Although you may be working in China, does the ATO still consider you an Australian resident? It’s just one of the things you need to get absolutely right.
The tax requirements for Aussies working overseas vary from region to region. Aussies working in Hong Kong will find last month’s tax guide useful in determining their tax requirements. This month, Tom O’Sullivan, a tax specialist at Wolters Kluwer, has put together this overview of important tax issues for Australians working in China.
Australian tax resident or Chinese?
If an Australian employee is sent on a work assignment to China, their liability to Australian tax depends on whether they remain an Australian tax resident or become a tax resident of China.
This is because, broadly speaking, Australian tax residents are subject to Australian tax on their worldwide income.
If the employee no longer resides in Australia while on assignment, and the Australian Taxation Office (ATO) is satisfied they have established a permanent place of abode in China while working there, the employee might not be regarded as an Australian tax resident.
This means the employee’s foreign salary is unlikely to be subject to Australian tax if the salary has a Chinese source. However, this depends on the employee’s circumstances, and several criteria apply. Appropriate advice should be sought before making any final decisions.
Alternatively, should the employee remain an Australian tax resident, their foreign salary will be subject to tax in Australia, although a foreign income tax offset may be available to prevent any double taxation of salary.
There is also an exemption for income earned in overseas employment for a continuous period of more than 90 days where the foreign service is directly attributable to certain specified activities.
China applies the same tax rates to salaries derived by residents and non-residents. This means the employee’s salary will be subject to Chinese tax at the following progressive rates:
|Monthly taxable income (RMB)||Tax rate (%)|
The tax is normally withheld from the employee’s salary before it is paid to them.
A tax exemption of 4800 RMB per month is available for expatriates.
It is possible for an Australian employee on assignment in China to receive a total remuneration package that includes salary and other benefits. If the employee is a non-resident for Australian tax purposes, then there is unlikely to be Australian fringe benefits tax (FBT) payable when providing non-salary benefits to the employee while they are at work in China.
For expatriate employees, accommodation, meals, laundry, relocation and reasonable travel allowances received in a non-cash form, or as reimbursement for expenses incurred, are provisionally exempt from individual income tax in China.
(1) Payment of relocation costs. The reimbursement of relocation costs is provisionally exempt from income tax for expatriate employees. The costs need to be reasonable and may be reviewed by the local tax authority. Costs paid over the reasonable amount are subject to tax. However, regular (monthly or periodical) payments under this category are still fully taxable, regardless of the amount.
(2) Family holidays in home country. Family holiday costs incurred by an employee and paid by an employer are taxable to the employee. However, transportation costs incurred between China and the home country for family visits are not taxable. The transportation costs of up to two such holidays a year is considered reasonable. Costs paid above the reasonable amount are subject to tax. Copies of transportation receipts must be submitted to the local tax authority for review.
(4) Living away from home allowances. Such allowances paid in cash are fully taxable to an employee.
(5) Free board and accommodation. Board and accommodation costs (both home and abroad) incurred by an employee and paid by an employer are provisionally exempt from income tax for expatriate employees. The costs must be reasonable and are subject to review by the local tax authority. Costs paid above the reasonable amount are subject to tax. Copies of receipts or business plans must be submitted to the local tax authority for review.
(6) Language training fees and school fees. Language training fees paid by an employer for an employee, and school fees paid by an employer for the education of an employee’s children, are provisionally exempt from income tax for expatriate employees. The fees must be reasonable and are subject to review by the local tax authority. Fees paid above the reasonable amount are subject to tax. Copies of receipts and education details provided by education institutions must be submitted to the local tax authority for review.
(7) Accommodation allowance, meal allowance and laundry costs.Accommodation allowances, meal allowances and laundry costs received in a non-cash form or as reimbursement for expenses incurred are provisionally exempt from income tax for expatriate employees if the costs are reasonable. Allowances or costs paid above the reasonable amount are subject to tax.
The fact a person has worked in China for a period will not affect their superannuation accumulated in Australia.
