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Taxation
i Income tax for employeesDetermining residence of an employeeUnder Australian domestic law, Australian resident taxpayers are assessed on their worldwide income. An employee would usually include employment income in their assessable income in the income year in which it is received in cash (rather than when the entitlement to receive the amount accrues to the employee).
Non-resident individuals are generally assessed only on income derived directly or indirectly from sources in Australia (subject to certain exemptions). In particular, non-residents may be liable for withholding tax on dividends, interest, certain managed investment fund payments and royalties from Australian entities. Non-residents may have relief from double taxation under a double tax agreement if they are a resident in a country with which Australia has formed such an agreement.
A person may be a resident of Australia under Australian domestic law if they satisfy either a common law test or one of three statutory tests.
Individual taxpayers will be considered residents under the common law test if they reside in Australia. The term 'resides' takes on its ordinary meaning as 'to dwell permanently, or for a considerable time, to have one's settled or usual abode to live in a particular place'. Whether a taxpayer resides in Australia will be a question of fact to be determined on an annual basis. The Australian Commissioner of Taxation (the Commissioner) has outlined some of the factors that should be taken into account in considering this question in Taxation Ruling 98/17, including:
- behavioural factors: including personal intentions or purpose of presence, family and business ties, maintenance and location of assets, place of abode, and social and living arrangements; and
- physical presence: where an individual displays behaviours consistent with them residing in Australia over a period of time (generally six months).
Where the common law test is not satisfied, each of the three statutory tests must be applied in the order set out below.
Under the domicile test, an individual whose domicile is in Australia will be a resident of Australia unless the Commissioner is satisfied that the person's permanent place of abode is outside Australia. An individual's domicile generally refers to that person's place of birth; however, this may change when a person moves indefinitely to another country. The question as to whether an individual's permanent place of abode is outside Australia is a question of fact and includes considerations such as the intended and actual length of the individual's stay in a foreign country. Generally, a period of two or more years outside Australia would indicate that a taxpayer's permanent place of abode is overseas.
Under the 183-day test, non-residents will be tax residents of Australia if they are physically present in Australia for more than 183 days during a year of income, either continuously or intermittently, unless the Commissioner is satisfied that their usual place of abode is outside Australia and the individual does not intend to take up residence in Australia. The discussion above in relation to permanent place of abode is relevant to considering whether an individual's usual place of abode is outside Australia.
Finally, an individual may be a resident of Australia if they contribute to a superannuation fund for certain government officers.
Temporary residents who hold a temporary visa under the Migration Act 1958 (Cth) may be subject to different tax treatment from that for non-residents. Generally, foreign-sourced income (other than income related to employment) and capital gains derived by temporary residents would be treated as non-assessable and non-exempt income.
In the 2021–2022 Federal Budget, the federal government announced changes intended to simplify the tax residency rules for individuals.
The primary test under the new rules will be a 'simple bright line' test under which a person who is physically present in Australia for 183 days or more in any income year (i.e., the Australian tax year ending 30 June) will be an Australian tax resident. This represents a simplified version of the 183-day test used by some of Australia's major trading partners, such as the United States. Even if an individual is not physically present in Australia for 183 days or more, they may still be a tax resident under secondary tests that depend on a combination of physical presence and what are proposed to be 'measurable, objective criteria'. No news has been released by the federal government about the enactment of these changes; however, the new individual tax residency rules are intended to apply following Royal Assent. Close monitoring of draft legislation surrounding the proposed residency rules for individuals is imperative over the coming year.
