Analysis of Australian Income Tax for Foreign Residents (BLO5539)

This report delves into the intricacies of Australian income tax as it pertains to foreign residents, offering a comprehensive analysis of the tax implications. It begins by defining residency under Australian law and outlining the various tests used to determine an individual's residential status. The report then elucidates the tax treatment of foreign residents, emphasizing the differences in taxation compared to Australian residents, including the scope of taxable income and eligibility for deductions and exemptions. A key focus is on the tax rates applicable to foreign residents, including the implications of tax treaties. The report highlights the implications of tax treatments for foreign residents, such as the removal of capital gains tax exemptions and the application of the Foreign Resident Capital Gains Withholding (FRCGW) rules. The discussion incorporates relevant legislation, case law, and budget announcements, providing a detailed overview of the subject matter.

Running head: TAX
Tax
Name of the Student:
Name of the university:
Authors Note:

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Table of Contents
INTRODUCTION:....................................................................................................................2
DEFINITION:............................................................................................................................2
TAX TREATMENT FOR FOREIGNERS:...............................................................................4
DIFFERENCE BETWEEN RESIDENT AND FOREIGN RESIDENT IN TAX
CONSEQUENCE:.....................................................................................................................5
WHEN A PERSON IS CONSIDERED A FOREIGN RESIDENT UNDER AUSTRALIAN
TAXATION LAWS:..................................................................................................................6
Tax Rates for Foreign Residents:...............................................................................................6
IMPLICATION OF TAX TREATMENTS FOR FOREIGNERS:...........................................7
CONCLUSION:.........................................................................................................................8
References................................................................................................................................10

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INTRODUCTION:
The object of this paper is to identify the tax consequence of foreign residents in Australia.
Tax treatment differ from what it is for Australian residents and how foreign residents are
treated when it comes to taxation. Basically, this paper gives a detailed report of how foreign
resident are treated in case of income tax under the current Australian tax system. Here
foreign resident does not only mean individual but also foreign business entities. The tax
treatment will of course differ between residents of Australia and non-residents of Australia
earning income in Australia. But anyone earning income in Australia, either a resident or a
non-resident has to pay tax for any gains made from transactions. Australian residents may
have provisions for taxation relief but when it comes to non-residents very less or almost no
relief is given by the Australian tax laws. Further, we have a detailed report on the
implications of different tax treatments for the non-residents.
DEFINITION:
According to section 995 of ITAA 1997, a resident of Australia is a person who stays in
Australia and in a resident of Australia to do income tax assessment and who ever does not
fall under the ambit of this definition is a Foreign resident. Now of course there are tests to
determine the residential status of an individual as given in the taxation laws under section
995 of the said act. So to find out that an individual is a resident of Australia or not, we have
different rules as prescribed by the statute. So those rules are: i) the ordinary concept rule, ii)
the domicile rule, iii) the 183 days rule, iv) the commonwealth superannuation fund rule. For
the purpose of this act, a foreign resident is needed to include any ordinary income in the
computable income under section 6-5 of ITAA 1997. It says that any income generated either
directly or indirectly from sources in Australia during the economic year1. A non-resident for
tax related issue must declare any income generated in Australia, including:
1 Berns, Sandra. Women Going Backwards: Law and change in a family unfriendly society. Routledge, 2017.

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 Income from employment
 Income from rent
 Earning from pension and annuities
 Income from CGT event
Explanation of four rules in determining residential status:
I) Ordinary concept rule: This basically means a person who normally resides in
Australia and in order to declare yourself as an Australian citizen one must pass
the ‘Common Law test’2.
II) Domicile Rule: In this rule, the duration of actual stay in Australia is considered.
The word domicile represents the geographical location. Thus, in order to
determine the status, the actual physical stay of an individual in the Australian
land is considered3. The 'Domicile Rule is applicable principally to individual
domiciled in Australia, and the Commonwealth Superannuation Fund Rule is
principally objected to determine that Australian ambassadors and other
Commonwealth government bureaucrats who are working in Australian posts
outside Australia are taken in to account to be residents for Australian financial
purposes.
III) 183 days rule: In the case of “FCT v Pechey”, it was decided that an individual is
a resident if the person has stayed for a considerable time period. This stay can be
continuous or intermittent during one half of a year.
2 Gitman, Lawrence J., Roger Juchau, and Jack Flanagan. Principles of managerial finance. Pearson Higher
Education AU, 2015.
3 Edwards, Alexander, Todd Kravet, and Ryan Wilson. "Trapped cash and the profitability of foreign
acquisitions." Contemporary Accounting Research 33, no. 1 (2016): 44-77.

