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My interview Razor Sharp 18 February
Me interviewed by Sharon Firebrace on Razor Sharp on Tuesday 18 February. (0)

My interview Razor Sharp 11 February 2014
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Razor Sharp 4 February 2014
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Closing down one tax lurk for the rich; what about the others?

Often seemingly appropriate policy responses can lead to tax rorts. Take section 23AG of our income tax laws.

Back in the mid 1980s Australia moved from an exemption system for foreign taxed income to a foreign tax credit system (FTCS). 

In essence under the FTCS Australian residents declare their foreign income and receive a credit for the foreign tax they have paid on it. (The credit is now called a non-refundable tax offset.)

As a rough rule of thumb an Australian resident can live overseas for about two years and still have Australian residency status for tax purposes.

There was one exception to the FTCS.  For residents whose salary and wages was earned overseas the Labor Government of the day decided it would remain exempt if it was taxed overseas.  This exemption is found in section 23AG of the income tax law.

The argument Hawke Labor used was that the exemption would save these Australian resident salary and wage earners from the compliance costs associated with including the income only to see them receive a credit roughly equivalent to Australian tax.

This has some superficial appeal.  Many Australian resident expatriates do pay income tax in other countries on their overseas salary that is roughly equivalent to Australian tax levels on the same income.

But of course, many do not.  Expatriates in Hong Kong for example pay a maximum of 17.5 percent tax on their salaries there.  Until recently, as Australian residents they were exempt from any tax in Australia on that lightly taxed income.

However it is likely the real driver for the section 23AG exemption was political. Labor didn’t want to be seen as attacking working people.

And no doubt they reasoned that since the exemption was limited to Australian tax residents earning foreign salary and wages this meant that these people were out of the country for up to two years and so wouldn’t be getting the benefits of Government expenditure on taxpayers in Australia, things like schools, hospitals and roads, without contributing to Australia’s tax coffers.

Almost immediately there was a problem.  What about offshore oil workers who worked five weeks on in foreign waters nearby and paid foreign tax, and then spent 5 weeks at home with the family in Australia?

The Tax Office developed a ruling which decided the 23AG exemption applied to such people. 

Then pilots began to get in on the lurk.  Many had families in Australia.  Yet they themselves might notionally be based in a foreign city and pay tax in that low tax country.

Pilots would structure their flights in such a way that they spent their rest days and other leave days in Australia.  This meant they were with their family, enjoying our roads, hospitals and schools, but arguably paying no Australian tax on that income.

In other words globalisation and the free flow of labour (a free flow for some skilled workers, not refugees unfortunately) undermined the exemption.  The inequity was obvious – why should pilots of foreign airlines pay no tax in Australia when they, like their Qantas counterparts, really lived here?

The Tax Office tried to deal with the problem administratively by issuing a ruling. The outcome was an interesting comprise between competing interests which didn’t really prevent the rort. 

Interested parties merely sought the advice of counsel that their arrangements were OK and ignored the ruling.

The personal tax area of the ATO did not see enforcing the ruling (for example by auditing a large number of foreign airline pilots living in Australia) as a priority. It didn’t have the staff and international matters were not given high priority. 

Treasury took the position that the matter could best be resolved administratively.  Why waste Parliament’s time? And, so the argument went, there were bigger tax fish to fry.

But, as Treasury’s own Tax Expenditure statement shows, the cost of the exemption (and another minor one) was estimated at $520 million last financial year.

Couple that with a Government keen to cut its deficit in any fashion possible to fund its stimulus package and it is not surprising the Government changed the rules with effect from 1 July 2009.

Only charity workers, aid works and defence personnel (to simplify) will now be eligible for the exemption.

The Treasurer estimates this reform will bring in an extra $675 million over the next four years.  That is likely to be an underestimate.

So what seemed to be a sensible policy exemption became a burgeoning drain on revenue as globalisation made it easier for skilled labour to exploit the weaknesses in the provision.

The good thing has ended, and with many tax arrangements cleverly designed as agricultural schemes collapsing, I wonder now where the pilots and their crew will put their money?

 My guess is superannuation and negative gearing, using the halving of the capital gains rate as an extra incentive.

Let’s hope the Henry Tax Review fixes up superannuation and negative gearing, and the capital gains concessions, all of which favour the rich.

After all, Treasury’s own Tax Expenditure statement shows the cost to revenue of tax exemptions, deferrals and the the like at around $80 billion a year.

Most of these disguised grants go to the rich or go disproportionately to the rich. 

I won’t hold my breath that the Henry Review will do anything since the whole of our tax system is one giant conduit of revenue from ordinary workers to the well off.



Comment from Abi
Time July 30, 2009 at 2:43 pm

One of your best articles yet. Can you also look at Foreign Source Income and how deficient the intel gathering and data collection is within the ATO, which allows large companies and the well off to get away with deferring and/or transferring their income to avoid any means of taxation.

