TAXATION OF INCOME FROM SINGAPORE OR CHINA IN AUSTRALIA

How are persons living in Australia taxed on income from Singapore or China?

Examples of the types of income that a person living in Australia might receive from Singapore or China are professional services, entertainment income, teaching income, employment income (the actual work might have been carried out in Singapore or China or Australia), pensions, business income from business activities in Singapore or China, interest from investments in Singapore or China and dividends from Singapore or Chinese 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 Singapore or China. Australia has concluded Double Taxation treaties with both Singapore and the Peoples Republic of China. The treaties concluded with Singapore and China are very similar. Consequently, I shall deal with the provisions of both treaties together and set out any major differences.

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 Singapore or China, 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 Singapore or China. The Australian taxation authorities receive all of the tax levied.

Category 2. The income is taxable only in Singapore or China and is not taxable in Australia. The Singapore or Chinese taxation authorities receive all of the tax levied.

Category 3. The income is taxable in both Australia and Singapore or China but the Australian taxation laws allow a credit against Australian tax for the Singapore or Chinese tax paid. In this case, the Singapore or Chinese 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 Singapore or China but the Singapore or Chinese taxation laws allow a credit against Singapore or Chinese 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 Singapore or China. Each country ignores the existence of the other and the income is effectively taxed twice i.e. once in Australia and once in Singapore or China. It is very rare in international tax matters for such a situation to apply. This situation never applies in Australian/Singapore or Chinese 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 Singapore or China for two months, earned $10000 and then returned to Australia. Singapore or Chinese 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 Singapore or Chinese income will be 15% of $10000 i.e $1500. Singapore or Chinese 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 Singapore or Chinese 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 Singapore or Chinese 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 Singapore or Chinese taxation authorities $2,000 while working in Singapore or China, making total Singapore or Chinese and Australian tax paid of $2,500 (i.e. $2,000 + $500).

PERSONAL SERVICES INCOME

There are a number of categories here.

China professional services or other independent services. If an Australian resident carries out professional work in China, he is subject only to Australian tax. Category 1 applies. However, 1) if he has a fixed base, e.g. an overseas branch office, regularly available to him in China or 2) he spends over six months of the year in China, then he will be subject to Chinese tax. Category 3 applies.

China salaries and wages. If 1) the employment is for less than 183 days in China and 2) he is employed by an Australian company and 3) the company does not have a permanent establishment in China, 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.

Singapore professional services and salaries (including teaching income). If 1) the employment or professional service period is for less than 183 days in Singapore and 2) he is employed by an Australian company and 3) the company does not have a permanent establishment in Singapore, 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 Singapore or China will be subject only to Australian tax. Category 1 applies.

Public entertainers. Australian entertainers who go on short-term tours to Singapore or China will be subject to Singapore or Chinese tax. Category 3 applies.

Pensions. Australian residents could receive pensions for a) service to the Singapore or Chinese Government or b) other pensions from Singapore or China. Pensions for service to the Singapore or Chinese Government will be taxable in Singapore or China. Category 3 applies. However, Chinese government pensions will be taxable in Australia if the recipient is a citizen and resident of Australia. Category 3 applies. All other pensions from Singapore or China will be taxable only in Australia. Category 1 applies.

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

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

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

BUSINESS INCOME

Real Property. Income from rental or sale of real property or exploitation of natural resources in Singapore or China is taxable in those countries. Category 3 applies.

If an Australian company derives income from business activities in Singapore or China, is it taxable in Singapore or China? We must distinguish between businesses that have a permanent establishment in Singapore or China and those that do not. A "permanent establishment" usually implies the opening of a branch in Singapore or China. However, a company will not have a "permanent establishment" in Singapore or China 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 Singapore or China, then it is not subject to Singapore or Chinese tax on its Singapore or Chinese business activities. Category 1 applies. If it does have a permanent establishment in Singapore or China, them the company is subject to Singapore or Chinese tax on so much of its profits as are attributable to its branch in Singapore or China. 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 Singapore or China 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 Singapore or China 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 Singapore or China, then Singapore or Chinese 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 Singapore or Chinese tax deducted. Category 3 applies.

COMPANY DIVIDENDS

If an Australian resident receives dividends from a Singapore or Chinese 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 Singapore or Chinese 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/Singapore or Chinese 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 Chinese resident carries out professional work in Australia, he is subject only to Chinese tax. Category 2 applies. However, 1) if he has a fixed base regularly available to him in Australia or 2) he spends over six months of the year in Australia, then he will be subject to Australian tax. Category 4 applies.

Salaries and wages. If a Chinese resident works in Australia, he is normally taxable in Australia. Prima facie, Category 4 applies but it is unlikely that China 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 Chinese company and 3) the company does not have a permanent establishment in Australia, then he is subject only to Chinese tax. Category 2 applies.

Professional services and salaries (including teaching income) carried out in Australia by Singaporean. If 1) the employment or professional service period is for less than 183 days in Australia and 2) he is employed by a Singapore company and 3) the company does not have a permanent establishment in Australia, then Category 2 applies. In all other cases, Category 4 applies, subject to Singapore taxation laws.

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

Public entertainers. Singapore or Chinese entertainers who go on short-term tours to Australia will be subject to Australian tax. Category 4 applies.

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

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

Pensions. Singapore or Chinese 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 Singapore or Chinese taxation law re taxability in Singapore or China). All other pensions from Australia will be taxed only in Singapore or China. Category 2 applies.

Students. A Singapore or Chinese student in Australia will not be taxed in Australia on any money received from Singapore or China 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 Singapore or China, he will not be taxed in Australia on that income. Category 2 applies.

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