Recent Developments in Australia & The Netherlands
Jan 27, 2012
Client Alert Highlights
Australia – Proposed LAFHA Changes - The Australian Government has recently announced a proposal to effectively scrap the tax-free status of LAFHA (Living-away-from-home allowance) payments to temporary residents. Starting July 1, 2012, employers and employees will need to substantiate LAFHA claims in order to maintain tax-free LAFHA treatment, and they will now only apply in very limited circumstances.
Australia – Targeted Audits affect Foreign Assignees - The Australian Tax Commissioner has given notice to request the names & addresses of all persons granted Temporary Visas from July 1, 2008 through March 31, 2011 to possibly audit them for Income Tax and/or Superannuation compliance.
Netherlands – Dutch 30% Ruling Changes - The Netherlands has recently approved amended legislative changes to the Netherland’s “30% Ruling” tax concession for inbound employees. These changes are now effective 1/1/12. The amendments include: re-defining the “specific expertise” requirement; reducing the maximum duration period; and amending the “look-back” period.
AUSTRALIA – Proposed LAFHA Changes & Targeted Audits affect Foreign Assignees
LAFHA: The Australian Government has recently announced a proposal to effectively scrap the tax-free status of LAFHA (Living-away-from-home allowance) payments to temporary residents starting from July 1, 2012. LAFHA payments were originally intended to compensate employees for additional costs they incur when they are temporarily relocated by their employer for their work. However, the Australia government believes the LAFHA benefit concessions are now being widely exploited in a manner that is outside the original policy intent. Some employers do not have to pay FBT (Fringe Benefits Tax) and employees do not pay tax on income claimed to be spent on accommodations and food for those living away from home as taxable salary income is being re-characterized as tax-free LAFHA payments.
Starting July 1, 2012, employers and employees will need to substantiate LAFHA claims in order to maintain tax-free LAFHA treatment, but they will now only apply in very limited circumstances (noted below). If unsubstantiated, LAFHA payments will be treated as employment income to the employee and subject to income tax. Also, direct payments to landlords by the employer or reimbursement by the employer of employee’s accommodation costs will be subject to fringe benefits tax (to the employer). Permanent Residents currently receiving substantiated LAFHA payments can continue receiving them with the tax concessions they currently enjoy.
The only instance where a temporary resident can effectively receive a tax-free LAFHA (by claiming tax deductions for accommodation and food expenses) is if they establish a usual place of residence in Australia and are then required to live away from that residence to perform their employment duties. For example, an employee is assigned to Sydney and relocates there with his family. He rents a house in Sydney for his family. He is then required to work in Melbourne for 3 months and is paid a LAFHA for the costs of accommodation and food in Melbourne. In this instance, he will be taxed on the LAFHA but will be able to claim a tax deduction for his actual accommodation and food expenses in Melbourne – the house in Sydney would have to be maintained by him (rest of the family would typically remain in the Sydney house).
As you can see, the exception is very limited and unlikely to apply in many cases. Current LAFHA arrangements are not affected until the new law becomes effective. The Government has requested submissions on this proposal by February 3, 2012 with a possible scaled back version of the proposed reform prior to enactment.
GMT recommends the following actions on the part of companies with temporary assignees in/going to Australia regarding this new proposal:
1. Companies should assess the financial impact of temporary assignees in Australia who are receiving LAFHA payments for both Australia income tax and FBT under this proposal. Accruing for increased tax costs of current assignments or determining viability of a pending assignments should be undertaken in the coming months before the proposed law’s July 1st enactment. GMT can assist with these cost projections.
2. Permanent residents will need to begin substantiating their LAFHA expenses for tax-free treatment. This change should be communicated to these employees.
