TAXATION OF INCOME FROM JAPAN IN AUSTRALIA

How are persons living in Australia taxed on income from Japan?

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

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 Japan, 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 Japan. The Australian taxation authorities receive all of the tax levied.

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

Category 3. The income is taxable in both Australia and Japan but the Australian taxation laws allow a credit against Australian tax for the Japanese tax paid. In this case, the Japanese 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 Japan but the Japanese taxation laws allow a credit against Japanese 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 Japan. Each country ignores the existence of the other and the income is effectively taxed twice i.e. once in Australia and once in Japan. It is very rare in international tax matters for such a situation to apply. This situation never applies in Australian/Japanese 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 Japan for two months, earned $10000 and then returned to Australia. Japanese 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 Japanese income will be 15% of $10000 i.e $1500. Japanese 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 Japanese 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 Japanese 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 Japanese taxation authorities $2,000 while working in Japan, making total Japanese 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. If an Australian resident carries out professional work in Japan, 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 Japan, then he will be subject to Japanese tax. Category 3 applies.

Salaries and wages. If 1) the employment is for less than 183 days in Japan and 2) he is employed by an Australian company and 3) the company does not have a permanent establishment in Japan, 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 Japan 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 Japan will be subject to Japanese tax. Category 3 applies.

Pensions. Australian residents could receive pensions for a) service to the Japanese Government or b) other pensions from Japan. Pensions for service to the Japanese Government will be taxable in Japan. Category 3 applies. All other pensions from Japan will be taxable only in Australia. Category 1 applies.

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

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

Students. An Australian student in Japan will not be taxed in Japan 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 Japan, is it taxable in Japan? We must distinguish between businesses that have a permanent establishment in Japan and those that do not. A "permanent establishment" usually implies the opening of a branch in Japan. However, a company will not have a "permanent establishment" in Japan 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 Japan, then it is not subject to Japanese tax on its Japanese business activities. Category 1 applies. If it does have a permanent establishment in Japan, them the company is subject to Japanese tax on so much of its profits as are attributable to its branch in Japan. 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 Japan 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 Japan 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 Cook Islands' company or the Australian 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 Japan, then Japanese 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 Japanese tax deducted. Category 3 applies.

COMPANY DIVIDENDS

If an Australian resident receives dividends from a Japanese 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 Japanese 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/Japanese 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 Japanese resident carries out professional work in Australia, he is subject only to Japanese 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 Japanese resident works in Australia, he is normally taxable in Australia. Prima facie, Category 4 applies but it is unlikely that Japan 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 Japanese company and 3) the company does not have a permanent establishment in Australia, then he is subject only to Japanese tax. Category 2 applies.

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

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

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

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

Pensions. Japanese residents could receive pensions for a) service to the Australian Government or b) other pensions from Australia. Pensions for service to the Australian Government will be taxed in Australia. Category 4 applies (subject to Japanese taxation law re taxability in Japan). All other pensions from Australia will be taxed only in Japan. Category 2 applies.

Students. A Japanese student in Australia will not be taxed in Australia on any money received from Japan 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 Japan, he will not be taxed in Australia on that income. Category 2 applies.

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