In May 2015, the Abbott Government announced that, as part of its objectives for the Australian federal budget, it will reform the tax residency rules by creating tougher rules and higher income tax bills for the approximate 1.2 million temporary foreign workers who are granted work rights in Australia each year. Treasurer Joe Hockey announced that the reform is expected to raise up to $540 million AUD in tax revenue over the next three years. Without a doubt, this reform will impact many temporary foreign workers who enter Australia to work on a short-term basis.
Under the current tax code, the tax treatment for expatriates working in Australia turns on their classification as either (i) residents of Australia; (ii) nonresidents of Australia; or (iii) temporary residents. Nonresidents of Australia are taxed on their Australian sourced income at nonresident tax rates, unless they meet the residency requirements. Under the current system, foreign workers are treated as Australian residents if they have been in the country for more than six months, allowing them to qualify for various tax benefits including tax-free income for all income earned up to $18,200 AUD, as well as taxation at the lower tax rate of 19% for any income between $18,201 up to $37,000 AUD.
However, beginning July 1, 2016, foreign workers will be treated as non-residents for tax purposes, regardless of the length of their stay in Australia, which means that they will instead be taxed at 32.5% from the first dollar of income earned up to an $80,000 AUD threshold. Additionally, foreign workers will no longer qualify for the low income tax offset. Therefore, in comparative terms, the taxes paid by a temporary foreign worker who makes $18,000 AUD in a year will go from zero to $5,850 AUD, and the tax liability for a foreign worker who earns $37,000 AUD in a year will increase from $3,572 AUD to $12,025 AUD.
These changes will impact thousands of companies that utilize temporary working visas – such as the 457 or subclass 400 visas – to send temporary expatriate employees to Australia in order to complete certain projects, conduct employee training or meet short-term operational needs of the business. Companies who utilize these or other similar short-term Australian visas to send temporary workers to Australia on assignment will need to consider the impact that these changes will have on employee tax liabilities and whether a tax employee equalization strategy may be required.