RSS Feed

Creation Date: Mon, 18 May 2009 GMT

Tax time bomb for overseas workers

THAT squeak and splash you just heard was the baby being chucked out with last week's budget bathwater.

That's in two clear cases, which is a small percentage in such a huge document, but it's important to see the damage that the demon of unintended consequences can wreak on law-abiding taxpayers when a government grabs the notion of a tax crackdown and runs with it.

Let's start with the removal of what's called the 23AG exemption on taxpayers who work outside Australia for periods between 90 days and two years.

Until now, anyone in that time category was given an exemption from paying tax in Australia as long as they were paying tax in the country where they are working.

Treasurer Wayne Swan's been told that there's around $675 million to be won in tax over the next four years by insisting that from now on those people will be taxed in Australia during that period, but if they pay tax overseas they'll get a tax credit so they won't find themselves paying double tax.

It's clear that a lot of people have been forgetting to pay tax anywhere, or at the very least enjoying a much lower tax regime in places like Hong Kong (15 per cent) or the Middle East, where in some parts there's no tax payable at all.

The catch is fairly easy to spot.

If they go to Hong Kong for the lower tax but they find themselves being asked to pay Australian tax, maybe they won't go.

Unless their take-home pay in Hong Kong, after paying Australian tax on their earnings, is markedly higher than it was before, they're not going to be tempted to climb on the plane.

We've been told that the 23AG exemption was brought in because the compliance costs of collecting tax from those people were almost the same as the consolidated revenue they actually earned -- around $250 million a year -- so someone sensibly brought the exemption in.

The other catch is that if you stay away for more than two years you can be classified as a non-resident and not pay any Australian tax at all -- as long, of course, as you're a resident somewhere else.

There are complications in store for people going to places like Saudi Arabia, where it's not easy to qualify as a resident, but by and large there is a giant temptation for expat Australians to stretch what might have been a one-year assignment into two years to reduce the tax burden.

But isn't it better to look at overseas postings from the point of view of how well people might do the job, rather than how long it might suit them to stay?

There are exemptions, by the way, for government workers, charity workers, military and the police, some of whom will be very glad to reduce their overseas posting, but clearly there are hundreds of thousands of others who will have to navigate their way carefully round the tax laws if they want to avoid a nasty surprise in the shape of a letter from the tax office waiting for them when they get home.

As one tax expert put it, it's a time bomb that's about to go off, as there's been so much high-profile fiscal policy stuff occupying the front pages since last Tuesday that only the experts have spotted the implications of the change.

The other big issue is the stuff about employee share schemes.

That's a grenade that got thrown late last week once the many people in the employee share scheme industry realised that the only people who will be able to carry on benefiting from such schemes will be those earning less than $60,000 a year. In their case they will be able to claim a tax exemption on the purchase of $1000 worth of shares every year.

The real aim of the crackdown is to corral some of the $90 million-plus a year of tax being stepped around by around 2000 senior executives in Australia who enjoy paying very low tax upfront on complex "performance option" schemes. In many cases, when they do finally sell shares, they pay capital gains tax at a much lower rate than the top marginal income tax rate that less sophisticated mortals find themselves paying.

Assistant Treasurer Chris Bowen said on Thursday that 85 per cent of employees going into share schemes would be earning too much to qualify for the $1000 deal, in which case they'll now have to pay tax upfront.

It's the paying tax upfront, rather than when people leave jobs or after 10 years, that looks set to kill the schemes off.

"Why they've chosen $60,000 a year is beyond me," says Gail Hambly, company secretary at longtime scheme operator Fairfax Holdings. She notes that most other government means tests are focused on incomes of $150,000 a year.

She made the point that because the number of people entering schemes is now going to be much smaller, a lot of them will be rendered uneconomic to run and will probably have to close down.

Ms Hambly is not alone. One of the useful services that the big professional firms provide in the wash-up of budget announcements is analyses of the detail, and every single one gave the employee share scheme plan the thumbs down.

Pricewaterhouse Coopers partner John Fauvet said it could force employees to pay upfront tax on shares they might not earn, "and may never earn", while his colleague Debra Eckersley noted that from the shareholders' point of view there will now be fewer employees whose interests are aligned with the shareholders' interests, if -- as is likely -- they don't go into employee share schemes.

KPMG said the announcement "significantly inhibits the use of executive share schemes as a form of remuneration and equity participation" and was "likely to have immediate and significant consequences for many employee share schemes currently in operation".

Lawyers Mallesons said the plan "may effectively remove the benefits of salary sacrifice share plans" and threw in that it would make it difficult for overseas equity offerings to be extended to Australian participants.

There are two possibilities emerging from all of this: one, that our elected representatives and their experts in Treasury have thought through all these issues, and despite everything we'll end up being happy as clams that they have applied so much brainpower to these existential dilemmas for our eventual benefit; or two, they haven't.

Let's wait and see.