Aussies working in Hong Kong should avoid these tax traps

If you plan on living and working in Hong Kong, you should be aware of certain tax particulars.

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 assignment
  • The worker intends to return to Australia at the end of the assignment
  • The assignment is <2 years

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:
    •         Removal and storage of household effects
    •         Expenses incidental to the sale of the old home             and acquisition of a new home
    •         Utility connection fees
    •         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. 

This information was compiled and produced exclusively for intheblack.com by Denise Honey and Angela Bryce at Pitcher Partners

Honey is an international tax Partner/Executive Director with Pitcher Partners Melbourne. She has many years' experience providing international tax and structuring advice to corporate and trust groups and their key stakeholders as well as advising in relation to ATO reviews. Honey is an Accredited Tax Law Specialist with the Law Institute of Victoria, a member of the Transfer Pricing Working Group, the BEPs Tax Advisory Group, the Tax Institute’s Corporate and International Subcommittee and a regular presenter at the Institute's events.
 
Bryce is a manager in the Tax Consulting division of Pitcher Partners Melbourne. She has more than seven years of experience in providing taxation advice on a broad range of corporate and individual tax issues to clients in a variety of different industries. Bryce specialises in international taxation and employment taxes with a focus on expatriate issues.


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