Chapter Seven - Other concerns of expatriates
This chapter examines some of the other concerns of
Australian expatriates including:
- taxation issues;
- issues relating to driver's licences;
- medical insurance issues;
- social security agreements;
- working holiday arrangements; and
- issues relating to tourist visas.
Each of these issues will be considered below.
A number of submissions commented on taxation. The most
significant areas of concern were:
- income tax rates;
- withholding tax for non-residents;
- lack of a tax-free threshold for expatriates on
- section 23AF of the Income Tax Assessment Act 1936 (expatriates working in countries
with no personal income tax); and
- the need to make information on tax issues more
available to expatriates.
Income tax rates
7.4 A substantial number of submissions raised income tax
rates as an issue, generally to argue that they are too high. Some submitters,
such as Mr Ray
Thaller, claimed income tax as a factor
'driving them out' of Australia:
As a potential emigrant (I will be emigrating shortly to the
US), I can say that one of the reasons Australians are leaving home is not just
to make a splash in a bigger pond as some suggest, but because our tax rates
are not internationally competitive. Much smaller countries like Singapore
recognize that they will always be a small pond, hence make it attractive
through low income tax rates. Taxes have to be internationally competitive to
lure expatriates back and to reduce incentive for Australians wanting to go
Other submissions described (allegedly) high rates of
income tax as a factor which may prevent or delay repatriation. For example,
the SCG stated that:
The relatively high level of income taxes in Australia compared
with the much lower levels applying in many of the countries in which
[expatriates] live, is identified as one of the major reasons not to repatriate
to a country where job prospects commensurate with their experience and
qualifications are limited and a large part of their earnings is taken in tax.
Most submissions argued that the solution was for Australia
to institute a lower personal income taxation regime, though some submitters
sought specific tax concessions in order to entice expatriates to return. For
What about some kind of tax "forgiveness" for the
first five years of returning Australians? What about low-cost housing loans? A lower mortgage? Subsidised housing?
Maybe a $200 fare for returning Australians?
The Committee does not support tax 'forgiveness' or
other tax concessions for returning expatriates. Such a system may in fact have
the perverse effect of forcing more Australians overseas in order to qualify
for concessional taxation when they return.
Concern about the level of personal income tax is not
confined to expatriates, but rather is a regular feature of Australian public
debate on tax policy. The Committee supports one underlying argument in these
submissions: that Australia
should have an internationally competitive taxation regime. However, in the
Committee's view it is somewhat simplistic to examine personal income tax in
isolation. Rather, income tax should be considered in the context of the
taxation system as a whole, and also
in terms of the services which are provided by government. Other nations may
indeed have smaller levels of income tax, but may compensate for this either by
having other forms of taxation, or by providing lower levels of government
service. One submitter, Ms Emma
Cuttler, took a more sophisticated view of
personal income taxation and found that she preferred a nation with relatively
high levels of personal income tax:
I am currently paying 40% income tax in Denmark,
which is at the low end of the scale. However I am entitled to free medical
cover, I attend free Danish language classes each week, I have access to the
libraries and if I am living here after 2 years I will be entitled to free
education with study payments from the government each month.
The Committee noted that some submissions on personal
income tax appeared confused about what the actual level of personal income
taxation is. For instance, Dr George
Fifty percent tax in Australia
is an appalling tax on reward, hence people in Australia
don't work hard. This is one of the reasons why many Asian countries have
growth rates of about 8-10%, whereas in Australia
we struggle tor each half that growth rate.
Statements such as this one give the impression that
resident high income earners are paying 47 per cent income tax on every dollar
they earn. This is simply not the case. Personal income tax rates in Australia
are marginal tax rates. That is, 47
per cent taxation is only applied to every dollar earned over $70,000 (in
2004/05). Even for high income earners, their first $6000 in income is untaxed;
their income between $6001 and $21,600 is taxed at 17 per cent; between $21,601
and $58,000 at 30 per cent; and between $58,001 and $70,000 at 42 per cent.
Only their income above this amount attracts 47 per cent taxation.
This system of progressive taxation is a cornerstone of
Australian taxation, because it places the greater tax responsibilities on
those with the greatest capacity to pay, and seeks a lesser contribution from
those with a lesser capacity to pay. While the precise levels of marginal
taxation, and the income thresholds at which they should apply, are likely to
continue to be matters of political debate, the system of progressive income
taxation itself is unlikely to be changed in order to reduce perceived barriers
to expatriates returning to Australia.
