Taxation of Foreign Earnings

14/07/2018 2:05 PM


In a major shakeup of the foreign earnings tax exemption that was previously in place, from 1 July 2009 foreign employment income earned by Australian resident taxpayers will in most cases no longer be exempt.

Under the measures in the new legislation, the general exemption from income tax on foreign employment income will only be available if the foreign service of the employee is directly attributable to any of the following activities:

  • an aid worker employed in the delivery of Australian official development assistance;
  • an aid or charitable worker employed by an organisation in providing overseas aid relief;
  • a specified government employee deployed overseas as a member of a disciplined force; or
  • an employee undertaking an activity of a kind specified in the regulations.

For all others, foreign employment income will be fully taxable in Australia at resident tax rates. Individuals will be able to claim a non-refundable tax offset for foreign income tax paid in the foreign jurisdiction.

Many foreign countries levy tax at a lower rate than Australia so most Australian residents who earn income overseas would pay less tax than they would if they had earned the income solely in Australia. As a result of the tax change, individuals will end up paying more tax in Australia than what they previously used to pay.

In order for employees to be able to claim the exemptions referred to above, the organisation needs to be one that is recognised by the Australian Taxation Office as a non-government charitable organisation. The Explanatory Memorandum to the Tax Laws Amendment (2009 Budget Measures No. 1) Bill 2009 details what type of charitable entities are eligible for this exemption and states:

`These paragraphs apply to a prescribed charitable or religious institution that is exempt from Australian income tax pursuant to item 1.1 or 1.2 of section 50-5 of the ITAA 1997`.

Note that the organisations do not necessarily have to be located in Australia and can include organisations that have a physical presence in Australia but incur their expenditure and pursue their objectives principally outside Australia.

If you are not recognised as an exempt charitable body under this new legislation, you will need to continue withholding PAYG from your employees working overseas as well as the possibility of superannuation and payment of FBT.

If you have any further questions relating to these tax changes, please feel free to contact either Shannon Burdeu or Tim Olynyk of Moore Stephens on (03) 9614-4444.

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