Aussies working in Hong Kong should avoid these tax traps

Australians working in Hong Kong should be aware of the various complexities that affect their residency, super and tax status.

Going overseas to work is a grand adventure for many professionals. But the way income earned outside your home country is taxed is a complex area, and it’s worth seeking expert advice that can keep you from paying up twice.

If you’re an Aussie expat working in Hong Kong, here are some tax points you’ll need to consider.

What’s important to know

1.Residency – Get it right (know your position and plan for it). Your tax residency  status has a significant impact on your tax position in Australia and overseas. Don’t     make assumptions, because getting it wrong can be costly. Get some professional tax   advice before you go overseas to better understand your tax residency status,and the   potential effect on your bottom line.

2. Salary packaging – While it may be effective to salary package some benefits in          Australia, expats should know that some of those benefits may not operate when you’re     working outside of the country.

3. Retirement plans – Some employers will continue to pay super into your Australian       fund, while others will make contributions to a fund in the foreign jurisdiction.

Make sure you know what’s happening before you leave.

In particular, if you have a self-managed superannuation fund, find out what consequences a change of residency may have, before it happens.

Why tax residency matters

Residency is a highly complex area of international tax law and is determined on a case-by-case basis. You should always seek professional tax advice to understand your tax residency status during any assignment overseas.

Indicators of tax residency status

While no one single factor determines your tax residency status, an individual would be likely to remain an Australian tax resident if:

The worker or spouse is an Australian government employee The worker has been physically present in Australia for >183 days (not necessarily continuous) in income year Their family remains in Australia during assignment Assets and memberships are held in Australia The family home is maintained in Australia (e.g. left vacant) The person is employed by an Australian company The worker lives in temporary accommodation while on assignmentThe worker intends to return to Australia at the end of the assignment The assignment is <2 year

Claiming to be a non-resident of Australia is not something to be taken lightly, and some recent Australian court cases show the complexity of this area:

• Boer v Commissioner of Taxation: A taxpayer worked in Oman on a 35 days on/35 days off rotation. On several occasions he returned to Australia to visit family and friends. In Oman he shared an apartment with another employee who worked a complementary roster. He was held to be an Australian resident.
• Sully v Commissioner of Taxation: A taxpayer working as a marine engineer in Dubai. He shared two-bedroom accommodation with another company employee in Dubai. He was later posted to New Orleans where he lived in an apartment. But he maintained family ties in Australia and owned a house in Cairns during the relevant period. He was held to be an Australian resident.
• Sneddon v Commissioner of Taxation:  A taxpayer worked with a company in Qatar. While there, he lived alone in a fully furnished apartment provided by the employer. He was held to be an Australian resident, despite his physical absence from Australia for majority of the income year. This was because he didn’t establish “a permanent place of abode” in Qatar.

Remember: You may still be a tax resident of Australia even if you haven’t been physically present in Australia for the whole year. Check your position with a professional adviser.

The Hong Kong (HK) tax regime at a glance:

Tax treaty between Australia and Hong Kong?	No. At face value, this presents a theoretical risk of double taxation. However, Australia is likely to allow a foreign income tax offset for tax paid on Hong Kong-sourced income, and Hong Kong does not tax non-Hong Kong sourced income. Therefore, the actual risk of double taxation is low for Australian residents working in Hong Kong.
Hong Kong tax year	1 April to 31 March
Hong Kong tax rates	Taxable income (HKD) Tax on this income (HKD) 0 – $40,000 2% for each $1 $40,001 – $80,000 $800 plus 7% for each $1 over $40,000 $80,001 – $120,000 $3,600 plus 12% for each $1 over $80,000 $120,001 and over $8,400 plus 17% for each $1 over $120,000
Relocation costs	If an employee pays relocation costs, no tax deduction is available. If an employer pays, it is taxable to the employee.
.Housing allowances	Taxable to the employee – exemption may be available for utility fees.
Retirement/ pension contributions	Should not be required to be made by the employer in Hong Kong if either: –  The employee is a member of an overseas retirement scheme (for example, an Australian superannuation fund); or –  The employment visa only allows the employee to remain in Hong Kong for 13 months or less
Withholding tax rates, Australia to Hong Kong	Australian non-residents earning Australian sourced interest and unfranked dividends will be charged withholding tax of 10% and 30%, respectively.