Withholding tax for expatriates
Non-resident Australians who earn Australian income in
the form of interest, dividends and royalties will have some of those earnings
withheld under the pay as you go (PAYG) withholding tax system. The withholding
tax on interest is 10 per cent, and the withholding tax on the unfranked
portion of dividends and royalties is 30 per cent, unless Australia
has a tax agreement with the non-resident's country of residence (in which case
the rate is generally lower). This is a final
withholding tax; that is, once the withholding tax has been paid, the
taxpayer's tax liability is fully discharged.
Some submissions argued that this withholding tax is
unfair. Australian Chamber of Commerce, Singapore
suggested that the withholding tax on interest should be waived.
Mr Quentin Waddell argued that instead of paying the withholding tax,
expatriates should be able to enter dividend reinvestment programs, not pay tax
on the re-invested income, then pay personal income tax once they return to
Australia and realise the income.
This suggestion would be problematic. Currently, tax
law treats wealth acquired through dividend reinvestment schemes as income, and
taxes it as such, in the year it is earned. Allowing expatriates to reinvest
their dividends, thus delaying their tax liability, would result in that
reinvestment wealth occupying an ambiguous position where it is neither income
(or else it would be taxed in the current year) nor exempt income (because a
tax liability for that wealth remains).
This suggestion may also increase the complexity of the
taxpayer's tax liabilities in their country of residence. Under the double
taxation agreements Australia
has with a substantial number of nations, Australian nationals may have their
Australian tax credited against their tax liability (on their Australian
income) in their country of residence. If the tax liability was deferred and
not paid, and if the dividend reinvestment was regarded as income by their resident
country, this may in fact result in the expatriate being taxed twice for that
wealth: once by their country of residence in the year it is earned, and once
when the gain was realised on return to Australia.
The Committee notes the concerns of expatriates
regarding withholding tax, but acknowledges that this issue is part of the
broader tax debate, and beyond the scope of this inquiry.
Lack of a tax-free threshold for
expatriates on superannuation pensions
Another specific concern that was raised related to the
fact that expatriates living on self-funded retirement pensions are not granted
a tax-free threshold and as a result are required to pay tax on their entire
Australian expatriate superannuation pensioners are not entitled
to any Australian government financial assistance in their medical care simply
because they do not live in Australia.
Most such pensioners are also not entitiled to the social security pension (the
old age pension) because the means test disqualifies them. They are therefore
not a financial burden whatsoever on the Australian government. They must look
after themselves. Yet an unfair anomoly exists because any superannuation
pension generated in Australia
is fully taxed. There is NO tax threshold whatsoever. Out of the net pension
they are then required to provide their own offshore medical insurance cover
and to pay the costs of hospital outpatient treatment and associated
This issue is not restricted to superannuees. As a
matter of policy, non-residents are not entitled to the tax-free threshold with
respect to any personal income,
instead paying a 29 per cent marginal tax rate on their first $21,600 of
Australian sourced income. Income in excess of $21,600 is taxed at the same
marginal tax rates as for Australian residents. Application of this policy to
income from superannuation schemes results in the concern identified above. Any
suggestion that tax-free thresholds should be implemented for superannuation
pensions, by extension, would suggest the implementation of the tax-free
threshold for all Australian-sourced income derived by non-residents.
Section 23AF of the Income Tax
Assessment Act 1936 (expatriates working in countries with no personal income
Another concern raised was the application of section
23AF of the Income Tax Assessment Act
1936, which relates to income tax
exemptions for income derived by Australian residents whilst working on
approved overseas projects. According
to Austrade, the main intent of section 23AF is to ensure that Australian
consultants and contractors working overseas on approved projects do not suffer
a tax disadvantage compared to similar workers of foreign countries, allowing
them to operate and compete under tax-free conditions.
The Committee is aware of concerns that a recent
reinterpretation of section 23AF means that many who may previously have
benefited from this section may now miss out. The Committee notes that the
Joint Committee on Foreign Affairs, Defence and Trade has been inquiring into
this issue as part of a broader inquiry into expanding Australia’s
trade and investment relationship with the economies of the Gulf
States. The report of the Joint Committee may throw
some light on this matter.
As with tax, superannuation was a common area of comment
and concern amongst submissions. Two superannuation issues raised were:
- portability of superannuation; and
- residency requirements for small superannuation
Portability of superannuation
Many expatriates wish to establish the basis for a
retirement income by contribution to superannuation or similar tax-sheltered
retirement savings vehicles, even while they are overseas. However, a number of
submissions raised concerns regarding the 'portability' of such overseas
retirement savings. 'Portability' in this context refers to the expatriate's
ability to repatriate their retirement savings without facing punitive taxation
penalties. This was particularly a concern for expatriates in the US
and UK, but was
not limited to residents of those nations.