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IV) Commonwealth superannuation fund: This rule was made with the object
Australian ambassadors and other commonwealth government bureaucrats
registered in Australian post outside the country are considered to be resident for
purpose of income tax calculation.
TAX TREATMENT FOR FOREIGNERS:
A foreigner who makes up his mind to start trade in Australia must keep in mind things that
are important in doing business there and for income tax purpose. Australia has its own
policy of meeting its labour requirement and allows. This being the situation, he should
acquire a fitting visa before his take-off. The visa will present lawfulness on the outside
person's quality in Australia, however won't as such give Australian living arrangement. The
tax collection regulations of most nations require a specific level of connection or association
between the person to be burdened and the region specified. The term 'living arrangement'
itself suggests a specific proportion of changelessness to a person's essence in a specific
place, in spite of the fact that at customary law it is a less extreme idea than home4.
As this paper considers not only individual but business entities too, In Australia, living
arrangement is one of the two basis which bring a person inside the jurisdictional territory of
the administration for financial purposes5.
Indeed, the Commonwealth government may force Australian income laws onto pay inferred
under an agreement went into and completed in another nation, gave that the individual
concerned is an Australian occupant. As such, habitation is a trial of additional regional
purview. Subsequently, the topic of regardless of whether an outside person is under contract
4 Jimenez, Peggy, and Govind S. Iyer. "Tax compliance in a social setting: The influence of social norms, trust
in government, and perceived fairness on taxpayer compliance." Advances in accounting 34 (2016): 17-26.
5 Picciotto, Sol. "Indeterminacy, complexity, technocracy and the reform of international corporate
taxation." Social & Legal Studies 24, no. 2 (2015): 165-184.

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to work together in Australia will be considered to be an inhabitant for expense arising in
Australia purposes will drastically influence the measure of duty exacted on the wage
produced by the exchange. An occupant from Australia is subject to assess on his overall pay,
while a non-occupant is just at risk to charge on his salary generating in Australia. Then
again, just Australian inhabitants are qualified for certain statutory discounts and concessions.
DIFFERENCE BETWEEN RESIDENT AND FOREIGN RESIDENT IN TAX
CONSEQUENCE:
1) The main difference resident and non-resident in tax status is that, non-
residents cannot claim for low tax threshold. Thus, for foreign resident income
is taxed for every dollar they earn whereas for ordinary resident there are
scopes of deduction and exemption6.
2) A foreign resident is taxed on the income they earn in Australia and not
outside Australia where as in case of residents they are taxed for every income
they earn, whether within Australia or outside Australia which they later bring
into Australian land7.
3) People who are resident pays for Medicare and can claim medical expense
when required but in case of a foreign resident, there is not Medicare liability
and cannot claim for medical expenses.
6 Adam Cobb, J. "How firms shape income inequality: Stakeholder power, executive decision making, and the
structuring of employment relationships." Academy of Management Review 41, no. 2 (2016): 324-348.
7 Zucman, Gabriel. "Taxing across borders: Tracking personal wealth and corporate profits." Journal of
Economic Perspectives 28, no. 4 (2014): 121-48.

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4) For residents, income is calculated at a marginal tax rate but for a non-resident
interest rate is flat 10% and 45% if no tax file number is provided8.
5) A resident of Australia is liable for Capital gain tax on assets a person owns
worldwide but a foreign resident is liable for capital gain tax for properties
within Australia only.
6) As mentioned earlier, for residents there are scopes for exemption or tax offset
and allowances but for non-resident there are no scope for any leniency or tax
offset9.
WHEN A PERSON IS CONSIDERED A FOREIGN RESIDENT UNDER
AUSTRALIAN TAXATION LAWS:
Here are some situations when an individual is treated as foreign resident for tax purpose:
 When an individual is staying Australia for less than six months and mostly during
that time period he is travelling and employed in various part of Australia.
 When an individual is having a vacation in Australia or visiting Australia for any
purpose when he earns money in less than six months.
 When an individual leaves Australia permanently.
8 Chapman, Bruce, Philip Clarke, Timothy Higgins, and Miranda Stewart. "Income Contingent Collection of
a'Brain Drain Tax': Theory, Policy and Empirical Potential." Population Review 54, no. 2 (2015).
9 Langenmayr, Dominika. "Voluntary disclosure of evaded taxes—Increasing revenue, or increasing incentives
to evade?." Journal of Public Economics 151 (2017): 110-125.

