sourced income. However, thanks to the Australia – US DTA, Australia will generally treat any US income tax paid as foreign tax credits against the Australian tax liability. This means you will only need to pay Australian tax on any difference between the amount of US tax paid and the amount of Australian tax assessed. If the US tax is higher, then you will not be refunded the excess above the Australian assessment.

Living In The US Permanently – Becoming A Non-Resident Of Australia

If you are moving to the US on a permanent basis you will become a non-resident of Australia for tax purposes. You will need to still lodge Australian tax returns on any income generated from sources in Australia.

Capital Gains Tax Payable When You First Move To The US

One of the first taxation issues to understand when moving to the US is that Australia will treat you as having disposed of your capital assets (excluding Australian real property) at the market value prevalent on the date of your departure, unless you elect to defer the deemed disposal (explained further below). A deemed capital gain or loss will need to be calculated and included in your tax return, as if you had actually sold those assets. Once those assets are sold at a later date whilst you are in the US, there will be no further tax payable in Australia (tax will be payable in the US). 

However, you do have the option not to include the deemed capital gain if you instead choose to report it as a capital gain when you eventually sell the assets. However, the DTA will need to be referred to, to see whether the gain would be taxable only in the US.

In summary, your options are:

Option 1- Declare a “deemed” capital gain in your Australian tax return for your foreign investments when you leave the country. As long as you don’t return to Australia you will have no more Australian tax to consider when you eventually sell those foreign assets.

Option 2- Choose not to declare a deemed capital gain, but wait until you actually sell the foreign investment. If you are still living in the US (or another country that has a similar clause that gives them taxation rights over Australia in this situation), then you won’t need to declare the capital gain in an Australian tax return. If you are living in a country that doesn’t have this clause when you sell the foreign investment, then you would have to declare the capital gain in an Australian tax return at that time.

Australian Sourced Income

As a non-resident for Australian tax purposes you would only be required to lodge an Australian tax return to declare any Australian sourced income that was not already fully taxed under the Double Taxation Agreement. For instance, interest income for non-residents is subject to special withholding rates that are considered to be the full and final tax. This means that the tax withheld is the tax paid for this income. You can’t claim deductions against this income to reduce the tax you have to pay on it, and you can’t claim the tax as a credit against other income being reported in an Australian tax return. As long as your bank has been notified that you are a non-resident they should withhold the correct amount of tax.

Fully franked dividends from Australian sourced companies are also considered to be the full and final tax for the Australian sourced income.

Other Australian sourced income is required to be included in your Australian tax return to be assessed for tax at non-resident rates.

Australian Superannuation

While contributions that you make to your Australia superannuation fund may be deductible against your Australian income, they will generally not be deductible against your US income.

Australian superannuation funds are not subject to the same tax deferral rules in the US. Further advice will need to be sought on whether Australian superannuation fund earnings will be taxable in the US.

Talk To Your Tax Advisor Before Making The Move

Moving overseas can create a large number of potentially complex taxation issues to consider. This article contains a brief introduction to some of the tax issues that may be encountered when considering a move to the US and does not consider your personal situation or circumstance. It is important to speak to a qualified and experienced tax advisor, both in Australia and in the USA, about how the various laws and tax treaties apply to your specific situation.

Please note that the general information provided is accurate at the time of publication, however tax laws do change frequently. To ensure you have reliable information it is therefore important that you seek specialist advice at the time of your potential or intended move, to ensure you have up to date, and personally relevant advice on hand.

Planning ahead ensures you have the information necessary to make informed choices, and prevents you from being surprised with unexpected tax costs.

CST Tax Advisors in Sydney can provide you with advice regarding your Australian tax when it comes to moving, or considering a move overseas. Our US office will be able to assist you with tax advice regarding your US tax.

Employee Share Schemes (ESS) involve an employer giving employees a benefit through the provision of shares in the company that the employee is working for.

This can include giving employees the ability to purchase shares at a discounted price and giving employees options to buy shares in the future. 

While employees are often eligible for tax concessions on the benefit they are given, it is important to be aware of the potential tax consequences that can occur. This is particularly true in situations where a taxpayer can be assessed for taxes on hundreds of thousands of dollars of assessable income, without the cash income being available to them to pay for those taxes.

In essence, unless the ‘start-up’ concessions apply, you are required to include the ‘discount’ on the shares you acquire, with the discount determined by comparing the price you pay for the shares to the market value.

This discount is a benefit that is included as assessable income in your tax return. The terms of when the market value is measured, and whether tax concessions may apply, vary depending on the exact nature of the ESS.

Basic Example:

Employer company issues you shares that are worth $100,000
You only pay $80,000 for the shares.
This means you received a discount of $20,000.

You are required to include that $20,000 benefit as assessable taxable income in your income tax return.

Tax Concessions

For concessional tax treatment both the general condition and specific conditions of the particular ESS must be met.

The general condition is: 

That after acquiring your shares through the ESS, you must not:

• Hold over 10% ownership of the company
• Control more than 10% voting rights in the company

(Including ownership/rights held by associates and additional ownership/rights that would be held if any other ESS interests were exercised). 

