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Tax on foreigners may have a bite

THE Australian Taxation Office has announced its intention to tax all foreign employees working in Australia for the benefit of local businesses, even if their employment contracts are with a foreign employer.

The decision is outlined in the draft taxation ruling TR 2003/D1. The ATO has widened the tax net to impose tax on individuals who previously thought they were not subject to Australian income tax as they were not employed by an Australian employer and were in Australia for less than 183 days.

In a statement written on the ruling, Ernst & Young tax principal Peter Hills said the interpretation placed an unfair administrative burden on employees who are in Australia for a short time.

The ruling relates to Australia’s double tax agreements, which are in place with over 45 countries. The agreement gives one country the taxing rights over employment income where two countries are involved. A conditional exemption exists where the employee remains a resident of another country or is in Australia for less than 183 days and where the employer is not an Australian resident. However, the ruling has redefined the definitions to in-crease its scope to tax the income of people working in Australia from other countries.

According to Mr Hills, the ATO’s interpretation could in-crease employment costs of Australian companies and, in turn, affect the competitiveness of Australian companies.

He said Australia was generally recognised as a high taxing country and any additional costs of employment would generally be born by the Australian company through tax equalisation arrangements. Overseas companies that have already left Australia will also be caught in the loop, with the ruling to be applied retrospectively.

“Expatriates seconded to Australia on short-term arrangements are normally high skilled and their skills are not available in Australia or are in short supply,” the Ernst & Young statement says.

“Any additional taxes on these types of employees could cause these employees to turn down Australian assignments and Australia to miss out on these valuable skills.”

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