In the US,
retirement savings are commonly accumulated through what are known as '401k
accounts'. These are analogous to Australian complying superannuation funds. An
Australian who lived and worked in the US,
and who contributed to a 401k account, would face severe penalties upon their
return to Australia:
Let me illustrate here what would happen in the case of an
Australian (the same would happen in reverse to an American). There are a
number of permutations (usually all adverse), but the following basic example
will illustrate the dilemma. As noted above withdrawal from the US
schemes is restricted until usually a person reaches a certain age. If an
Australian were to return home, he must leave his 401K or IRA in the US
since they cannot be moved or liquidated without a severe tax penalty (e.g. all
cumulative gains would be taxed at current rates plus a 10% early withdrawal
penalty). However, from an Australian tax perspective, as I understand, the
Australian upon returning to reside in Australia would find that the Australian
government would tax all dividends and interests and certain other gains in the
year they arose even though the returning expatriate would not have access
(without penalized withdrawal) to the funds in the account to pay the Australian
tax that was levied. Although Australian tax law may recognize Australian tax
sheltered savings vehicles, they do not recognize foreign ones and vice-versa
in the US for
an expatriate returning to the US
who would have an Australian or other foreign sheltered scheme.
This issue was recently considered by the Senate Select
Committee on Superannuation, in its July 2002 report Taxation Treatment of Overseas Superannuation Transfers. While the
Select Committee examined all
incoming superannuation transfers, whether from returning expatriates or
migrants entering Australia
for the first time, its conclusions are relevant to the current inquiry.
The Select Committee recommended concessional taxation
for the earnings of lump sums from foreign superannuation which were
transferred to Australia.
This is somewhat different to the situation described above, where the
superannuation funds are to be held in the 401k account until retirement. In
considering such accounts, the Select Committee was less prepared to offer concessions,
arguing instead that such funds should be treated in the same manner as
Australian non-complying funds:
The Committee also notes that, while an
overseas entity may have many of the characteristics of a complying fund, it
may be difficult to justify why earnings from such a source should be treated
differently from earnings from any other non-complying source ... Specifically,
if the earnings of an overseas non-complying fund are to receive concessional
treatment, there may be a presumption that the same should apply to resident
non-complying funds. However, the Committee considers that such a move may
weaken the current distinction between complying funds which forms the basis of
superannuation regulation in Australia.
the Committee is aware of the importance of the distinction between complying
and non-complying superannuation funds, workers in Australia are inevitably able to contribute to
complying funds. If they choose to contribute to a non-complying fund, they may
make this choice with a full appreciation of the taxation consequences. An
expatriate, in most cases, will not
have the choice of making contributions to an Australian complying
superannuation fund. It therefore seems anomalous to press a tax disadvantage
notes that the Senate Select Committee on Superannuation has made a full
investigation of this issue. However, the Committee considers that
consideration should be given to recognising some forms of foreign
superannuation, which have characteristics similar to Australian complying
funds, as complying funds for Australians resident in that nation at the time
the contributions are made.
Residency requirements for small superannuation funds
For superannuation funds to attract concessional
taxation, they must be resident
superannuation funds. However, this may not be feasible in the case of small,
self-managed superannuation funds operated, for instance, by a couple who then
move overseas for a relatively short period. In recognition of this, the Income Tax Assessment Act 1936 was
amended to provide that a small fund could remain resident for tax purposes so
long as its trustees are not absent from Australia for more than two years.
One submission argued that this two year period is too
Many expatriates are sent on overseas assignments for periods in
excess of 2 years at the behest of their employers, a matter that is largely
beyond their control.
It is submitted that the residency test for a superannuation
fund should be amended to allow for a long-term 'hiberation' of 'mum and dad'
funds to the eventual return of the expatriates or at the very least, extend
the 'hibernation' period beyond 2 years, to perhaps 5 years.
The Committee considers that the current two year
permitted absence is adequate. If an expatriate plans to leave for more than
two years, they have the options of appointing resident trustees or
transferring the assets of their self-managed superannuation fund into a
larger, resident, complying superannuation fund.