A person who has worked overseas and has accumulated superannuation in a foreign superannuation fund may transfer such superannuation amounts in a lump sum back to an Australian fund when the person becomes an Australian resident on their return to Australia.
The balance of any occupational retirement account accumulated by an employee while working in China can be withdrawn in a lump sum if their Chinese residency terminates. The withdrawal is subject to individual income tax.
Employees need to be careful to ensure that various case law principles do not result in them retaining their Australian tax residency status despite having lived outside Australia for two or more years. While many employees who work in China for two or more years should be regarded as non-resident for Australian tax purposes, this isn’t always the case. The following factors may have a bearing on whether the employee retains their Australian tax residency:
- The employee’s family, business and employment ties in Australia.
- The employee’s social and living arrangements. Whether the employee maintains assets in Australia while they are on assignment.
- The intention and duration of any return trips to Australia while on assignment.
Many Australian employees will need to satisfy the ATO they have established a permanent place of abode outside of Australia to ensure they cease being an Australian tax resident from departure. The ATO has published a tax ruling on this matter (Income Tax Ruling IT 2650) to assist employees in deciding this question.
If an individual is regarded as a tax resident of both countries, the tie-breaker rules in the Australian-Chinese Double Tax Agreement can establish the tax residency of the individual.
If the employee becomes a non-resident for Australian tax purposes, yet they continue to derive Australian sourced income while overseas (such as rental income from an Australian property investment), they need to be mindful that they are:
- Not entitled to a tax-free threshold on their Australian taxable income. In fact, non-residents commence paying tax at 32.5 per cent on their first dollar of Australian taxable income.
- Liable to the 2 per cent temporary budget repair levy if their yearly taxable income exceeds A$180,000.
- Not subject to the Medicare levy or surcharge.
- Not eligible for personal rebates against their Australian tax liability.
- Subject to a final withholding tax on their Australian sourced bank interest and unfranked dividends paid to them by an Australian resident company (the payer). The payer withholds tax at 15 per cent on unfranked dividends and at 10 per cent on interest, if the employee is a resident of mainland China.
- Deemed to have disposed of some of their capital gains tax assets (such as shares in Australian companies) for their market value on the date they stop being an Australian tax resident. This means a capital gain or loss might arise on that date which needs to be included in their Australian tax return. There are rules which enable the employee to choose deferring the taxation on such assets until they are eventually sold.
- As a non-resident, the employee will generally no longer be able to access the 50 per cent capital gains tax discount.
What if you’re an Australians tax resident living overseas?
If the employee remains an Australian tax resident while overseas, then their worldwide income (including their Chinese salary) is subject to tax in Australia. The employer may also have a fringe benefits tax (FBT) obligation for certain non-salary benefits provided to the employee if the employer also has a sufficient connection with Australia. The Australian resident employee should be aware that they are:
- Entitled to a tax-free threshold of up to A$18,200.
- Liable for the 2 per cent temporary budget repair levy if their yearly taxable income exceeds A$180,000.
- Potentially subject to the 2 per cent Medicare levy, and the Medicare levy surcharge if they are high income earners without private health insurance.
- Possibly entitled to credits for the foreign taxes paid in China on their overseas employment income. This will reduce the employee’s Australian tax liability and stop them from being double-taxed on their foreign salary.
- Eligible for personal rebates to reduce their Australian tax liability if certain conditions are met (the employee will be entitled to a low income tax offset if their yearly taxable income is below A$66,667).
- Entitled to franking credits on the franked dividends received on their investments in Australian shares which reduces their Australian tax liability.
- Required to continue to pay off any unpaid university debts through the tax system if their HELP repayment income is above the minimum repayment threshold (A$53,345 for 2014-15).