The specific conditions depend on the type and particulars of the ESS that the employer offers.

Potential tax concessions include:

• Rollover relief
• Start-up concession (where the employer is a start-up company)
• $1,000 discount on taxed-upfront schemes (explained further below)
• Deferred Taxing point (discussed further below)

Taxed-Upfront Scheme

In a taxed-upfront scheme the employee is taxed on the discount that they receive in comparison to the market value at the time of acquisition. In certain situations a very small benefit of $1,000 is available.

Provided your taxable income is under $180,000 (and you meet the general condition ownership/voting rights test), then shares that are acquired under the taxed-upfront scheme are eligible for a reduction in assessable income by up to $1,000.

For example:

Jack has a total taxable income of $50,000.

His employer provides him with $999 worth of shares in the employer company. After receiving these shares Jack will have less than 1% ownership/voting rights in the company.

The $999 value of the shares is required to be reported as assessable income in Jack’s income tax return. However, as he meets the concessional requirements he is able to apply the discount and will not be taxed on the $999. 

If Jack was provided with $1,999 worth of shares then he would be able to discount $1,000 of those shares and only be assessed on the remaining $999.

Tax-Deferred Scheme

Under a tax-deferred scheme the timing of when the employee is taxed on their discount is deferred to a specific “taxing point” in the future, rather than being the time they initially receive the benefit. 

There are a number of different types of tax deferred schemes and specific conditions must be met for each arrangement. 

When it comes to deferred taxing schemes it is important to follow the specific terms of the actual scheme itself, as this will play a big part in determining when the deferred taxing point occurs. 

In general, the deferred taxing point is the earlier of the following events: 

1. The time when there is no risk of the ESS interest being forfeited and there are no restrictions on selling the shares.
2. Where the interests are rights (options), usually the point when the employee exercises those rights and there is no risk that they can forfeit the share and no restriction stopping them from selling that share. 
3. When the employee ceases employment with the employer who provided the ESS.
4. 15 years after the acquisition of the ESS interests.

However, if an ESS interest is disposed of within 30 days of the deferred taxing point, then the date of the disposal becomes the taxing point instead.

For example:

Max’s taxing point occurs on 1 March 2020, when he exercises his rights and acquires shares at a $100,000 discount compared to market value. 

On 15 March 2020 Max decided to sell those shares. By this time the market has dropped and he sells his shares for only $80,000 more than he paid for them.

If he was required to include the discount at the point of acquiring the shares he would have to declare the $100,000 discount as  income in his tax return and then declare a capital loss of $20,000 from the sale 15 days later. 

However, because he has sold them within 30 days of the deferred taxing point, he will only need to include the $80,000 discount that applied at the time of sale. 

However, if Max hangs on beyond the 30 day window and the share price drops he will get a capital loss but will be stuck paying income tax on the higher value.

Capital Gains Tax

Deferred Taxing Schemes

An ESS interest that is acquired under a deferred taxing scheme is taken to have been “re-acquired” immediately after the deferred taxing point.

For example:

Wilma is issued with options to acquire shares in her employer’s company on 1 January 2018. 

On 1 May 2020 Wilma exercised those options and acquired shares with a market value of $500,000. She only paid $300,000 for the shares, which means she included $200,000 of assessable income in her 2020 tax return for the discount realised at her deferred taxing point. 

On 1 December 2020 Wilma sells those shares for $600,000.

The $500,000 market value is her cost base, which means she has realised a $100,000 capital gain. 

Since 1 May 2020 is the acquisition date, she has not held the shares for over 12 months and is unable to apply the 50% CGT discount to that $100,000 gain. This means she will need to declare $100,000 in capital gains in her 2020 tax return. 

Forfeiture or Loss of ESS Interests

If an ESS interest is forfeited or lost then there are provisions to ensure that a person is not stuck with a tax bill, however the rules are highly technical and if you are in this position you should seek further tax advice. but they do not necessarily operate as some people may expect.

Being Prepared with ESS Interests

Managing your tax in relation to ESS interests can become complex and can result in cash flow difficulties.

Understanding and accessing any eligible tax concessions can also help reduce the tax burden. For instance, there can be significant tax incentives for early stage investors.

Because ESS discounts are a tax assessable benefit that is provided in the form of discounts on acquiring shares in the employer company, there is no cash income seen by the employee at the time the income becomes assessable to them. 

Since ESS discounts can see individual taxpayers with hundreds of thousands of dollars in assessable income, it is important that the taxing points are adequately prepared and planned for. 

In the event of termination of employment, this can be a double edged sword. 

Since employment termination is one of the triggers for determining the deferred taxing point, and loss of employment can also mean loss of income, some taxpayers can find themselves being assessed for high levels of tax, with low levels of cash to cover their tax requirements.

It is important to talk to your tax and finance specialists when receiving ESS interests, so you can be aware of contingencies and make necessary plans for tax and cashflow considerations. 