Driver's licence issues
Another issue of concern raised in the course of the
inquiry relates to the reciprocal recognition of driver's licences and between Australia
and other countries. The Committee notes that Australia
has recognised a number of countries with equivalent driver's licensing
standards and procedures. Under reciprocal agreements with these countries,
applicants for licences are not required to undergo a practical driving test.
They are still required to pass a knowledge test.
For countries where no reciprocal arrangement exists,
however, many Australian expatriates experience difficulties when attempting to
obtain a driver's licence. The SCG argued that due to language difficulties and
time and cost issues it is not uncommon for expatriates who have been resident
in a country for a number of years to continue driving on international
driver's licences which have been issued in Australia.
This is illegal in their country of residence and could result in serious
consequences such as their not being covered by insurance in the event of an
accident. The SCG also pointed out
that an Australian who becomes resident in an overseas country is required to
obtain a local licence within a defined period of becoming a resident.
The SCG voiced particular concern that Australia's
policy towards foreigners driving in Australia
has a direct impact on policies towards Australians in other countries. Ms
of the SCG was critical of Austroads, the association of Australian and New
Zealand road transport and traffic authorities.
Austroads plays an important role in considering and approving applications for
overseas countries seeking recognition of their driving licences in Australia.
told the Committee:
Austroads does not seem
to have grasped that its policy on the treatment of foreigners arriving in Australia with foreign licences directly impacts on
the way other countries treat Australians overseas on this matter. Attempts are
also under way to achieve a reciprocal licence arrangement with Belgium but these are going to be hindered if
Australian licensing authorities are not prepared to allow Belgian citizens to
swap their licences for Australian licences. A great deal remains to be done in
this area. Many employment opportunities for expat Australians depend on the
ability to be able to drive legally in their country of residence.
Increasing economic globalisation and movement of
people will inevitably lead to a growing need on the part of many countries for
reciprocal recognition of driver's licences. The Committee notes that other
countries are also grappling with this issue. In the US,
for example, the American Association of Motor Vehicle Administrators (AAMVA)
has recognised that multinational corporations are relocating staff and their
families around the world for extended periods, and that there is a rise in the
number of countries seeking reciprocity agreements. The AAMVA has established a working
group to assist states (of the US)
and provinces (of Canada)
in their consideration of applications from other countries for reciprocity
The Committee notes that Austroads, through its
Registration and Licensing task force, is continuing its work in this area, and
encourages Austroads to expedite applications from other countries.
Medical insurance issues
The SCG raised some concerns in relation to medical
insurance issues, in particular the issue of Medicare coverage overseas. The
SCG submitted that Medicare will only cover Australians outside Australia
has a reciprocal health care arrangement with the particular country in which
medical assistance is sought.
has reciprocal health care agreements with some countries, including Finland,
New Zealand, Norway,
Sweden and the UK.
The SCG submitted that these agreements 'generally exclude long-term members'
of the Australian expatriate community.
According to the SCG, whether an Australian in one of
these countries will be covered by the relevant agreement concerned then
usually turns upon whether the person is an Australian resident for the
purposes of the Health Insurance Act 1973
at the time he or she seeks medical assistance in the country with which Australia
has the reciprocal agreement. The SCG submitted that generally the agreements
cover people who are 'temporarily in the territory' of the other country but
not ordinarily resident there.
The SCG argued that this has the effect of creating
confusion, for example, for those Australians overseas on working holiday visas
for a 12-month period.
Pure travel insurance in order to obtain medical coverage may be
feasible for those who are away for up to 12 months, but it is not always
available, advisable or even necessary for longer periods. Once employed
overseas, many overseas Australians and their dependents are covered by the
health systems in their country of residence through their social security or
national insurance contributions, or in the US,
for example, by employer health benefits.
The SCG suggested that it would be advisable for DFAT
to explain in brochures such as Living
and Working Overseas that, where this is not the case, expatriates should
obtain their own private insurance locally where travel insurance is not
available or not appropriate. In addition, the SCG suggested that it would be
helpful if a link could be provided to an Australian Government website which
includes detailed information in plain English on eligibility under Australia's
existing reciprocal health agreements, concentrating on the particular areas
which cause many people confusion.
A further issue relates to those expatriates who have
not obtained private health insurance by the age of 30 in Australia.
On repatriation, people who purchase hospital cover for the first time after
the 1 July following their 31st birthday must pay a Lifetime Health
Cover Loading, based on the person's Lifetime Health Cover Age. This loading
equals 2 per cent for each year the person's Lifetime Health Cover Age is over
30. One submission expressed
concern in this regard as follows:
Naturally, we are worried about
our own situation when the time comes for us to take up residency as far as
membership of Medicare is concerned. In the meantime we are aware of changes to
membership of private health insurance. We did try to get private insurance
with HBA but were told that without Medicare cards it was not available to us.