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Tax Rates for Foreign Residents:
Taxable income Tax on this income
0 - $90,000 32.5c for each $1
$90,001 - $180,000 $29,250 plus 37c for each $1 over $90,000
$180,001 and over $62,550 plus 45c for each $1 over $180,000
IMPLICATION OF TAX TREATMENTS FOR FOREIGNERS:
1) Removal for Capital Gain tax exemption for foreign residents- For claiming
exemption on CGT event there has to be main residence or permanent dwelling,
which, in case of a foreign resident is absent and thus cannot claim for the same. In
2017-18 budget the Australian government declared that outside residents are not
eligible to claim the main residence exemption where they sell property in Australian
land. Such exemption was valid till 9th May 2017 after which amendment of law took
place10.
2) New rule for foreign resident capital gains withholding (FRCGW) is applicable to
individuals selling property in Australia under contract. When seller of such property
is a foreign resident the buyer must pay 10% or 12.5% of the price towards the ATO
as a FRCGW11.
10 Aktaev, Nurken Erbolatovich, Kristina Alekseevna Bannova, A. S. Balandina, I. N. Dolgih, N. V.
Pokrovskaia, U. A. Rumina, Anna Borisovna Zhdanova, and K. N. Akhmadeev. "Optimization criteria for entry
into the consolidated group of taxpayers in order to create an effective tax mechanism and improve the social,
economic development of regions in the Russian Federation." Procedia-Social and Behavioral Sciences 166
(2015): 30-35.
11 Abdmouleh, Zeineb, Rashid AM Alammari, and Adel Gastli. "Review of policies encouraging renewable
energy integration & best practices." Renewable and Sustainable Energy Reviews 45 (2015): 249-262.

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3) The most important factor of being a resident is the intention to stay which is a valid
law in most of the countries. Thus the physical presence is necessary under provision
6-5 of ITAA 1997. In the case of “FCT v Applegate”, the issue was whether the
resident is indeed a resident for the purpose of tax. Justice Fisher said that, the
intention to return is important.
4) Tax consequence- a foreign resident is someone who has stayed outside Australia for
a period of less than 183 days in that financial year as prescribed by the statute.
This kind of residents are treated in following ways:
 They are taxed on Australian source of income and Australian taxable
property.
 Have a tax rate of 45%
 Pays and gets no capital gain tax exemption on the disposal of assets.
 Special rule for foreign resident requires foreign resident to repay their HELP
debts at the same rate at which ordinary resident assess their worldwide
income. This makes sure that the foreign resident who may earn substantial
amount of income overseas12.
CONCLUSION:
Taxable income is generated whenever there is earnings or gains, be it for a resident under
section 6 of ITAA or a foreigner under section 995 of ITAA 1997. The treatment of course
12 Johannesen, Niels, and Gabriel Zucman. "The end of bank secrecy? An evaluation of the G20 tax haven
crackdown." American Economic Journal: Economic Policy 6, no. 1 (2014): 65-91.

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differs for a resident and non resident but in case of foreign resident the tax laws are more
punishing as they are not entitled to a lot of benefits which can be claimed by being a
resident. The principle difficulty in applying ordinary rules to a foreign resident is the
doubtfulness of intention to stay. Thus considering the rules of 183 days and Domicile rule
given in the ITAA 1997, it is easy to determine whether an individual will be taxed as an
ordinary resident or a foreign resident13.
There are complications in treating foreign resident for tax purpose. There are various
provisions that gives rules regarding treatment of a foreign resident such as section 83.235 of
ITAA 1997, section 118.435 of ITAA 1997 which talks about rules relating investment as a
foreign resident in Australia. Both individual and business entities have prescribed rules to
deal with various situations in case of foreign entities. It is clear that foreign residents are
taxed on income earned in Australia under section 6-5(3) which talks about Australian source
and how someone is considered a foreign resident by applying the given tests in the statute.
Even the new ATO rule prohibits foreign resident from acquiring certain kinds of property14.
When it comes to business entity, a company is considered Australian if it is registered in
Australia and operates business in the same land and even has the central control and
management in Australia15. However, there is tiny scope for foreign business to claim
exemption under section 855-10 of ITAA 1997, where foreign resident does not consider
capital gain or loss event and a similar rule is applied to temporary resident also. Under
section 118-110 if ITAA 1997, the exemption of main resident cannot be claimed by foreign
resident as per the new government regulation in the budget of 2018, but whoever holds
13 Hertel-Fernandez, Alexander, and Cathie Jo Martin. "How employers and conservatives shaped the modern
tax state." In Worlds of Taxation, pp. 17-48. Palgrave Macmillan, Cham, 2018.
14 Isa, Khadijah. "Tax complexities in the Malaysian corporate tax system: minimise to maximise." International
Journal of Law and Management 56, no. 1 (2014): 50-65.
15 Silver, Natalie, Myles McGregor-Lowndes, and Julie-Anne Tarr. "Delineating the fiscal borders of Australia's
non-profit tax concessions." eJTR 14 (2016): 741.

