Government double dipping on fringe benefits taxDOWNLOAD
The proposed elimination of the section 23AG (foreign earnings tax exemption) announced in last week’s Federal Budget will increase personal tax for many Australians working overseas, and expose both the employer and employee to double tax on fringe benefits according to Deloitte.
Deloitte Employment Taxes partner, Frank Klasic, says under the current legislation employers are not liable for fringe benefits tax (FBT) on benefits provided to employees where their employment income is exempt under section 23AG. This, however, does not mean that the provision of fringe benefits is tax-free.
“In most countries, employees pay income tax on fringe benefits in the same way as they do for their employment income, while only a handful of countries impose tax on fringe benefits on the employer in a similar way to Australia,” Mr Klasic said.
“The proposed changes to s. 23AG will mean that in most countries, employees will pay the tax on taxable fringe benefits in the overseas country, but will be unable to claim a foreign tax offset in Australia. As the employer will be subject to FBT in Australia, the benefits may effectively be taxed twice, once in the hands of the employee and a second time in the hands of the employer.
“For countries with an FBT system, the employer may be taxed on the same benefits in both countries as the FBT legislation does not allow for foreign tax credits to be applied.”
Mr Klasic warned that the proposed changes to s. 23AG are likely to significantly increase the costs of Australian businesses employing Australians overseas.
“The proposed changes to s. 23AG are also likely to have both PAYG withholding and cash flow issues even where no fringe benefits are provided. Tax will generally be withheld in both Australia and the foreign country at the time of payment of salary. But the foreign tax credit will not be available until the income tax return is lodged, which could almost be two years after the tax was withheld.”
Deloitte has lodged a submission to Treasury highlighting the significant impact of the proposed changes.