3. GMT will continue to monitor this situation as potential changes to this proposed law change is anticipated.
FOREIGN NATIONAL AUDITS: The Australian Tax Commissioner has given notice to request the names & addresses of all persons granted Temporary Visas from July 1, 2008 through March 31, 2011 to possibly audit them for Income Tax and/or Superannuation compliance. The following Visa Subclasses are part of this ATO review: 406,410,411,415-424,426-428,442,457,462,570-576,580. The audit review project is being called the “DIAC/ATO Temporary Visa Data Matching Project”. Its main purposes are to detect fraud and noncompliance with tax payments. Long-stay Business Visa (457) and Holiday Visa (462) holders appear to be primary targets of this investigation. Of note is that Short-term Visa holders (456) were NOT subject to this review. However, note above that 456 & 457 Visa holders will be impacted by the LAFHA proposals if enacted.
GMT recommends the following actions on the part of companies with foreign assignees in Australia regarding this new Audit initiative:
1. Companies should alert their foreign assignees of this review and emphasize compliance and retention of records.
2. Companies should also review their internal policies as related to secondees and local Australian hires. Tax withholdings for income tax and Superannuation for these employees need to be reviewed to make sure proper withholding levels are being applied, such as for foreign nationals who depart Australia with trailing income tax liabilities or the withdrawal of Superannuation benefits.
3. GMT anticipates the ATO will focus on lodging of tax returns, payment of taxes, proper withholding rates, FBT & Superannuation tax compliance for these Visa subclasses. LAFHA issues as discussed above may also be part of the review. We can assist with making sure companies are fully compliant with these rules and prepare for any potential audit.
NETHERLANDS – Dutch 30% Ruling Changes
30% Ruling: The Netherlands has recently approved amended legislative changes to the Netherland’s “30% Ruling” tax concession for inbound employees. These changes are now effective 1/1/12. There will not be a retroactive adjustment to those currently enjoying the 30% Ruling as previously legislated prior to 1/1/12; however, a 5-year interim test will be applied as part of the transition to the new rules (those already past the 5-year mark at 1/1/12 are not affected). The amendments include: re-defining the “specific expertise” requirement; reducing the maximum duration period; and amending the “look-back” period among other changes.
The 30% Ruling in general taxes employees on only 70% of their employment income, which in effect reduces the employee’s maximum tax rate from 52% to 36.4%. The Ruling generally applied only to employees assigned to the Netherlands and typically must be employed by a Dutch resident employer or wage withholding agent in the Netherlands. The key requirement for qualification is that the employee has “specialized skills or knowledge not readily available in the Dutch labor market” (the “specific expertise test”).
The following changes to this 30% Ruling effective 1/1/12 are as follows:
- The “specific expertise test” is now based on a minimum taxable salary level, which will vary based on the type of employee. The minimum taxable level will be the minimum salary level excluding the 30% tax-free allowance, but will also include variable compensation and taxable fringe benefits.
- The maximum duration period for the 30% Ruling is now limited to 8 years or 96 months (it was 10 years or 120 months). The old interim test is rescinded, but starting in 2012 the 30% Ruling must be met continuously or else it will end immediately.
- There is now a 25-year “look-back” period, which counts against the 8-year max duration of the Ruling.
- Employees who lived within 150 kilometers of the Netherlands’ borders during at least 1/3 of the 24 months preceding their start of employment in the Netherlands will no longer qualify for the 30% Ruling.
GMT recommends the following actions on the part of companies with assignees subject to the Netherlands 30% Ruling regarding these new legislation:
1. Companies should review their foreign assignee population in The Netherlands to assess the new rules in relation to any potential future breaches in the new requirements.
2. Tax planning opportunities may exist for employees who do not meet the minimum salary level by granting a lower percentage of tax-free allowance to meet this requirement. This planning opportunity should be discussed with GMT and our Netherlands partner firm.
3. New 30% Ruling applications will be available soon by the Dutch tax authorities and should be reviewed by our GMT tax partner firm in the Netherlands prior to submission.
Should you require assistance from our office or our partner firm in Australia or The Netherlands regarding the above, please do not hesitate to contact us. We can help!
Your Global Mobility Tax Team