You cannot avoid taxes, the tax man cometh from every direction

How to cover this… I have detailed taxation legalities, a lot of them after the ‘client case’ so that you can see how complicated this matter will become. No spoilers though….

Only way, straight to the point on this case ….

On arrival on the rock, I was asked to clear up a husband and wife’s SMSF income tax return lodgments, plus some small matters pertaining to Australian residency for the wife.

Seems that certain actions taken, others not, plus taxation office a bit testy.

Now this is straight forward, or would have been had not the client decided to approach the Auditor that I recommended… thereafter I was white anted, so to speak.

Going through culling files on the computer and started looking at all of the documentation and notes that I had prepared. A smile came upon my face.

My first thought….shit … yes I smile when something looks weird, maybe is weird and gets weirder. A lot of shit but a simple matter overlooked….maybe….but sweet revenge.

Quickly checked the dear diary, emails and notes. Brilliant. These arseholes are going to be in a lot of financial pain when the ATO does a spot check (and they will, even though a lot of so called tax experts say otherwise).

On this client, it is in the dates, between the date of the agreement that I was asked to do certain things and the date of being unceremoniously white anted, I confirmed by email…. basically for him to F.O. And I even informed the Auditor that I would cease and desist forthwith.

Now I did all the work, papers, minutes, letters, draft accounts (two separate accounts, one set that would save them a lot of money and the second set a normal set of accounts) both sets complying and certain documents ‘extracting a member/terminating benefits’… these together with draft tax returns ….. But and I love buts, as these clients decided not to pay my account, I did not hand over any documentation whatsoever.

What I did have on file though, was a photo of a letter I penned to the tax office for the wife, basically because they did not want to pay tax on a capital gain…. So I penned this letter stating that she was no longer a resident of Australia and that premises sold, was the principal residence for tax purpose. No capital gains tax….

Yes amazing how people try an avoid paying tax.

I love tax, believe me I really love tax and tax problems. It was my forte’ … Compliance is a big deal with the ATO and you just have to get all your I’s dotted and your T’s crossed. Dates perfect and cover your arse with notations to files and minutes. Works wonders if you have an audit or to attend the Administrative Appeals Tribunal, which by the way I had to do for this auditor once… Another story.

Anyway this letter, was dated, signed, sealed and despatched to the ATO. All subsequent documentation had this specific requirement in context. Brilliant, absolutely friggin genius.

So they will have a problem…. A financial one and a few fines to boot. The Auditor will most probably get a look see at this blog, so no spoilers.

Will let him tell his clients.

The legalities which will catch them was detailed in the 2012 budget, Bill Shorten (acting in his capacity as the Minister for Financial Services and Superannuation) announced an intention to implement measures that created a “reduction of higher tax concession for contributions of very high income earners.”

As a result, Division 293 (tax) of the Income Tax assessment Act 1997 (ITAA97) was introduced by the bill titled Tax and Superannuation Laws Amendment (Increased Concessional Contributions Cap and Other Measures) Act 2013, which received Royal Assent on 28 June 2013.

Now this piece of legislation was drafted to have ‘retrospective application’ and, therefore, Division 293 tax can apply in respect of superannuation contributions made from 1 July 2012.

The ATO commenced issuing Division 293 tax notices of assessment (January 2014) in respect of superannuation contributions made within the year ended 30 June 2013. Given the complex nature of the legislative provisions it will impact them, especially if they ever seek to return to the land down under.

What is Division 293 tax?

Generally, concessional (pretax) contributions made to a superannuation fund are able to access a 30% concession from the top marginal rate of tax, bringing the effective tax rate on these contributions to 15% (i.e., 45% to 30%) within the fund.

What Division 293 of the ITAA97 seeks to do is reduce this concession to 15% where the contributions are made by a high- income earner. Important point in context and in this case to the amount of superannuation contributions made in a bulk lot.

There are a few Government Departments involved in information sharing, specifically focusing on various overseas employment tax and Australian immigration requirements.
There are ongoing compliance obligations, in superannuation and ex-pats seeking to return to Australia will see the practical flow-on implications of previously legislated superannuation reforms coming into play.

The ATO are increasingly recognizing tax and immigration risks associated with expatriate employees and are keen to mitigate penalties relating to inappropriately classified contractor arrangements. Also individual tax lodgment requirements are necessary, whilst outside of Australia. Just go to the ATO website for ex-pat tax lodgment requirements and there is an income test, insert $1 and hey presto, lodge a tax return.

Division 293 tax is usually a reference to the additional 15% tax charged on ‘taxable contributions’ made for high-income earners. In this context, high-income earners are individuals who have income for surcharge purposes (disregarding reportable employer superannuation contributions) and ‘low-tax contributions’ greater than $300,000.

Low-tax contributions are in essence the concessional contributions (including Superannuation Guarantee and salary sacrifice), less any contributions subject to excess contribution tax, plus contributions for defined benefit interests.

The Division 293 tax applies to the lesser of the low-tax contribution and the amount above the $300,000 threshold.