We did this before the system changed in such a way that if you were not
enrolled in private health care before the age of 30 (we are in our 50’s) you
would have to pay increased premiums if and when you did join. So we are also
concerned that we will be unable to get reasonably priced private health cover
when we return.
The Committee notes that there is no provision, under
the Lifetime Health Cover scheme, for taking into account the contributions
made by expatriates to foreign private health insurance whilst resident
overseas. Thus for those returning after the age of 30, there is no way of
avoiding the additional insurance premium that must be paid. This is a matter
for consideration by the Department of Health and Ageing.
Social security agreements
The Department of Family and Community Services (FaCS)
informed the Committee that Australia
currently has international social security agreements with 14 different
countries, including Canada,
New Zealand, Spain
and the US. Negotiations
for an agreement with Greece
have been continuing for a number of years.
previously had an agreement with the UK,
however this was terminated from 1
March 2001 because of the UK's
decision not to index the pensions it pays to UK
pensioners living in Australia. The SCG noted that the termination
of the agreement with the UK
has 'been of great concern to, and the subject of much lobbying by, expatriate
groups representing the recipients of British pensions'.
FaCS pointed out that an emerging priority with
agreements which is of interest to the expatriate and international business
community 'is the incorporation of provisions regulating compulsory
employer/employee contributions to retirement income schemes (in Australia's
case the Superannuation Guarantee)'.
These are included in existing agreements with the Netherlands,
the US and in
new agreements with Belgium,
Chile and Croatia.
Wherever possible, such provisions will be included in all future negotiations
for social security agreements.
The SCG submitted that, in its view, the current
momentum that has built up in establishing bilateral social security agreements
should be maintained.
Working holiday arrangements
currently has working holiday agreements with 15 countries, including Canada,
Sweden and the UK.
Negotiations are taking place to establish agreements with 11 other countries.
The SCG argued that working holiday schemes are an
important element of arrangements for Australian expatriates. Amongst other
things, working holiday schemes provide the following advantages:
- young Australians, between the ages of 18 and
30, have the opportunity to stay for an extended period of time in the host
- working holiday visa holders are exposed to the
culture, language, lifestyle and working environment of the host country; and
- the significance of the Australian expatriate
phenomenon is enhanced to family and friends of the visa holder and the
Australian public generally, particularly through those returning to Australia
on the termination of their visas.
In evidence at one of the Committee's hearings, Mr
from Global Exchange argued that the traditional working holiday program model
could usefully be improved to promote travel by Australians to a greater number
Australia now has something like 17 working
holiday-maker destinations and New Zealand I think has about 18, but some of those
countries are exclusive to one or the other. I think with the two put together
there are about 23 countries that accept either Australian and/or New
Zealanders. Unfortunately the expansion in the Working Holiday Maker program,
while it is good in its own right and does provide additional opportunities to
work in other countries, still has not changed the traditional model much, in
the sense that I estimate 25,000 or 30,000 Australians go overseas each year,
the first time on a working holiday visa. But the bulk of them still go to London. Of those 20,000-odd you are still getting
about 18,000 to 20,000 going to London; 5,000 or 6,000 going to Canada; up to
about 1,500 to Japan. Then other countries might get one or two or three,
In particular, Mr
Havenhand suggested that the following
improvements could be made to some elements of the existing scheme:
There needs to be maybe
some encouragement, some direction to get students to look at going to other
countries as well that provide opportunities. I suppose at some level that
meshes in with the developing program now about student exchange and trying to
get students to go to a whole range of different countries and generally
encouraging students to go as well. That is outside the parameters of this
investigation, but those sorts of issues mesh together a bit.
I would not look at any
more countries or any more deregulation but perhaps making the current system
work better in terms of getting people to go to more of the different countries
and getting some of those other countries to loosen up their employment rules.
The SCG recommended that the Australian Government take
steps to hasten the finalisation of those agreements currently under
negotiation and mount a pro-active campaign to establish working holiday
agreements with other countries where there is an existing or potentially
significant Australian expatriate community.
The Committee agrees that the working holiday scheme is
a positive and beneficial scheme which should continue to be promoted and expanded.
The Committee also considers that the agreements currently under negotiation
should be finalised as soon as possible, with development of an extended