Australian tax considerations for individuals continuing to be Australian residents:

Housing allowance	·         If the employee is paid by a foreign entity, the value of the housing allowance will be taxable to the employee directly[1]. ·         If the employee is paid by an Australian entity[2], maintains a home in Australia and lives away from it because of the assignment, the allowance may be eligible for tax-free treatment for up to 12 months.
Relocation costs	·         If the employee pays, no tax deduction is available. ·         If the employee is paid by a foreign entity, and the employer pays, the value of the benefits may be taxable to the employee directly. ·         If the employee is paid by an Australian entity[3], and the employer pays, the value of the benefits may be eligible for exemption and therefore not taxable to the employee. Such benefits include: o            Removal and storage of household effects o            Expenses incidental to the sale of the old home             and acquisition of a new home o            Utility connection fees o            Travel expenses to new location (including meals          and accommodation en route).
Superannuation contributions	·         Only required by Australian law if the employer is also an Australian resident.
Main residence	·         Australian main residence may be rented for up to six consecutive years, without losing access to full main-residence exemption.

Australian tax traps for individuals ceasing to be Australian tax residents

Self-managed superannuation funds	Becoming a non-resident can have significant adverse tax effects on your self-managed superannuation fund, including potentially resulting in the assets and income of the fund being taxable at the top marginal income tax rate. If you have a self-managed superannuation fund, then it is critical that you consult a tax adviser before potentially becoming a non-resident.
Capital gains tax event on ceasing to become a resident	Individuals ceasing to be Australian residents can trigger a capital gains tax (CGT) event where no election is made to treat CGT assets as “taxable Australian property” after residence ends. Professional tax advice should be taken.

 

An Australian in Hong Kong

Here is an example of how much tax an Australian tax resident might pay

Assumed facts:

• ·         Australian employee sent on work assignment to HK for two-plus years
• ·         Single employee (no partner or children)
• ·         Hong Kong employer pays employee a salary of HK$150,000
• ·         Exchange rate of AU$1.00 = HK$6.09
• ·         Australian tax rates used are for the income year ended 30 June 2015
• ·         Hong Kong tax rates used are for the income year ended 31 March 2015

If the individual continues to be a tax resident of Australia (Australian resident)

If the individual ceases to be a tax resident of Australia (non-resident)

Hong Kong tax position (AUD & HKD amounts shown for comparison only) AUD HKD Gross income 150,000 913,500 Less: Hong Kong basic allowance (19,704) (120,000) Taxable income 130,296 793,500 Income tax charged 20,179 122,895 Australia tax position AUD Taxable income 150,000 Income tax charged 43,447 Medicare levy[4] 3,000 Foreign income tax offset (20,179) Net tax payable 26,268 Total Tax Paid AUD Australia 26,268 Hong Kong 20,179 46,447

Hong Kong tax position (AUD & HKD amounts shown for comparison only) AUD HKD Gross income 150,000 913,500 Less: Hong Kong basic allowance (19,704) (120,000) Taxable income 130,296 793,500 Income tax charged 20,179 122,895 Australia tax position AUD Taxable income 0 Income tax charged 0 Medicare levy 0 Foreign income tax offset 0 Net tax payable 0 Total Tax Paid AUD Australia 0 Hong Kong 20,179 20,179

[1] In some circumstances, where an entity has a sufficient connection with Australia, the benefit provided to an employee from a foreign entity may not be taxable to the employee.

[2] Or an entity which has sufficient connection with Australia.

[3] Or an entity which has sufficient connection with Australia.

[4] Medicare levy rate for the income year ended 30 June 2015 is 2 per cent. We have completed the calculation on the assumption that the employee holds the appropriate level of private patient hospital cover for the year.