Income tax ratesThe tax rates (known as marginal tax rates) for Australian residents for the income year ending 30 June 2022 and 30 June 2023 are as follows.
| Taxable income | Tax on this income* |
|---|---|
| A$0 to A$18,200 | Nil |
| A$18,201 to A$45,000 | 19 cents for each A$1 over A$18,200 |
| A$45,001 to A$120,000 | A$5,092 plus 32.5 cents for each A$1 over A$45,000 |
| A$120,001 to A$180,000 | A$29,467 plus 37 cents for each A$1 over A$120,000 |
| A$180,001 and over | A$51,667 plus 45 cents for each A$1 over A$180,000 |
* These rates do not include the Medicare levy of 2 per cent or the Medicare levy surcharge (between 1 and 1.5 per cent if a taxpayer does not have a prescribed level of private hospital insurance). |
The tax rates for non-residents for the income year ending 30 June 2022 and 30 June 2023 are as follows.
| Taxable income | Tax on this income* |
|---|---|
| A$0 to A$120,000 | 32.5 cents for each A$1† |
| A$120,001 to A$180,000 | A$39,000 plus 37 cents for each A$1 over A$120,000 |
| A$180,001 and over | A$61,200 plus 45 cents for each A$1 over A$180,000 |
* Foreign residents are not required to pay the Medicare levy. † Where an individual taxpayer is resident for only part of an income year, the tax-free threshold must be apportioned based on the number of months the individual is considered a resident of Australia. |
An employee will be subject to tax on any discount given in respect of shares or rights to acquire shares (including options or restricted stock units) when those interests are acquired. However, if shares or rights are provided under a complying employee share scheme (ESS), then an employee may defer the tax payable in respect of acquiring the shares or rights.
Alternatively, an ESS may be structured so that an employee may be eligible for an exemption for the first A$1,000 worth of shares or rights if certain conditions are satisfied, including that the employee's adjusted income is less than A$180,000. This is referred to as the upfront tax concession.
Some smaller companies that meet certain requirements might be eligible to grant shares2 or options that are eligible for the start-up concession.
The federal government announced proposed changes to the ESS rules as part of the 2021–2022 Federal Budget. These came into force effective 1 April 2022 and, as a result, from 1 July 2022, cessation of employment will no longer be a taxing point for ESS interests that are subject to deferred taxation. The removal of cessation of employment as a taxing point is intended to support Australian businesses to attract and retain the talent needed to compete on the global stage.
The following table shows the taxation of options, start-up concession options, restricted stock and restricted stock units. It has become popular to issue performance rights or similar interests in Australia, and these should be taxed in a similar manner to that for restricted stock units. However, as a result of changes made in 2015, it has become popular once again to issue options to Australian employees.
| Option | Start-up options | Restricted stock | Restricted stock unit | |
|---|---|---|---|---|
Tax treatment upon grant? | No tax payable on grant, provided relevant conditions for deferral satisfied | No tax payable if the company and the options meet certain requirements | No tax payable on grant, provided relevant conditions for deferral satisfied | No tax payable on grant, provided relevant conditions for deferral satisfied |
Tax treatment upon vesting? | No tax upon vesting | No tax upon vesting | Tax on market value of shares at ESS deferred taxing point‡ (generally vesting unless genuine restrictions on disposal) | Tax on market value of shares at ESS deferred taxing point‡ (generally vesting unless genuine restrictions on disposal) |
Tax treatment upon exercise/delivery? | For options granted on or after 1 July 2015: tax on market value less cost at ESS deferred taxing point* (generally exercise* unless genuine restrictions on disposal of resulting shares) | No tax upon exercise | No tax, unless ESS deferred taxing point has not yet happened | No tax, unless ESS deferred taxing point has not yet happened |
Tax treatment upon sale of underlying shares? Further gain (in excess of market value at ESS deferred taxing point plus exercise price) would be subject to capital gains tax, unless sold within 30 days of ESS deferred taxing point. If shares acquired upon exercise of options held for at least 12 months prior to sale, a discount may be available on any capital gain | Gain on disposal of options or shares acquired upon exercise of options subject to capital gains tax. If options or shares acquired upon exercise of options are held for a combined period of at least 12 months prior to sale, a discount may be available on any capital gains | Further gain (in excess of market value at ESS deferred taxing point) subject to capital gains tax unless sold within 30 days of the ESS deferred taxing point. If shares held for at least 12 months after ESS deferred taxing point, a discount may be available on any capital gain | Further gain (in excess of market value at ESS deferred taxing point) subject to capital gains tax unless sold within 30 days of the ESS deferred taxing point. If shares held for at least 12 months after ESS deferred taxing point, a discount may be available on any capital gain | |
