The ATO Compliance Program for 2010-11 released earlier this month identifies a focus on globally mobile executives and other highly paid individuals. This focus, in the context of recent significant legislative changes in the areas of foreign employment income and employee share schemes, creates significant risks for those individuals identified and their employers. Now is the time to undertake a compliance review and get the house in order before the ATO comes knocking at your door!
ATO Compliance Program 2010-11
Each year, the ATO releases a compliance program which sets out the tax compliance risks that the ATO is most concerned about and what it proposes to do to address those risks.
On 8 July 2010, the ATO released its compliance program for 2010-11. The compliance program identifies a focus on globally mobile executives and other highly paid individuals. Specifically, the compliance program states:
Changes to rules on taxation of foreign employment income
The compliance program indicates that the ATO will focus its audit program on compliance with the taxation of foreign employment income provisions (section 23AG). These rules underwent significant changes with effect from 1 July 2009.
Broadly, under the old section, foreign employment income of an Australian resident taxpayer was exempt from tax in Australia if it was in respect of a period of continuous foreign service of at least 91 days.
Under the new section, this exemption is limited to foreign employment income of certain government employees and charitable workers, meaning that foreign employment income of most Australian resident taxpayers has been taxable in Australia since 1 July 2009.
Importantly, from an employer's perspective, this means that PAYG tax must be withheld and remitted to the ATO (subject to application of the ATO PAYG Variation that allows just the "top up" tax to be withheld and remitted – i.e. the difference between the $AUD equivalent of the tax paid in the foreign jurisdiction and the PAYG tax required to be withheld in Australia). Employers may be subject to penalties for failure to withhold PAYG tax when they should have.
Further, fringe benefits tax (FBT) may also apply to fringe benefits provided in respect of the foreign employment of an Australian resident taxpayer. Employers are liable toFBT and may be subject to interest and penalties for failure to report fringe benefits and pay FBT.
Changes to employee share scheme rules
The employee share scheme (ESS) provisions were overhauled with effect from 1 July 2009.
The new provisions (as with the old) contain complex rules dealing with cross-border employees (i.e. where the ESS interest relates to both domestic and foreign service of the employee). Broadly:
- If the employee is a non-resident at the ESS deferred taxing point, the part of the taxable amount that relates to foreign service will be exempt from Australian tax (as foreign source income of a non-resident).
- If the employee is an Australian tax resident at the ESS deferred taxing point, the employee will be required to include the full taxable amount in their assessable income (subject to any double tax agreement) but may be entitled to a foreign tax credit if foreign tax has been paid on the ESS interest.
The new provisions now contain employer reporting requirements. Broadly, employers are required to give a statement to the Commissioner of Taxation (Commissioner) and to the employee if:
- The employer provided ESS interests to the employee during the income year which were taxed up-front or on a tax deferred basis.
- The employer provided ESS interests to the employee (during the income year or a previous income year) to which tax deferral applies and the deferred taxing point occurred during the income year.
The statement must be given to the employee no later than 14 July after the end of the relevant income year (30 June) and to the Commissioner no later than 14 August after the end of the relevant income year (30 June).
Employers may be subject to penalties for failure to comply with the reporting requirements. Reporting will put the ATO in a position to audit employees that do not report ESS income. Incorrect reporting may cause unnecessary difficulties for employees as a result of ATO audit activity.
What should you do?
Employers should undertake a general compliance review to ensure they are correctly withholding PAYG, paying FBT and reporting on ESS interests provided to employees under existing arrangements. This may require an analysis of the tax residency of employees, both inbound and outbound.
Going forward, employers need to understand the new framework for taxation of foreign employment income and consider whether their international secondments are structured in the most tax effective manner.
Should you require any further information, please contact a member of the Norton Rose Tax Group.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.