Our principal, Matthew Marcarian, was recently published in Australia’s leading tax journal, Taxation in Australia (run by the Tax Institute), with his article titled “Residency in a global pandemic: advising the returning Australian“.

A brief overview of the tax residency issues that have arisen with COVID can be read here.

In his article Matthew breaks down the intricacies of the rules regarding tax residency for expats who have returned to Australia during this global pandemic.

If you are an expat who has returned to Australia due to the pandemic you may have to seek advice on your tax position.

Matthew has over 20 years of international tax experience advising clients on cross border tax matters. His depth of knowledge in this area will give you the clarity you need to understand your tax obligations as a result of returning to Australia.

Contact us today to discuss your residency status.

As an Australian moving to Singapore there are a number of differences that you should be aware of in relation to taxation.

Having an idea of what to expect will help you to organise your move and understand your tax position so that you are more financially prepared.

You can download our guide: Moving to Singapore, here.

Taxation Basics

The most fundamental difference between Australia and Singapore is that in Singapore there is no CGT in Singapore and they do not generally tax investment income. Singapore also has a much lower rate of tax in their highest tax tier, which is one of the appeals for Australians considering a move to Singapore on a permanent basis.

Other key differences between Australia and Singapore’s taxation system include: 

• Financial year
• Terminology used
• What constitutes allowable deductions
• Which income is taxed
• How tax is paid. 

For instance, while you are taxed on your worldwide income as an Australian resident, Singapore only taxes residents on income that is actually sourced in Singapore. Read on to see some of the basic differences in taxation from an employment perspective.

Employment Taxation

As an Australian employee you would be familiar with the PAYGW system.

Pay As You Go Withholding ensures that your estimated tax is paid directly to the ATO through the year. Then, at the end of the year, you lodge your tax return and are either required to pay any additional tax owed, or are refunded any excess tax that the ATO received through the year.

Singapore is the opposite. All of your wages will be paid to you in full as an individual. Then you are required to pay your income taxes in full at the end of the tax year. This means you need to be careful to track and keep aside money to pay your tax bill. In your second year as a resident of Singapore you can pay your tax for the first year using a monthly instalment system.

You will also be used to working in a system where you can claim work related deductions to help bring your tax obligations down. In Australia any work expenses that your employer does not cover can be paid for yourself, then claimed as a deduction that reduces your taxable income. Singapore does not allow employees to claim tax deductions. This means you will want to be extra sure that your employer is covering your work related costs.

Another system you will be familiar with as an Australian worker is Superannuation. Your Australian employer is required to make superannuation contributions to your superannuation fund in order to fund your eventual retirement. The accrued superannuation balance is only able to release your superannuation to you in limited situations, such as retirement.

Singapore also has a retirement fund, the Central Provident Fund (CPF). However, this fund does not just serve as a retirement cash payout. Instead, it is intended to help save for housing and healthcare in retirement. Unfortunately for Australian expats, the CPF is not typically available. This means you may need to continue to build an Australian superannuation fund to plan for your own retirement.

Other Taxation Matters

Employment income is not the only source of income. While Australians are taxed on a range of income types, the Singapore tax regime is not the same.

Capital Gains Tax

Australians are required to pay tax on the sale of most capital assets, and in some situations they are even taxed on the deemed realisation of assets. Certain concessions, such as the 50% discount where the asset has been held for more than 12 months, can be applied. Singapore does not have a capital gains tax regime at all.

Goods and Services Tax (GST)

GST is a tax that applies in both Australia and Singapore on the sale of goods and services. GST is 7% in Singapore, whereas it is 10% in Australia. However, this doesn’t necessarily mean you end up paying less GST in Singapore overall. While Australia has a large range of supplies that are exempt from GST, including essential goods and services, Singapore only has a limited number of exempt supplies.

Investment Income

In Australia you are taxed on investment income at your own individual marginal tax rate. However you are also typically able to claim tax credits for any tax that the company has paid on income that is distributed to you.

In Singapore a company pays taxes on its own chargeable income. This is the final tax paid, and investment income that is passed on to shareholders is not taxed in their hands. (If the investor is a non-resident, they would only be liable for non-resident taxes in accordance with their country of residence).

Running a Company

If you plan to run a company in Singapore there are a wide range of requirements that you need to understand in terms of setting up and running the company. Not the least of these is that, from a taxation perspective, the first three years of operation are tax free for the first $100,000 of chargeable income. After this the company tax rate is only 17%. In Australia the company tax rate is currently 30%.

Tax Differences between Australia and Singapore

While there are some commonalities in the foundation from which the Australian and Singapore systems have grown, there are a lot of differences. These differences range from terminology to timing, what income is taxed, at what point it is taxed, and the tax rate.

As outlined above, there is an appeal in being taxed under the Singapore regime. For instance, the tax rates are lower, there is no CGT, and investment income is not typically tax in the hands of the individual it is distributed to. If you are considering making this move, ensure that you fully understand your personal situation and have a good understanding of whether you would be a Singapore tax resident. It is always important to speak to a professional advisor for a more detailed assessment of your specific situation.