* ESS deferred taxing point for rights (such as options or restricted stock units) granted on or after 1 July 2015 is the earliest of:
However, regardless of when the right was acquired, if the resulting share is disposed of within 30 days of the ESS deferred taxing point, the ESS deferred taxing point will be moved to the date of disposal. ‡ ESS deferred taxing point for shares (such as restricted stock) is the earliest of:
|
Where a taxpayer is considered to be an Australian resident, foreign service income may be exempt from tax in Australia provided that certain conditions are satisfied. Specifically, under Section 23AG of the Income Tax Assessment Act 1936 (Cth), the foreign earnings of an individual taxpayer who is engaged in certain types of foreign service for a continuous period of 91 days or more should be exempt from Australian tax. The categories of work that qualify for the exemption are very narrow: the exemption is generally limited to aid workers, charitable works and government employees. As of 1 July 2016, Australian government employees who earn foreign income while delivering Australian official development assistance have not been eligible for exemption from Australian income tax on their foreign employment income.
If an Australian resident's employment income is taxed in another country, the employee may be entitled to a foreign income tax offset in respect of the tax paid in that other country.
iii Tax deductibility for employersRemuneration (including bonuses)Generally, remuneration paid to employees will be deductible to an employer provided that the expenditure is incurred in gaining or producing assessable income and is not of a private or capital nature. Usually, a tax deduction is available in the year in which the employer incurs the liability to pay the salary or wages. However, in some circumstances, prepaid salary and wage expenses may not be deductible in the year the payment is incurred.
Expenses relating to annual leave, long service leave, sick leave or other leave are deductible only when the relevant amount is actually paid to the individual to whom the leave relates.
Bonuses paid to an employee should be deductible when the expense is incurred. This generally requires that the bonus is capable of reasonable estimation and that a legal liability to pay the bonus has arisen.
Other taxesEmployers (including a foreign company that has employees who are liable for taxation in Australia) will need to register for and remit tax instalment deductions known as pay-as-you-go withholding tax in respect of the salary and wages of their employees.
Employers may also be required to pay payroll taxes to state authorities. Additionally, a superannuation guarantee charge may be payable to the Australian Taxation Office (ATO) if an employer does not make the minimum level of superannuation contributions (up to the maximum contribution base) for each employee. The superannuation guarantee is 10 per cent of employees' ordinary time earnings for the income year ending 30 June 2022 and 10.5 per cent for the income year ending 30 June 2023.
Fringe benefits tax may be payable by an employer on the value of certain fringe benefits (such as non-cash allowances, gratuities, compensation, benefits, bonuses and premiums) provided to employees (or associates of employees) in respect of the employment of the employee. Fringe benefits tax is a separate tax from income tax to be paid in quarterly instalments and is payable by the employer at a rate of 47 per cent.3 Where fringe benefits tax has been paid, the taxable value of the fringe benefit will generally be deductible to the employer. The value of the fringe benefit received is not assessable to the employee.
iv Other special rulesSpecial rules may apply where a business is sold and the new employer takes on the existing long service leave, annual leave, sick leave or other leave obligations of the former employer in respect of employees transferred to the new employer. The former employer would not be entitled to a deduction for that leave unless it makes an accrued leave transfer payment to the new employer, because an Australian law, award or industrial agreement requires the former employer to make the payment. The new employer would include the accrued leave transfer payment in its assessable income and claim a deduction for providing the leave when the employer pays an amount to the individual to whom the leave relates.
