TAXATION OF INCOME FROM UNITED KINGDOM IN AUSTRALIA

How are persons living in Australia taxed on income from U.K.?

Examples of the types of income that a person living in Australia might receive from U.K. are professional services, entertainment income, teaching income, employment income (the actual work might have been carried out in U.K. or Australia), pensions, business income from business activities in U.K., interest from investments in U.K. and dividends from U.K. companies.

The liability to Australian taxation of the above types of income can be ascertained by consulting a) the Australian Income-tax Assessment Act and b) the Double Taxation Treaty between Australia and U.K..

Persons living in Australia may be officially classed as Residents for tax purposes or they may be classed as Non-residents for tax purposes.

Who is an Australian resident? The answer to this question is not as simple as it seems. It involves a complex area of the law. However, generally speaking, anybody who comes to Australia solely to work, even for a short time, will be regarded as a resident. Also, anybody who come to Australia to study will be regarded as a resident. However, anybody who comes to Australia on a holiday will not be regarded as a resident. A person who comes to Australia for combined work and holiday will not be regarded as a resident. An example of the latter is somebody holding an Immigration working-holiday visa. Conversely, a person may be held to be an Australian resident even though he/she is living abroad. The Australian Taxation Office will generally accept that a person who leaves Australia with the intention of returning can be treated as an Australian resident for two years after he has left Australia..

I shall deal first with those who can be categorised as Residents. After that, I shall deal with Non-residents.

Residents of Australia are taxed on their world-wide income.

If an Australian resident receives income from U.K., there are five possible ways in which it can be taxed.

Category 1. The income is taxable only in Australia and is not taxable in U.K.. The Australian taxation authorities receive all of the tax levied.

Category 2. The income is taxable only in U.K. and is not taxable in Australia. The U.K. taxation authorities receive all of the tax levied.

Category 3. The income is taxable in both Australia and U.K. but the Australian taxation laws allow a credit against Australian tax for the U.K. tax paid. In this case, the U.K. taxation authorities get most or all of the total tax levied. See below for an example of the working of this rule.

Category 4. The income is taxable in both Australia and U.K. but the U.K. taxation laws allow a credit against U.K. tax for the Australian tax paid. In this case, the Australian taxation authorities get most or all of the total tax levied.

Category 5. The income is taxable in both Australia and U.K.. Each country ignores the existence of the other and the income is effectively taxed twice i.e. once in Australia and once in U.K.. It is very rare in international tax matters for such a situation to apply. This situation never applies in Australian/U.K. tax matters.

The following is an example of the working of Category 3 above. A credit is given against Australian tax for any foreign tax paid. However, in all cases where a credit is given for foreign tax paid, the credit cannot exceed the Australian tax payable. Take this example. Suppose John Smith worked as an employee in U.K. for two months, earned $10000 and then returned to Australia. U.K. tax of $2000 was paid by deduction from his salary. The average Australian rate of tax on his income is 15%. The tax payable in Australia on his U.K. income will be 15% of $10000 i.e $1500. U.K. tax paid was $2000 but John Smith will only get a credit of $1500 against his Australian tax. In effect, John Smith pays no further Australian tax on his U.K. income. If the Australian tax payable by John Smith had been $2,500, then he would have got a credit against this tax of the U.K. tax paid i.e. $2,000. John Smith would have ended up paying the Australian taxation authorities $500 (i.e. $2,500 less credit of $2,000). He would already have paid the U.K. taxation authorities $2,000 while working in U.K., making total U.K. and Australian tax paid of $2,500 (i.e. $2,000 + $500).

PERSONAL SERVICES INCOME

There are a number of categories here.

Professional services or other independent services e.g. visiting doctors, lawyers, accountants, engineers etc. If an Australian resident carries out professional work in U.K., he is subject only to Australian tax. Category 1 applies. However, if he has a fixed base, e.g. an overseas branch office, regularly available to him in U.K., then he will be subject to U.K. tax. Category 3 applies.

Salaries and wages. If 1) the employment is for less than 183 days in U.K. and 2) he is employed by an Australian company and 3) the company does not have a permanent establishment in U.K., then Category 1 applies. If the employment is for less than 90 days but either 2) or 3) above does not apply, then Category 3 applies. In all other cases, Category 2 applies.

Airline and Shipping employees. Employees of Australian airlines and Australian shipping companies who regularly fly or sail to U.K. will be subject only to Australian tax. Category 1 applies.

Public entertainers and athletes. Australian entertainers and athletes who go on short-term tours to U.K. will be subject to U.K. tax. Category 3 applies.

Pensions. Australian residents receiving any type of pension from the U. K. will be subject to Australian tax only. Category 1 applies.

Lecturers and teachers. An Australian resident lecturing in U.K. for less than two years will be subject only to Australian tax. Category 1 applies. If over two years, he will be subject to U.K. tax. Category 2 applies.

Australian Government employees. Employees of the Australian Government working in U.K. will be exempt from U.K. tax and subject only to Australian tax. Category 1 applies. However, any employees who are permanent residents of U.K. will be subject to U.K. tax. Category 2 applies.

