NO.082

TAXATION OF EXPATRIATES

The Government will enhance the previously announced measure of providing

a tax exemption for certain foreign source income of expatriates resident in

Australia for less than four years. This measure was recommended by the Ralph

Review of Business Taxation and is to commence from 1 July 2002.

Recognising the vital importance to Australia of a competitive expatriate

taxation regime, the Government will make the following improvements to the

measure to ensure that it is fully effective.

• The exemption will apply to the foreign source income of eligible temporary

  residents from assets regardless of when acquired and to interest withholding

  tax on interest payments in respect of liabilities regardless of when incurred.

• No capital gain or loss will arise on the disposal by eligible temporary

  residents of assets not having the necessary connection with Australia, other

  than portfolio interests in Australian publicly listed companies.

• Periods of residence terminated more than ten years prior to the commencement

  of a current period of tax residence will be ignored in determining whether

  an individual is tax resident for the first time.

• Where the period of the temporary visa exceeds four years, the exemption

  will be available up to a maximum period of four years.

Removing impediments to the temporary employment of skilled foreign workers

will be of significant benefit for skill intensive industries and firms, and

assist in retaining and attracting corporate headquarters.

To ensure that the exemption applies consistently to New Zealand citizens

entering under special category visa arrangements, they will have access to

the exemption if they:

• are first-time tax resident (subject to the ten-year reset rule);
• have been resident in Australia for less than four years;
• are not eligible for Australian social security payments or Medicare (that

  is are not or are not treated as permanent residents); and

• have not applied for permanent residence in Australia.

The Government will also amend the existing exemption for temporary residents

from the foreign investment fund (FIF) rules, with effect from 1 July 2002.

The amended FIF exemption will be more generous in terms of its eligibility

requirements than the general foreign source income measure as FIF income is

taxed on an accruals basis, with potentially significant cash-flow difficulties

and double tax risks.

Under the existing exemption, taxpayers holding a temporary residents visa

are exempt from the FIF rules provided the period of the visa, or any extension

of a previous visa(s), does not exceed four years.

Under the proposed change, taxpayers holding temporary residents visas will

be exempted from the FIF rules regardless of the length of time for which the

visa has been held.

New Zealand citizens entering under special category visa arrangements will

have access to the amended FIF exemption if they are not eligible for Australian

social security payments or Medicare and have not applied for permanent residence

in Australia.

As a transitional arrangement, the existing FIF exemption will continue to

be available for New Zealand expatriates who qualify for the exemption up to

and including 30 June 2002 but only until their current period of residence

allowable under the exemption expires.

This measure is not expected to materially affect the forward estimates.

Departing residents and deemed capital gains

The Government is also aware of concerns relating to the capital gains tax

(CGT) treatment of departing residents, including expatriates.

Currently, individuals resident in Australia, including expatriates, who become

non-residents are liable for CGT on the unrealised gains on assets they own

that do not have a necessary connection with Australia, principally foreign

assets, via a deemed disposal rule. Such departing residents can elect to defer

CGT until an actual disposal occurs, but in that case they are also subject

to CGT on any gains that arise after their departure.

As an exception, an expatriate who has been resident in Australia for fewer

than five years during the previous ten years is exempt from the deemed disposal

rules for those assets they owned before becoming a resident or those acquired

because of someone’s death.

This CGT treatment of departing residents raises the costs of employing skilled

foreign workers in Australia. Unless an expatriate leaves within five years,

problems such as double tax, gains being inflated by currency movements and

cash-flow difficulties may arise.

The Government will seek to address these concerns on a country by country

basis through renegotiation of double tax agreements. In line with this approach,

the recently finalised protocol to the tax treaty with the US incorporates this

measure.

MELBOURNE

15 October 2001