Aussie Expat Tax Changes Create More Uncertainty

If you thought that the federal government's insulation rebate scheme was a bit of a disaster? Stand by for an even noisier reaction by temporary expat workers over the removal of the Section 23AG exemption in last year's federal budget.

Whilst we have covered this in previous newsletters, nine months after the announcement the issue is getting more, rather than less, uncertain.

There's a rising sense of panic among tax professionals, not so much about who the new tax measure will affect, which they approximately know, as about how it will actually work.

Without that, they can't advise their clients and they certainly won't be able to do their tax returns for them. Think shemozzle.

In 1986 the federal government and the tax office realised it was very hard to get people working overseas for a short time -- between 91 days and two years -- to pay Australian tax, so they gave them an exemption if they were paying tax elsewhere.

The cost of collecting the tax, by all accounts, was almost more than the amount raised.

It's fair to say a lot of smarties over time managed not to pay tax at all, which is not fair.

But your average short-term expat, often on a working holiday, usually found himself or herself paying tax if they worked in developed countries, thus avoiding the need to pay tax here.

Treasurer Wayne Swan stood up on budget night in May last year and announced that the removal of the exemption would net the tax office about $675 million extra over the three years of the forward estimates period, or $225m extra a year.

The belief in Treasury, the ATO and government ranks was that the measure would affect between 15,000 and 20,000 Australians each year. It's likely the number will be a great deal bigger.

Most of the dodgers will indeed start paying tax, but the number of Australian travellers suffering collateral damage with costly paperwork will be much greater.

Why haven't we heard much about this?

Because it's not widely known about, the government is hardly drawing attention to what will almost certainly be a public relations disaster, and people don't start thinking about tax until year-end anyway.

At that point returned temporary expats will start reluctantly calculating their tax liability and the ATO will start sending out nasty little notices to people working overseas asking for tax payments for the 2009-10 year, at the same levels as for employees in Australia.

The only way out of it will be to provide documentary evidence of having paid tax elsewhere, and if it's at a lower rate, they'll still be hit for tax here to make up the difference.

The only exceptions made clear in the budget are for Australians on government service, such as police and soldiers, and staff of some specified charities.

Sydney University Taxation Professor Michael Dirkis has provided The Australian with an alarming example of what could happen.

"Say a gap-year student from Australia works in an English pub for a few weeks for maybe pound stg. 200 ($345) a week that will all be taxable back in Australia.

"They've got to report the dollar equivalent in their Australian tax return and they'll only get a tax credit for UK tax paid if they file a UK tax return for the UK tax year, which I believe ends on April 15," he says.

"But most people haven't lodged tax returns for years in the UK, where the tax system relies on PAYE records, so they'll have to find a UK tax agent to prepare one," he adds, noting that the timing differences will create problems of their own.

The subtext of his comments is that the cost to the student of preparing the tax return could easily exceed the size of the tax credit claimed, but without claiming the credit, the student would be liable to pay tax twice.

"The tax commissioner has been given powers to make changes," he says, although it is unclear if any have yet been made.

Other experts in the area, who prefer not to be identified because they work closely with the tax office, make it clear that this is not just an issue of getting used to a fiddly new system, but a question in some areas of finding out how it's going to work at all.

One says it is still not clear whether the ATO will allow Australian employers to self-assess the amount of tax their expat employee should be paying, or whether, for instance, foreign employers of Australian residents should apply Australian levels of PAYE withholding tax. And what about fringe benefits tax, he says.

Another says the budget proposal "caused some serious concern for both individuals working offshore, usually in difficult locations, and also for their employers".

The concerns of both have been completely ignored, despite attempts at consultation through the normal Senate committee hearings process.

The general view in the tax industry is that the Treasurer's decision to abolish the Section 23AG exemption was in the same category as his other similarly timed budget measure: the ill-fated changes to employee share schemes, most of which have had to be changed again after a loud industry outcry about unintended consequences. They both smack of the Streaker's Defence: it seemed a good idea at the time -- in this instance an opportunity for the Treasurer to trumpet a new crackdown measure that would make life hard for tax dodgers and deliver massive savings to consolidated revenue.

The share scheme measure now won't do that, and we suspect the 23AG change will go the same way.

Perhaps the most ominous statement came from senior Treasury policy adviser Greg Wood, who was asked at a Senate Committee hearing in June if the government had considered whether people might alter their behaviour as a result of the introduction of the new measure, as usually happens when new taxes are brought in.

"I believe that the simple answer to that question is no," he said with admirable clarity.

"The costing, or that information, was prepared by the tax analysis division of Treasury, and it was based on historical data.

"As I understand it, no attempt was made to predict taxpayer behaviour in coming up with the figures."

Article Adapted From The Australian