The 2012–13 Budget proposes to change the personal income tax scale applying to non-residents and remove their access to the 50 per cent capital gains tax discount. Together these measures are projected to increase revenue by $143.9m over the forward estimates period.

Personal income tax rate

Personal income earned by non-residents in Australia (whether or not they are actually present in Australia) is subject to Australian income tax, albeit with some differences:

• withholding tax applies to interest and dividends paid
• they do not pay the Medicare Levy
• they are not entitled to the personal income tax-free threshold
• they not entitled to claim certain tax offsets or tax credits that are available to residents, and
• they have different personal income tax rates.[1]

The following table illustrates the difference between residents’ and non-residents’ personal income tax rates.

Table 1: Resident and non-resident personal income tax rates 2011–12 (Medicare Levy not included)

Non-Residents		Residents
Taxable income	Tax on this income	Taxable income	Tax on this income
$0 – $37,000	29c for each $1	$0 – $6,000	Nil
$37,001– $80,000	$10,730 plus 30c for each $1 over $35,000	$6,001– $37,000	15c for each $1 between $6,001 and $37,001
$80,001 – $180,000	$23,630 plus 37c for each $1 between $80,000 and $180,000	$37,001– $80,000	$4,650 plus 30c for each $1 over $37,000
$180,001 and over	$60,629 plus 45c for each $1 over $180,000	$80,001– $180,000	$17,550 plus 37c for each $1 between $80,001 and $180,000
		$180,001 and over	$54,549 plus 45c for each $1 over $180,000

Source: CCH Australian Master Tax Guide 2012.

Under changes to the residents’ tax free threshold already legislated (i.e. increasing threshold to $18  200 p.a. and a change in rates)[2] under this proposal from 1 July 2012 the resident and non-resident tax rates will be as follows:

Table 2: Resident and non-resident personal income tax rates 2012–13 (Medicare Levy not included)

Non-Residents		Residents
Taxable income	Tax on this income	Taxable income	Tax on this income
$0 – $80,000	32.5c for each $1	$0– $18,200	Nil
$80,001 – $180,000	$26,000 plus 37c for each $1 between $80,001 and $180,000	$18,201– $37,000	19c for each $1 between $18,001 and $37,000
$180,000 and over	$63,000 plus 45c for each $1 over $180,000	$37,001 – $80,000	$3,572 plus 32.5c for each $1 between $37,001 and $80,000
		$80,001 – $180,000	$17,546 plus 37c on each $1 between $80,000 and $180,000
		$180,000 and over	$54,546 plus 45c on every $1 over $180,000

Source: Parliamentary Library derived from tax scales published in the Clean Energy (Income Tax Rates Amendments) Act 2011

This particular budget measure is projected to increase revenue by about $88.9m over the forward estimates period.

Capital gains tax

A non-resident’s net capital gains and losses realised on taxable real property more than 12 months after purchase can be assessed under one of two methods:

• the net gains are discounted by inflation during the period September 1986 to September 1999 for assets purchased during that time, and the resulting figure included in the taxpayer’s assessable income, or
• 50 per cent of the net gain is included in the individual taxpayer’s assessable income.

During a period of low inflation the latter method usually produces the least amount of capital gain, and thus the lowest assessed income.

The 2012–13 Budget proposes to exclude non-residents from using the 50 per cent discount method for including realised capital gains in their assessed taxable income. All other things being equal this will lead to a higher tax bill. This proposed change is projected to increase revenue by $55.0m over the forward estimates period.

This change will apply from 7:30 pm on 8 May 2012. For gains accrued before this date the 50 per cent discount method will remain available, if the non-resident obtains a market valuation of the asset in question as of 8 May 2012. This may be somewhat difficult for some unlisted assets, or managed investments holding assets that are not easily valued, such as infrastructure projects.

Comment

Press comment has been somewhat critical emphasising that these proposed changes will reduce Australia’s position as a destination for foreign investment.[3] Other possible implications are that the proposed changes will reduce Australia’s attractiveness as a place for highly skilled foreign workers to undertake short term assignments.

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