Assessment and payment

The ATO collates information from the individual’s income tax return and their relevant superannuation fund (or funds). The amount of Division 293 tax is assessed by the ATO and will generally be due and payable within 21 days from the date the notice of assessment is issued by the ATO.

Individuals are authorized to have amounts released from their superannuation benefits for the payment of Division 293 tax (or reimbursed if the individual has already paid the tax), but this must occur within 120 days of the date of issue of the notice of assessment. The due date for payment of the tax remains the date advised on the notice of assessment.

Specific rules

There are specific rules for defined benefit interests (particularly in relation to determining the amount of the contribution for surcharge calculation purposes and when the surcharge needs to be paid), constitutionally protected state’s higher-level office holders, certain commonwealth judicial officers, and temporary residents who depart Australia.

Individuals are entitled to a refund of any Division 293 tax paid if:

* They made a Division 293 tax payment,
* They received a Departing Australia Superannuation Payment (DASP), and
* They applied to the Commissioner of Taxation in the approved form for the refund.

The amount of the refund will be the sum of all payments made towards any Division 293 tax assessments an individual made while a temporary resident in Australia. However, if the individual becomes a permanent resident during an income year, and a payment is made towards a Division 293 tax liability in that income year, that payment will not be refunded.

Legalese I call it, the nitty gritty stuff that cannot be avoided when writing anything on tax law, as it is in these absolute words that have strict meaning. Now the auditor didn’t do one, maybe two things which are mentioned above. I know this has he would have not read the legislation, on the basis that the sum in total was $300,000 only, plus it was technically before legislation took effect.

I read the report issued by the NTAA when it was in Bill form and it was plain to me that simple superannuation practice rules being implemented covered all superannuation funds. I had made provision for this …. Anyway history.

Now we look at what constitutes an Australian resident, vitally important, and basically extracted from NTAA notes.

Tests of Residency

The issue of residency is complicated, and is very much dependent upon an individual’s personal circumstances. However, the importance of clarity around the issue of residency and expats obtaining appropriate advice is important. The ATO place a considerable focus on this issue – and particularly where the expat is based in an area such as the Middle East with no income tax or in a third world country where no income tax returns were lodged. A failure to address this issue can constitute an incredibly expensive mistake.

An individual is primarily a resident of Australia for taxation purposes if he or she resides in Australia within the ordinary meaning of the word “resides”. However, residence in the normal sense is quite different from domicile and nationality. For example, a taxpayer may be held to be resident in Australia, “even though he or she lived permanently abroad, provided he visited Australia as part of the regular order of his life.”

A person need not “intend to remain permanently in a place” to be found to reside there, but it seems that where the relative length or shortness of their stay in Australia is not decisive, the circumstances in which the person went and stayed have to be considered. The Taxation Office treats every case on its own particular merits.

Some common situations, and the ATO’s approach in terms of residency, are covered below:

If you go overseas temporarily, anddo not set up a permanent home in another country you may continue to be treated as an Australian resident for tax purposes.

If you are an overseas student enrolled in a course at an Australian institution that is more than six months long then you are generally treated as a resident for tax purposes.

If you are visiting Australia for more than six months and for most of that time work in the one job and live at the same place you are generally treated as a resident for tax purposes.

If you are holidaying in Australia, or are visiting for less than six months you will generally not be considered an Australian resident for tax purposes.

If you migrate to Australia, and intend to reside there permanently then you are generally considered to be an Australian resident for tax purposes from the date of your arrival.

If you leave Australia permanently you will generally not be considered an Australian resident for tax purposes, from the date of your departure.

There are four tests of residency contained within the definition of ‘resident’ in subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 36) this is the original tax Act. These are alternative tests in the sense that even if an individual is not a “resident” according to ordinary concepts [see ‘a’ below] within the common definition, they may fall within one of the other tests.

There are four main tests for residency:

Residency – the “resides” test
Residency – the “domicile” test
The 183 day rule, and
The Superannuation test

(a) Residency according to ordinary concepts

This test provides that whether a person resides in Australia is a question of fact that depends on all the circumstances of each case, with the following factors to be considered:

If the person returns to the country of origin – the frequency, regularity and duration of those trips and their purpose can be decisive factors. If the only reason for the person’s absence from Australia is business, this may not be enough in itself to support a claim that the person is not a resident.

The extent of family and business ties which the person has, in Australia and in the country of origin.

Whether the individual is accompanied by his or her family to Australia and on return trips to the country of origin.

Whether the person is employed in the country of origin.

Whether a place of abode is still maintained in the country of origin or is available for the person’s use while there.

Whether personal effects are kept in Australia or in the country of origin.

The extent to which any assets or bank accounts are acquired or maintained in Australia and in the country of origin.

Whether the migrant has commenced or established a business in Australia, and

(b) The domicile test

An individual is a resident of Australia under the domicile test if he or she has a domicile in Australia, unless the Commissioner is satisfied that the person’s permanent place of abode is outside Australia.

