2009 Australian Federal Budget - Impact on Expatriates

We've decided to retain this page on the site largely for historical reasons, and primarily because it provides some details around the changes made to s23AG, very much restricting its application.

It's been some months since the Budget was handed down and most of the provisions have been made into law - but we will retain this page for some time because of the continuing impact of some Budget provisions on Australian expats. This is particularly in relation to the changes to s23AG - for more up to date information on this issue go to our expat commentary page. Note that a summary of the 2009 Budget provisions can be found in this document from the ATO.

There were a number of changes in the 2009 Budget which had a significant potential impact on Australian expats:

1. Section 23AG - Exempt Foreign Income
 

The Treasurer indicated an intention to, "better target the exemption (provided by section 23AG of the Income Tax Assessment Act 1936)" - see the following page for a copy of the Press release .  The effect of the provisions was to severely limit the ability of Australian residents working overseas to claim tax relief/exemption on their earnings - particularly affected are Australians working on "fly in fly out" arrangements and on short term overseas assignments.  Under the new approach they pay normal levels of Australian tax and receive a credit for any tax paid in the foreign country (Foreign Income Tax Offset - FITO).

The press release mentioned, "Treasury will undertake stakeholder consultations concerning the legislation..", but since submissions by interested groups had to be made by within a matter of days it was reasonable to assume that the changes were a foregone conclusion and only issues around implementation were debatable.  So it proved.

Under the measures in the proposed legislation, the general tax exemption now only applies to income earned by:

• an aid or charitable worker employed by a recognised non-government organisation; or
• a government aid worker; or
• a specified government employee (for example, defence and police force personnel deployed overseas).

Income earned by an individual employed on an overseas project approved by the Minister for Trade as being in the national interest remain exempt as well, as it is under the existing rules. For all others foreign employment income will be fully taxable in Australia at resident tax rates.

Many foreign countries levy tax at a (much) lower rate than Australia so most Australian residents who earn income overseas pay less tax than they would if they earned the income solely in Australia. As a result of the change many individuals will end up paying considerably more tax in Australia.

We doubt that the Government has made a rational and sustainable distinction in this case - and it is unfortunate that these particular tax changes have been made in what  can be regarded as a hasty manner, without warning or consultation.

The effect of these provisions will be to place a great deal more emphasis on ensuring  that remuneration packages for temporary overseas assignments are carefully constructed for maximum tax efficiency.  However, this is unlikely to make up for the tax benefits lost and we expect that a number of Australians will now choose to move offshore and become non-residents for tax purposes.  This is not an option that will appeal to everyone, particularly those with settled families, but there are a number of ways that this can be organised in a practical and tax effective manner.  In fact there is already quite a large number of expatriate Australians living in various Asian countries  working in other countries on a rotating basis. We are already receiving requests for advice and assistance in this respect - see our expatriate blog for more up to date comments about proposed changes.

As a postscript, we understand that quite a few submissions were made to the Government regarding the proposed changes - focussing on a lack of equity and consultation, and the significant economic impact on employers and employees.  We understand that employers did meet with Government ministers to try and explain the adverse impact but this made no difference in terms of the legislation - even the Opposition's response to the legislation couldn't be described as "spirited".  Both employers and employees will need to think about basing themselves offshore if they want some degree of certainty. 
 

2. Foreign Investment Fund (FIF) Rules
 

The government has announced that the current FIF rules will be repealed and replaced with a "specific, narrowly defined anti-avoidance rule".

We applaud this - the current rules are far too complex - but on the premise that the changes will be "neutral" in revenue terms, and will be anti-avoidance in nature, we are expecting better grammar and transparency rather than a wholesale change in the nature of the provisions.  In any event, there will be an element of confusion in this area until the replacement provisions are tabled.

3. Contributions to Australian Superannuation and Access Age
 

The Government has announced that they will be, "reducing the cap on concessional superannuation contributions from $50,000 to$25,000 and the transitional cap for the over 50s from $100,000 to $50,000".  This does not directly affect expatriates, but they will often transfer their overseas pensions into superannuation using the non-concessional superannuation caps - and these have previously been expressed as three times (3 x) the concessional level.   Fortunately, the Government has specifically provided that the new multiple will now be six times (6 x) In effect, meaning that the process around pension transfers should be unaffected.

Of much more potential significance is that the Government is considering raising the access for Superannuation from a current minimum age of 55, to 67 - in line with the increase in the access age for the Aged pension. Over the last few years there has been a significant inflow into Australia from overseas pension funds, both migrant and Australian expatriate, seeking to benefit from the zero tax status of superannuation payments in retirement.  The change currently been considered, and an apparently increasing willingness of politicians to consider changing superannuation rules - the basis on which people make significant investment decisions - should see expatriates and migrants very carefully consider continuing with current or planned pension transfers until there is clarity.

The fact is that most overseas pension funds offer earlier access to funds than the age of 67 which the Government is effectively seeking - so retention in those funds, subject to tax advice - may be a better option.  Logic would suggest that any move to a later age for access to superannuation would be implemented on a staggered basis - but we are not convinced that this Government, on the basis that it is reacting to "crisis" conditions, has demonstrated a long term perspective 

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