The Chinese tax regime at a glance
KPMG’s Liam Branagan, manager, global mobility services, tax, summarises what Australian expats need to know.
|Tax treaty between Australia and China?||Yes. But the way Australia and China interpret the treaties depends on each country’s own perspective on tax law. For example, if the employment contract is with a Chinese company, the China tax authorities would initially view income paid under that contract to be China-sourced, whereas the Australian authorities would determine sourcing based on where the services are performed.|
|Chinese tax year||1 January to 31 December|
|Relocation costs||They are not tax deductible, but they are also not subject to tax (they are exempt from tax in China where the employer pays the expense). Employees who pay their own relocation costs won’t be able to deduct this expense against their income.|
|Housing allowances||Similar to relocation expenses, they are not taxable, but they also won’t be tax deductible if the employee pays this cost. Costs such as utilities expenses are generally taxable in China.|
|Retirement/ pension contributions||Foreign individuals legally working in China (including both locally hired individuals and those seconded from abroad to work in China) are required to pay both pension and social security charges, with the amount varying by locality. Some larger regions such as Shanghai currently do not enforce certain payments; however this could change in the future.|
|Withholding tax||Monthly tax filing obligations whereby taxes need to be withheld from employees’ salaries and remitted to authorities.|
What if you’re still an Australian tax resident?
|Housing allowance||Often characterised as a living away from home allowance, which is subject to fringe benefits tax (FBT). Whether this will be taxable depends on whether the taxpayer is considered to be an Australian resident. If the employee is not considered to be a resident, no FBT is payable because the income is not Australian-sourced. Even if the employee is considered to be a resident the FBT may be reduced to nil, as long as the person continues to maintain a primary residence in Australia, and the assignment is for less than one year.|
|Relocation costs||Where the employer pays relocation costs, these will generally be subject to FBT, unless a specific exemption applies (for instance for temporary accommodation costs and relocation transport costs). If the employee is simply given an allowance for relocation costs, without reference to the specific costs, this will not be deductible and will be included as income for tax purposes.|
|Superannuation contributions||There is no bilateral social security arrangement between Australia and China, so it’s not possible for an Australian employer to continue to pay superannuation in Australia instead of paying pension and social security costs in China. It may be possible to contribute voluntarily to superannuation funds back in Australia (although caution should be exercised regarding self-managed superannuation funds if the employee is likely to be considered a non-resident).|
|Main residence||If the employee maintains a residence in Australia and does not rent it out, it will remain free from capital gains tax. If the employee does rent out the property, it may be rented out for up to six years before capital gains tax becomes payable on any eventual sale of the property.|
|Capital gains tax event on ceasing to become a resident||When an individual becomes a non-resident for Australian tax purposes, they are deemed to have disposed of all of their assets apart from taxable Australian property (for example, their interests in Australian real estate) as at the date they become non-resident. They would therefore need to include the relevant capital gain in their income tax return for the relevant year. They may, however choose for this not to happen, in which case any capital gain or loss would arise when the asset is eventually disposed.|
An Australian in China
KPMG’s Liam Branagan looks at how much tax an Australian might be liable to pay when working in China.
- Australian employee sent on work assignment to China for two-plus years
- Single employee (no partner or children)
- Chinese employer pays employee a salary of RMB 1,175,000
- Exchange rate of A$1 = RMB 4.70
- Australian tax rates used are for the income year ended 30 June 2015
- Chinese tax rates used are for the income year ended 31 December 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)|
|Chinese tax position (AUD & RMB amounts shown for comparison only)
Australia tax position
Total Tax Paid
|Chinese tax position (AUD & RMB amounts shown for comparison only)
Australia tax position
Total Tax Paid
This document has been reviewed by tax experts at ShineWing Australia
Daren Yeoh, ShineWing Australia
Partner – Tax
Daren has over 20 years’ experience advising corporate and multinational groups on all aspects of Australian and International tax law.
Yang Shi, ShineWing Australia
Senior Manager – Tax
Yang’s experience in global transfer pricing in both China and Australia makes him an expert in his field. He has over eight years’ experience in “Big 4” accounting firms.
The list above is not exhaustive and you should always speak to a CPA-registered tax agent about your specific circumstances.
 Medicare levy rate for the income year ended 30 June 2015 is 2 per cent. Calculation based on the assumption the employee holds the appropriate level of private patient hospital cover for the year.