Individual tax residency
Individuals often reallocate either to work overseas or to live in a foreign country. International relocation can cause an unintended change in tax residency and tax complications. With the increase in data-matching between the ATO and Department of Home Affairs passenger movement records and the existing visa data-matching program, tax residency remains one of the ATO’s priority compliance targets.
The tax residency of an individual determines which country has the taxing rights over an individual’s income. However, there is no bright line test in Australian tax law to determine the tax residency of an individual. Determining an Australian tax resident can be challenging as it depends on the individual’s intention, behaviour, the length of period in the country, family, business and employment ties, the maintenance and location of assets, and the individual’s social and living arrangements. No single factor is decisive on its own.
The tax residency of an individual affects the tax rates that apply to the taxable income that is derived by the individual. Generally, an Australian tax resident is taxed on their worldwide income and taxed at their marginal tax rates plus Medicare levy on their individual taxable income in excess of the tax-free threshold of $18,200. A non-resident is taxed on the Australian sourced income at higher marginal tax rates starting from 32.5% with no access to the tax-free threshold and is exempt from Medicare levy. However, interest, dividends and royalties are limited to the withholding taxes for non-residents.
In some cases, an individual may have dual tax residency and therefore is treated as a tax resident of two countries. In such a case, the tax residency would then be determined by the tie-breaker rules contained in the Double Tax Agreements between the two countries. The ‘tie-breaker rules’ in the double tax agreement may result in the employment income being taxable in the country where salary income is derived and may not be subject to tax in Australia.
A change of tax residency of an individual who is a trustee for a trust could potentially affect the residency of a trust as the residency of a trust is based on the central management and control of the trust or the residency of the trustee.
How our international tax specialist can help
At Ezzura Tax Advisory, our international tax expert can help you mitigate any potential tax risks that could arise from an unintended change in tax residency.
- Our tax services include:
- review the tax implications of your international work reallocation on your Australian tax residency
- provide guidance on mitigating the unintended potential tax risks
- provide advice and assistance to comply with Australian tax obligations
- review double tax agreements to ensure the correct tax is calculated
Foreign investment and property
Do you have an investment or asset in a foreign country? Have you declared your foreign income in Australia? Have you received gifts or loans from family members and/or related entities located overseas?
- At Ezzura Tax Advisory, we can help you in:
- preparing voluntary disclosure of foreign income to the ATO
- attending to the ATO’s audit
- providing guidance on the appropriate documents for a gift or loan from outside Australia
International business expansion
The global economy provides opportunities for businesses to expand offshore to increase revenues, gain market power and lower costs through economies of scale. Expanding business overseas also increases complexities in terms of tax compliance, registration, and other tax issues. The significant wave of reforms in the realm of the global economy has created a new international tax landscape that presents challenges to businesses.
Planning your global business expansion plays a pivotal role in ensuring your business tax structures provide tax-effective structure and do not result in unintended tax implications. The choice of any cross-border expansion broadly depends on the business activity, the duration of the business activities, the tax profile of the entities in Australia and foreign countries, and the tax implications of the future exit.
When expanding your business overseas, an Australian business can either sell directly to customers outside Australia or establish a foreign company or a foreign branch. Generally, the active business profit of a foreign company is not taxable in Australia or is comparably taxed in a listed country. The profit of a branch is also generally exempt in Australia.
How we can help
At Ezzura Tax Advisory, our international tax specialist can assist you in untangling the web of complexities in the realm of international taxation.
- Our tax services include:
- establish a tax-effective business structure that meets your business's commercial and strategic objectives
- advise on how the foreign expansion could be financed (debt or equity) and the tax implications of different finance structures
- advise on how the profits from foreign subsidiaries and branches are taxed in Australia
- advise on how the sale of foreign business or shares in the foreign subsidiary is taxed in Australia
- assist with tax reporting and disclosure requirements of cross-border transactions
- advise on how transfer pricing rules apply to your cross-border transactions
- advise on the Australian transfer pricing documentation requirements
Funding cross-border expansion
The foreign subsidiary would likely require funding from its Australian parent company to finance the working capital. The funding can be either in debt, equity or a mixture of both. Debt is more desirable than equity as interest on debt is deductible. Equity is less attractive, but a minimum level of equity is generally required in most countries.
Broadly, debt interest is deductible to the foreign subsidiary as the borrower and taxable to the Australian parent company as the lender. The deductibility of interest is subject to the debt or equity rules, the thin capitalisation rules, and transfer pricing rules under both foreign domestic tax law and Australian tax law. Any cross-border business expansion strategy would need to consider the implications of the new earnings-based rules of the Australian thin capitalisation rules as well as the new earnings-based rules of thin capitalisation rules in the foreign jurisdiction.
