By: Max Newnham
What happens when your business replies on goods or services from overseas?
Thankfully most small business owners only have to deal with the Australian taxation system. When a business manufactures in or provides services from Australia that are used overseas, the business is only subject to the Australian taxation system. When the goods are manufactured or the service is provided in an overseas country, the taxation rules of that country must be complied with.
Q. I am operating a small business as a sole trader and have just moved to Canada where I will be based for two years. Will I still be considered an Australian resident for tax purposes? My business provides consultancy and other services in different locations overseas, with the consultants coming from different countries.
Small businesses based overseas may still have to pay tax in Australia. Photo: David McNew
I understand that since I’m a sole trader I can’t pay myself a wage as an employee for tax purposes. If the consultants I employ are of other nationalities, for example Serbian, do they need to pay tax to the Australian government? Would they need to pay tax to their own government or the country where the services are provided?
A. Whether you will be classed as an Australian resident for income tax purposes is dependent on a number of tests. The first test relates to the number of days that a person is absent from Australia. Under this test, when someone is overseas for more than 183 days they may be classed as a non-resident for Australian income tax purposes.
The test that provides greater certainty with regard to Australian residency for income tax purposes is called the domicile test. This test is based on the facts of each case and is designed to assess where a person normally resides.
As you will be overseas for longer than 183 days, you could be classed as a non-resident for Australian income tax purposes. If, however, it is your intention to return to Australia and you have a home to come back to, it is highly likely that you would be regarded as an Australian resident for income tax purposes.
This would mean you would pay Australian income tax on the net profit that your business makes based on its total income less all expenses related to earning that income. This would not only include the wages paid to your consultants, but would also include other costs such as travel.
Your expenses could also include the cost of your accommodation overseas, if you are still maintaining a residence in Australia. For the overseas accommodation costs to be deductible you would need to show that you must live overseas to earn the income, rather than it being a personal choice.
For the consultants that are residents of other countries, because they will not be working for you in Australia, they will only pay tax to the country that they are regarded as being a tax resident of. As to whether income tax will be payable on the income your business is earning, or the wages paid to your consultants, will depend on the tax laws of each of the countries where these services are provided.
Source: The Sydney Morning Herald
