I am a Non-resident for tax purposes having lived in Japan for 10 years. I am in the process of being employed full time for a company in Sydney – working from Tokyo.
I will of course be taxed for income by the Japanese, my question revolves around potential tax issues on the Australian side.
Initially I will be employed as a contractor, not an employee. So, super etc wont come into play. Eventually though and likely next year, the company will want to put me on payroll – though I will still be based in Tokyo.
So, Are there tax issues on the Australian side for me working as a contractor or as an employee, while being based permanently in Tokyo?
You really do not have anything to worry about. As a resident of Japan, earning the income in Japan Australia has no right to tax your income whether you be a contractor or employee. The catch maybe convincing your employer of this.
Firstly, Australia and Japan have a double tax agreement (DTA) (sometimes referred to as a tax treaty) a summary of it is available on the ATO web site
In particular note he following paragraphs:
“Income from employment (other than directors’ fees, pensions and annuities, remuneration for government service or the income of entertainers and sports persons) is taxed in the country of residence of the employee, unless the employment is exercised the other country, in which case, the income generally may be taxed in the country where the services are performed. However, where the services are performed during short visits to one country by a resident of the other country (who is employed by a resident of that other country) the income will generally be exempt in the country visited [Article 14].
Business profits (including income derived from the performance of professional services and other non-employment activities) are taxable only in the country of residence of the recipient, unless they are derived by a resident of one country through a permanent establishment in the other country. In that instance, the other country may tax the profits attributable to the permanent establishment. These rules also apply to business trusts [Article 7].”
Nevertheless, there are strict rules requiring Australian businesses making payments to foreign residents to withhold tax. These are not intended to apply if the DTA declares the income exempt from Australian tax but should your employer be over cautious you must convince them not to withhold or you will have great difficulty getting the amount back. Your employer can apply to the ATO to have the withholding amount varied to nil even if an amount did apply. But note in your case withholding should not apply, as discussed above. As an amount is not required to be withheld in your circumstances your employer should have no difficulty obtaining a ruling from the ATO that the withholding amount is nil. This is the ATO practice statement on the matter:
In particular note the following paragraph from the statement above:
“25. The withholding rules do not override the operation of a tax treaty as they do not impose tax on amounts which will, by operation of the treaty, be relieved of taxation. Rather, the withholding arrangements facilitate the efficient collection of amounts to be put towards discharging any liability by the foreign entity to taxation on assessment.”