Comment from Aaron
Time July 30, 2009 at 4:49 pm

Isn’t it funny that everyone believes whatever they are told. Do you really believe that the government will make $675 million out of this new ruling! These laws will not be getting to the white collar workers with international $ they are purely aimed at the oil and mining industries blue collar workers, so not the rich the hard working! We all make choices in what we do and sacrifices these guys make a lot and it soon will be no longer worth it, 30% will return to work in Australia, 30% will move away and the remaining 40% will minimise tax so $675 million I doubt it the fact of losing all of the stated foregin currency even coming in and being spent in Australia will be huge! I think we will be worse off for having this law…

Comment from trev
Time July 30, 2009 at 5:25 pm

Aarron, hit the nail on the head, you believe what these thieving say. Don’t know who your calling rich. Yes I’m one of these apparent rich tax dodging people. If you haven’t worked away in third world countries you really have no right to judge what’s fair and won’t is not. But for me, this is my last hitch over sea’s, I’m coming back to oz, knock somebody else out of work, he can go in the dole line. Cause I’m f..k if I’m going to support Krudd’s fairer tax laws. If you notice all the ground work krudd has been doing to get into the UN at the expense of the tax payer, you will notice he has left the tax free door open for himself when he takes up with the UN.

Comment from trev
Time July 30, 2009 at 5:37 pm

Quote extra $675 million over the next four years. Unquote
Do you and labour think us tax dodging rich people are idiots. and we will just roll over a play the game?
Tell him, he is dreaming.
My estimates would be under 100m over four years, not including the cost on implementing it.
Signed; one pi..ed off ex-expat

Comment from John
Time July 30, 2009 at 9:06 pm

Aaron and Trev

The article wasn’t arguing that ordinary workers were tax avoiders. It was arguing that what appeared to be a good policy was destroyed by rich people (eg pilots living in Australia) claiming the exemption. You should address your anger about the removal of this exemption at them.

Let’s say there are 1000 ‘foreign’ pilots resident in Australia. If the amount of foreign tax they alone didn’t pay because of section 23AG was on average $50,000 each, (probably an underestimate), then there is $50 million of the $130 million a year the government expects to raise from this change.

Two other things. The changes don’t catch aid workers and the like. And if the project is an approved one, then the wages paid under section 23AF will in any event be exempt.

I suspect a number of people currently claiming Australian resident status for tax purposes will now argue they are non-residents. But living in Australia with your family makes that a bit hard to sustain.

I suspect the ATO might begin a strong compliance program around the change. They would already have the pilots in sight I guess. And they will probably go wider to capture others within the new net. But you never know with the ATO. International and individuals seems to be a mix they are totally unprepared for intellectually, skillswise and practically. We shall see.

Comment from Aaron
Time July 30, 2009 at 10:16 pm

The other thing I find the strangest is that they have said this ruling starts as of July 1st yet it has not been finalized yet, so basically they are setting up a lot of good hard working Australians for a fall as even the tax department don’t know how it works, (I rang them to ask them) Is it worth while traveling to some bum f#ck disease invested war torn country for 7 months of the year (travel time is considered time off) when with this new ruling (if they could explain to me exactly how it works) would make it much more viable to work right here in Australia and get super anuation, work cover government assisted un-fair dismissal rules etc and more time with our families… Oh and the biggest one sure they might make $50k of tax off a pilot but they will lose a hell of a lot more than $50k I would guess closer to $150k of foreign cash coming into our economy for every expat that decides to move abroad or return to work in Australia…

Comment from John
Time July 30, 2009 at 10:38 pm

It is not a new ruling. It is a new law. It is a new subsection – 23AG(1AA). It was contained in the TAX LAWS AMENDMENT (2009 BUDGET MEASURES NO. 1) ACT 2009 (NO. 62, 2009) – SCHEDULE 1

It applies (nuances aside) from 1 July this year.

I don’t know who you spoke to in the ATO but the law has passed and is operational.

Comment from Aaron
Time July 30, 2009 at 11:43 pm

John, they told me it was not finalized in effect yes but the ins and outs and exactly how it works yet no they could not tell me…

Comment from John
Time July 31, 2009 at 12:07 am


23 AG(1AA) limits the exemption to a few types of taxpayers. It says:

After subsection 23AG(1)

(1AA) However, those foreign earnings are not exempt from tax under
this section unless the continuous period of foreign service is directly
attributable to any of the following:
(a) the delivery of Australian official development assistance by
the person’s employer;
(b) the activities of the person’s employer in operating a public
fund covered by item 9.1.1 or 9.1.2 of the table in subsection 30-80(1) of
the Income Tax Assessment Act 1997 (international affairs deductible gift
(c) the activities of the person’s employer, if the employer is
exempt from income tax because of paragraph 50-50(c) or (d) of the Income
Tax Assessment Act 1997 (prescribed institutions located or pursuing
objectives outside Australia);
(d) the person’s deployment outside Australia as a member of a
disciplined force by:
(i) the Commonwealth, a State or a Territory; or
(ii) an authority of the Commonwealth, a State or a Territory;
(e) an activity of a kind specified in the regulations.

That looks pretty clear to me. (But then again I spent 27 years working on tax laws.) What’s the problem? Is there a more specific question?

I am sure the call centre has a cheat sheet to address questions on this, and if not, put in a private ruling request.

Comment from Richard Johnson
Time August 5, 2009 at 8:54 pm

There are many unanswered questions; we could start with allowances. Living overseas incurs costs such as; accommodation, local transport, transport to visit the family in Australia, food, laundry, entertainment, Australian newspapers, internet bills, telephone calls, Australian beer, bringing the family over to stay for a few weeks each year, acountants to process all this nonsense. There might be issues such as liability for tax that we believe is paid and have evidence that our employer has paid it but actually might not be due to local corruption. Many expats I know are very generous to local people, sponsoring education or paying hospital bills. Shall those be tax deductables? Timing too effects such details as what exchange rate is to be used and the logistics of completing tax statements. Obviously there are a lot on issues still to be resolved and like Aaron I don’t get any sensible response from the ATO. I must stop now, I have a headache coming on.

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