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property at 7.30 pm on 9th May 2017 is allowed to claim exemption until June 2019 as the
law is prospective in nature and not retrospective16. The main provision of section 855-10 of
ITAA 1997 which says that foreign resident is only entitled to capital gain event if the same
event asset is taxable Australian property. Lastly under subsection 802-A of ITAA 1997,
foreign residents are exempted from paying tax on their conduit foreign income.
References
Berns, Sandra. Women Going Backwards: Law and change in a family unfriendly society.
Routledge, 2017.
Gitman, Lawrence J., Roger Juchau, and Jack Flanagan. Principles of managerial finance.
Pearson Higher Education AU, 2015.
Edwards, Alexander, Todd Kravet, and Ryan Wilson. "Trapped cash and the profitability of
foreign acquisitions." Contemporary Accounting Research 33, no. 1 (2016): 44-77.
16 Snape, John, and Jeremy De Souza. Environmental taxation law: policy, contexts and practice. Routledge,
2016.

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Jimenez, Peggy, and Govind S. Iyer. "Tax compliance in a social setting: The influence of
social norms, trust in government, and perceived fairness on taxpayer compliance." Advances
in accounting 34 (2016): 17-26.
Picciotto, Sol. "Indeterminacy, complexity, technocracy and the reform of international
corporate taxation." Social & Legal Studies 24, no. 2 (2015): 165-184.
Adam Cobb, J. "How firms shape income inequality: Stakeholder power, executive decision
making, and the structuring of employment relationships." Academy of Management
Review 41, no. 2 (2016): 324-348.
Zucman, Gabriel. "Taxing across borders: Tracking personal wealth and corporate
profits." Journal of Economic Perspectives 28, no. 4 (2014): 121-48.
Chapman, Bruce, Philip Clarke, Timothy Higgins, and Miranda Stewart. "Income Contingent
Collection of a'Brain Drain Tax': Theory, Policy and Empirical Potential." Population
Review 54, no. 2 (2015).
Langenmayr, Dominika. "Voluntary disclosure of evaded taxes—Increasing revenue, or
increasing incentives to evade?." Journal of Public Economics 151 (2017): 110-125.
Aktaev, Nurken Erbolatovich, Kristina Alekseevna Bannova, A. S. Balandina, I. N. Dolgih,
N. V. Pokrovskaia, U. A. Rumina, Anna Borisovna Zhdanova, and K. N. Akhmadeev.
"Optimization criteria for entry into the consolidated group of taxpayers in order to create an
effective tax mechanism and improve the social, economic development of regions in the
Russian Federation." Procedia-Social and Behavioral Sciences 166 (2015): 30-35.
Abdmouleh, Zeineb, Rashid AM Alammari, and Adel Gastli. "Review of policies
encouraging renewable energy integration & best practices." Renewable and Sustainable
Energy Reviews 45 (2015): 249-262.

12TAX
Johannesen, Niels, and Gabriel Zucman. "The end of bank secrecy? An evaluation of the G20
tax haven crackdown." American Economic Journal: Economic Policy 6, no. 1 (2014): 65-91.
Hertel-Fernandez, Alexander, and Cathie Jo Martin. "How employers and conservatives
shaped the modern tax state." In Worlds of Taxation, pp. 17-48. Palgrave Macmillan, Cham,
2018.
Isa, Khadijah. "Tax complexities in the Malaysian corporate tax system: minimise to
maximise." International Journal of Law and Management 56, no. 1 (2014): 50-65.
Snape, John, and Jeremy De Souza. Environmental taxation law: policy, contexts and
practice. Routledge, 2016.
Silver, Natalie, Myles McGregor-Lowndes, and Julie-Anne Tarr. "Delineating the fiscal
borders of Australia's non-profit tax concessions." eJTR 14 (2016): 741.