Tax traps for Aussies working in the United Kingdom

Australia has a tax treaty with the UK, but there are still some tricky areas for ex-pat workers there.

With insights from Liam Branagan who is a manager of global mobility services and tax at KPMG

1. Tax resident or not?

Residency is more complex for expats working in the UK compared to other countries.

The UK now defines tax residence in statute. If an employee meets the requirements of any of the automatic residence tests and none of the automatic overseas residence tests, they will be a UK resident. Practically, the majority of expat employees who live in the UK for 183 days or more in a year will be treated as UK tax residents under these rules.

However, a sufficient ties test also operates where the automatic residence or overseas residence tests do not apply. This means that an expat employee who works in the UK for less than 183 days may still be a UK tax resident, depending on the sufficiency of their ties with the UK. 

Consideration is given to such matters as the location of the employee’s family members, the location of their accommodation, and the number of days worked in the UK.

In general, a UK tax resident is subject to tax in the UK on their worldwide income, while a non-resident is subject to tax on their UK-sourced income only. 

However, a resident employee of the UK may have a different tax base if they are not domiciled in the UK, and certain tax concessions may apply.

For instance, the employee can choose for the remittance basis of taxation to apply. Under the remittance basis of taxation, income from non-UK employment that is not remitted back to the UK may not be subject to tax in the UK.

This is a complex area and it is worth seeking out professional advice.

An Australian who departs for the UK will likely remain a tax resident of Australia, unless they intend to remain in the UK on a permanent basis (generally, longer than two years).

Under the tax treaty between the UK and Australia, Australians who are considered residents of both countries will, depending on their circumstances, generally be considered resident only of:

-          The country in which they have a permanent home available

-          The country in which their personal and economic ties are closer, or

-          The country of which they are a national.

2.  Salary packaging

There are some benefits to salary packaging certain items, and statutory formulas apply to determine how to value these in the tax return. Benefits in kind are generally included in an employee’s tax return.

Some items that may be worth including in a salary package include motor vehicles and home-leave flights.

Workers coming into the UK to work for less than 24 months may be able to obtain detached worker relief, which will allow them to claim items such as accommodation, meals and travel expenses as tax deductions.

3.  Retirement plans

Provided certain conditions are met, employer contributions to non-UK pension plans are not taxable. But there could be UK tax on the benefits subsequently received from the plan. There may also be additional tax on irregular employer and employee contributions.

The UK tax regime at a glance

Australian tax considerations for employees continuing to be Australian residents

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

Assumed facts:

• Australian employee sent on work assignment to the UK for two-plus years
• Single employee (no partner or children)
• UK employer pays employee a salary of AUD250,000
• Exchange rate of AU$1.00 = 0.52 GBP
• Australian tax rates used are for the income year ended 30 June 2016
• UK tax rates used are for the income year ended 5 April 2016

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