Under the Domicile Act 1982 , a person acquires a domicile of choice in Australia if the person intends to make his or her home indefinitely in Australia. The domicile test is discussed in Taxation Ruling IT 2650. Domicile generally means the country you were born in unless you migrate to another country – then you adopt a “domicile of choice”.

(c) The 183 days test

A returning expatriate, or new migrant having regard to their terms of their migrant visa, who is present in Australia for more than 183 days (continuously or intermittently) in a tax year is, generally speaking, a resident of Australia under the 183 days test.

This is unless the Commissioner is satisfied that his usual place of abode is outside Australia and that he does not intend to take up residence.

(d) The Superannuation Test

This is a “statutory” test and an alternative to the ordinary tests of residence – that is to say that individual’s may be “residents” under this test when they do not in any way reside in Australia in the ordinary sense. In effect individuals are “deemed” to be residents if they “are an eligible employee for the purpose of the Superannuation Act 1976 or is the spouse or a child under 16 years of age of such a person.

This test applies mainly to people working for the Australian Government overseas, but take note it is a statutory test that has implications for people that think that they are ‘non residents’.

Dual Residency

It is possible for an individual to be tax resident in two countries concurrently, in other words to have dual residency – since the fiscal authorities may not apply complementary rules.

Additionally, the fact that you are no longer resident in your prior host country, or country of origin if you are a migrant, does not necessarily mean you are resident in Australia – that will be a question determined in all the circumstances and having reference to the rules above.

Employed by a non Australian Based Parent Company?

Non Australian based parent companies are not meeting their ESS (share awards or share options as bonus or salary) reporting obligations in Australia. The Australian subsidiary is usually not aware of the ESS interests awarded by the non-Australian-based parent company to employees now living and working in Australia.

Therefore, the ATO has increased its scrutiny surrounding the compliance of foreign providers with ESS reporting obligations. This has been demonstrated by a number of recent changes:

* The ESS annual report paper form has been updated to contain a tick box for companies that do not have an Australian Business Number (ABN) (i.e., foreign companies).

* The ATO’s electronic ESS Bulk Load Excel Spreadsheet allows for the ABN field to be completed with a zero if an overseas address is entered (intended for foreign companies).

* The ATO has ensured that its website and communications refer to the “provider” rather than “employer” where ESS reporting is concerned.

n 2013, the ATO also released an announcement clarifying its position in respect of participants who are taxable only on a portion of the gain in Australia as a result of being resident in another country during the life of the award.

Where the provider is able to calculate the portion of the gain assessable to a mobile employee, the provider should report the actual assessable amount of the gain (after taking into account foreign service).

If the actual amount cannot be reported by the due date, the provider should:

* Report the gross amount by the due date, and

* When known, report the actual amount on an amended ESS statement to the employee and an amended ESS annual report to the ATO.

Providers should ensure that they report the actual assessable amount (taking into account any period of foreign service) where possible. This will avoid mismatches arising when the ATO subsequently compares data from ESS annual reports with employees’ tax returns.

Now those ‘working in Indonesia

Consult your tax accountant, as to your residency, Australian tax resident or non tax resident. It is important, as I have spoken to a few people and they are vague in the facts.

Determination of tax residency status is based on various facts as listed above. Suggest you consult with your tax accountant to determine your residency status.

If you are a non resident working in Indonesia you still have to pay tax, Indonesian Tax law can be located at this website.

Now, as in Australia …. Indonesian resident taxpayers are subject to tax on worldwide income. Non residents are subject to tax on Indonesian-source income only. Individuals are considered resident if they reside in Indonesia; if they are present in Indonesia for more than 183 days within a 12 month period.

There is a dual tax treaty with Australia so no double taxation on earnings in Australia, but..

Yes always a will have to lodge a tax return in Australia on earnings from Australia, you will be taxed accordingly and you must declare foreign income and the tax paid to the foreign tax office, as you get a credit for taxes paid abroad and would be subject to Indonesian additional tax, only if the Indonesian tax rate is higher.

In such case, you would pay the difference.

Resident Taxpayers are liable for tax on the their total income, including income received or accrued from offshore. To lessen the possibility of double tax burden due to imposition of tax upon income earned offshore, the ‘double taxation’ provision provides the determination of income tax paid or payable in foreign countries, which is creditable against the tax payable on total income of a resident Taxpayer.

Nice international tax guide here.

Now why did I bring this up…. Oh yes…if you move back to Australia and transfer funds to an Australian Bank account you will be asked to provide all income tax returns from your Country of residence to prove that you paid tax on these monies. So think about that for a minute, any sale of real estate and/or business will be scrutinized and reviewed with bank statements to ensure that you have correctly declared income and paid the requisite tax.

If you have not lodged any tax returns then you will be taxed in Australia on the monies that you transfer to Australia, unless of course it came from Australia in the first place and did not earn interest in the bank account where you placed these funds. Bank statements will be required, together with an explanation as to how you survived so long on nothing.


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