From an Australian tax perspective, interest income is generally taxable, whereas distributions from equity interest are Non-Assessable Non-Exempt (NANE) income.
Withholding tax must also be paid by a foreign subsidiary on interest and dividend payments to the Australian parent company. Australian company may be entitled to claim a Foreign Income Tax Offset (FITO) for the tax paid in the foreign country, to the extent the eligibility conditions of claiming FITO are satisfied.
How we can help
At Ezzura Tax Advisory, our international tax specialist can assist you in untangling the web of complexities in the realm of international taxation.
- Our tax services include:
- establish a tax-effective business structure that meets your business's commercial and strategic objectives
- advise on how the foreign expansion could be financed (debt or equity) and the tax implications of different finance structures
- advise on how the profits from foreign subsidiaries and branches are taxed in Australia
- advise on how the sale of foreign business or shares in the foreign subsidiary is taxed in Australia
- assist with tax reporting and disclosure requirements of cross-border transactions
- advise on how transfer pricing rules apply to your cross-border transactions
- advise on the Australian transfer pricing documentation requirements
Transfer pricing implications
Australian transfer pricing rules require the pricing of cross-border transactions between an Australian company and its foreign subsidiary to be priced under the arm’s length principle, as an independent entity that is dealing independently with others. The internationally acceptable transfer pricing methods are comparable uncontrolled price, cost plus method, resale price method, profit split method and transaction net margin method or comparable profits method.
A transfer pricing adjustment occurs if there is a transfer pricing benefit resulting from the difference between the price under the actual conditions and the arm’s length conditions. In Australia, transfer pricing documentation (TPD) is not mandatory, however, failing to prepare an appropriate TPD means the taxpayer does not have a reasonably arguable position (RAP) in respect of the pricing of their inter-entity transactions within the multinational group. The consequence of not having a RAP in the case of a transfer pricing adjustment by the ATO means the base penalty would be 25% of the shortfall amount if no tax avoidance or 50% of the shortfall amount if tax avoidance. However, if there is a transfer pricing documentation, the penalty is 10% of the shortfall amount if no tax avoidance or 25% of the shortfall amount if tax avoidance.
To establish a reasonably arguable position, an Australian entity of a multinational group is required to substantiate that the pricing is within arm’s length standard. This means appropriate transfer pricing documentation must be prepared by the lodgment of the tax return. In essence, the transfer pricing documentation must demonstrate the appropriate transfer pricing methodology that is consistent with the arm’s length principles, showing a comparability analysis of functions, assets, and risks, industry analysis, benchmarking analysis, and economic analysis.
Internal Dealings Schedule
Australian International Dealings Schedule must also be prepared if the total value of revenue, expenditure and loan balance amounts in respect of cross-border transactions exceeds AUD 2 million.
Cross-border inter-entity loans which are interest-free, are now considered high risk by the ATO and the transfer pricing documentation is required to demonstrate that no transfer pricing benefit is present unless the Australian entity can qualify for the Australian Simplified Recordkeeping Option.
Australia’s Simplified Recordkeeping Options
To reduce the compliance cost of maintaining a transfer pricing document, small businesses can rely on the safe harbour options under the Australian Simplified Transfer Pricing Recordkeeping Options (STPRO) provided they qualify for it. The simplified recordkeeping options are available for:
- Small taxpayers
- Distributors
- Intra-group services
- Low-level inbound and outbound loans
- Materiality
- Management and administrative services
- Technical services
It is crucial to ensure that the Australian entity is eligible and has appropriately elected to use a simplified recordkeeping option as an incorrect application and assessment of the STPRO means small businesses cannot rely on the safe-harbour options.
How we can help
At Ezzura Tax Advisory, our international tax specialist can assist you in untangling the web of complexities in the realm of international taxation.
- Our tax services include:
- establish a tax-effective business structure that meets your business's commercial and strategic objectives
- advise on how the foreign expansion could be financed (debt or equity) and the tax implications of different finance structures
- advise on how the profits from foreign subsidiaries and branches are taxed in Australia
- advise on how the sale of foreign business or shares in the foreign subsidiary is taxed in Australia
- assist with tax reporting and disclosure requirements of cross-border transactions
- advise on how transfer pricing rules apply to your cross-border transactions
- advise on the Australian transfer pricing documentation requirements