Students. An Australian student in U.K. will not be taxed in U.K. on any money received from Australia for his education or training. Category 1 applies.

BUSINESS INCOME

If an Australian company derives income from business activities in U.K., is it taxable in U.K.? We must distinguish between businesses that have a permanent establishment in U.K. and those that do not. A "permanent establishment" usually implies the opening of a branch in U.K.. However, a company will not have a "permanent establishment" in U.K. if it merely carries on business through an agent there or if it only rents a warehouse.

If a company does not have a permanent establishment in U.K., then it is not subject to U.K. tax on its U.K. business activities. Category 1 applies. If it does have a permanent establishment in U.K., them the company is subject to U.K. tax on so much of its profits as are attributable to its branch in U.K.. Category 3 applies.

In recent years, most developed countries including Australia have passed laws against "transfer pricing". Transfer pricing works as follows. Some countries impose no income-tax or impose negligible income tax or exempt non-residents from income-tax. Examples of such countries are Cook Islands, Vanuatu, Hong Kong, Cayman Islands, Liechtenstein, Channel Islands. A person could set up a company in one of these tax havens and arrange for all of his profits to be derived by this company. Consequently, he would have no tax to pay on his world-wide operations. Suppose an Australian company buys goods from a company in U.K. for, say, $1000 and then resells them in Australia at $1500. It will be taxable in Australia on the profit made of $500. Suppose instead a company is incorporated in the Cook Islands. The Cook Islands' company buys the goods from the company in U.K. for $1000. It then resells them to the company in Australia for $1500. All the profit is now being made by the Cook Islands company. The Australian company makes no profit. Consequently, no tax will be paid by either the Australian company or the Cook Islands' company. Most developed countries have now made these types of arrangement illegal. In effect, they have collectively decreed that trans-national profits can only be made in a developed country. The taxing authorities insist on getting their "cut". But how far it is possible to enforce these laws in an international setting is debateable.

INTEREST

If an Australian resident receives interest from U.K., then U.K. withholding tax of 10% may, or may not, have been deducted from it. The interest will be subject to Australian tax and a credit will be given for any U.K. tax deducted. Category 3 applies.

COMPANY DIVIDENDS

If an Australian resident receives dividends from a U.K. company, then withholding tax of 15% may, or may not, have been deducted from them. As with the interest above, the dividends will be subject to Australian tax and a credit will be given for any U.K. tax paid. Category 3 applies.

NON-RESIDENTS

Non-residents of Australia are only subject to Australian tax on income derived from Australia. They are taxed at normal tax rates but they do not receive the tax exemption on the first $5,400 of income and they do not get any Rebates for dependants etc. However, they are exempt from the Medicare levy. But ultimately, non-residents usually have to pay more tax on their Australian income than do Australian residents. However, the provisions of a particular Double Taxation treaty can vary the law. For instance, many Double Taxation treaties, including the Australian/U.K. treaty, provide that 10% withholding tax only is to be deducted from interest remitted to overseas residents from Australia. This withholding tax will be the limit of the non-resident's liability to Australian tax. He cannot be made to pay more. You will recall that a person can be living in Australia but yet be classed as a non-resident of Australia for tax purposes. This is because he does not intend to settle permanently in Australia.

PERSONAL SERVICES INCOME

There are a number of categories here.

Professional services or other independent services. If a U.K. resident carries out professional work in Australia, he is subject only to U.K. tax. Category 2 applies. However, if he has a fixed base regularly available to him in Australia, then he will be subject to Australian tax. Category 4 applies.

Salaries and wages. If a U.K. resident works in Australia, he is normally taxable in Australia. Prima facie, Category 4 applies but it is unlikely that U.K. would tax overseas employment income for extended periods of time. However, if 1) the employment is for less than 183 days and 2) he is employed by a U.K. company and 3) the company does not have a permanent establishment in Australia, then he is subject only to U.K. tax. Category 2 applies.

Airline and Shipping employees. Employees of U.K. airlines and U.K. shipping companies who regularly fly or sail to Australia will be subject only to U.K. tax. Category 2 applies.

Public entertainers and athletes. U.K. entertainers and athletes who go on short-term tours to Australia will be subject to Australian tax. Category 4 applies.

Lecturers and teachers. A U.K. resident lecturing in Australia for less than two years will be subject only to U.K. tax. Category 2 applies. If over two years, he will be subject to Australian tax. Category 4 applies but it is unlikely that the U.K. would tax overseas employment income for extended periods of time.

U.K. Government employees. Employees of the U.K. Government working in Australia will be exempt from Australian tax and subject only to U.K. tax. Category 2 applies. However, any employees who are permanent residents of Australia will be subject to Australian tax. Category 1 applies.

Pensions. U.K. residents receiving any type of pension from Australia will be subject to U.K. tax only. Category 2 applies.

Students. A U.K. student in Australia will not be taxed in Australia on any money received from U.K. for his education or training. Category 2 applies.

If a non-resident of Australia who is living in Australia receives business income, interest or dividends from U.K., he will not be taxed in Australia on that income. Category 2 applies.

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