Business World

Thursday 5 December 2019

Will my son be hit by new backpacker tax?

Your questions answered

Employers hiring holders of working holiday visas are required to register with the Australian Taxation Office (ATO) and deduct the correct amount of tax from the employees
Employers hiring holders of working holiday visas are required to register with the Australian Taxation Office (ATO) and deduct the correct amount of tax from the employees

Barry Flanagan, Director at

Q My son will be travelling to Australia in February under a working holiday visa. Is it true that he will have to pay a new backpacker tax when he gets there? If so, can you explain how that tax works - and if he can claim that tax back when he returns to Ireland? Ger, Killester, Dublin 5

The taxation of the working holiday visa holders changed from January 1, 2017. The holders of such visa are now considered generally as non-residents for tax purposes and so are not entitled to a tax-free allowance. All the people with such visa are taxed as per the working holidaymaker tax rates for the 2017/2018 Australian tax year as follows. For taxable income of up to A$37,000, tax of 15c for each $1 is paid; for taxable income of between $37,001 and $87,000, tax of $5,550 is paid - plus 32.5c for each $1 over $37,000; for taxable income of between $87,001 and $180,000, tax of $21,800 is paid - plus 37c for each $1 over $87,000; and for taxable income of $180,001 and over, tax of $56,210 is paid - plus 45c for each $1 over $180,000.

Employers hiring holders of working holiday visas are required to register with the Australian Taxation Office (ATO) and deduct the correct amount of tax from the employees. As a working holidaymaker, your son's employer also has to pay 'super' (superannuation or pension contribution) for him (if eligible). When he leaves Australia, he can apply to have his super repaid as a Departing Australia Superannuation Payment (DASP). The tax on any DASP made to working holiday makers on or after 1 July 2017 is 65pc.

Will I pay tax on US pension?

I am receiving the contributory pension while I continue to work part-time. I have no other pension in Ireland. When I left the US almost 30 years ago, I chose to leave money in an IRA (individual retirement account) which I had in the US. Currently the pension is worth between €40,000 and €50,000. Am I entitled to draw down a portion of this pension tax-free in Ireland? I file taxes in the US but my income is well below the tax threshold. My ideal scenario is to draw down as much as possible in order to help my son purchase a house.

Ann, Drogheda, Co Louth

In general, foreign pensions (including UK and US pensions) are taxable sources of income in Ireland, and are liable to income tax and the universal social charge (USC). There is a provision in Irish tax law which allows foreign occupational or social security pensions that would not be considered to be taxable income if the individual had remained in their home country, not be taxable here either. However, this is distinct from a pension which is taxable but on which no tax is paid - due to the low level of income.

A tax-free lump sum of up to €200,000 can usually be taken on retirement. This applies to the Revenue Commissioners' approved occupational pension schemes (including Additional Voluntary Contribution - AVC - arrangements), RACs (Retirement Annuity Contracts), PRSAs (Personal Retirement Savings Accounts) and also qualifying overseas pension plans. Unfortunately, it would appear that the definition of a "qualifying overseas pension plan" is limited to plans established within an EU Member State.

It may be worth consulting a pension specialist to ascertain if any other relief is potentially available, or whether the IRA could be converted into a more tax-efficient ARF established here in Ireland.

Payslip anomaly

Q I was wondering if you could advise me on something I have noticed on my payslips and whether there has been a mistake made. In the last two months, I have decided to divert my monthly savings amount of €1,000 from a savings account into an Additional Voluntary Contribution (AVC) for my pension instead. The €1,000 is obviously deducted by my employer into the pension whereas previously the €1,000 was transferred at a later stage by myself into a savings account. What I have now noticed is that over the last two months, I have been paying no PAYE tax at all -in fact it has been showing as a credit of €26 for the past two months. I am still paying the usual universal social charge (USC) and PRSI. I know that I get tax relief on the pension contributions at 20pc. The amount of PAYE tax I have typically paid before would usually have been about €400 per month. I am 39. Is it correct that I am now paying no PAYE tax at all?

 Joan, Shankill, Dublin 18

Without knowing your exact salary level and tax credits receivable, it is impossible to know for sure if an error has occurred, but it does appear to be an unusual result.

Individuals receive income tax relief for pension contributions made. There is no relief from USC or PRSI. Assuming that a salary is paid on a cumulative basis, it can happen that no PAYE is payable, assuming other tax credits are sufficient to cover the PAYE liability.

However, as you are aged 39, relief on pension contributions will be limited to 20pc of yearly earnings. Therefore, if full relief is being granted on a monthly contribution of €1,000, this suggests that your annual earnings must be above €60k. At such a level, credits would need to be very high to cover the tax due. It would therefore seem advisable to query whether an error has been made with your payroll department.

401(k) pension investment

Q Do you know the percentage tax an Irish national would pay on a "401(k)" type pension investment in the US, based on the fact that Ireland and the US have a double taxation treaty?

Conor, Tralee, Co Kerry

There are two standard types of 401(k) plans. The first is a traditional 401(k) plan, where contributions reduce the taxable income. Tax on contributions and earnings is due in the future, when the individual takes distributions from the 401(k) plan. The second is a Roth 401(k) plan, where contributions have already been taxed at the current marginal rate. Therefore, with this plan, all earnings may be distributed tax-free (where the relevant conditions are met).

Based on the double taxation agreement between Ireland and US, this type of pension shall be taxable in the country in which the person is resident. If we assume that the benefit was received on retirement (where all requirements of the plan were satisfied), the individual will be taxed on that source of income in Ireland (as an Irish tax resident). He or she should also consider claiming an exemption from US tax.

The percentage tax that the person will pay on the foreign pension in Ireland depends on the amount of their total worldwide income: if under the standard rate cut-off point, the individual will pay 20pc income tax; if over the cut-off point, the foreign pension will be taxed at the highest rate (currently 40pc). In general, foreign pensions are liable to income tax and the universal social charge (USC) but not to PRSI.

When an individual makes early retirement withdrawals from a 401(k) plan, he or she will be liable to US income tax on that amount (regardless of residency status). The amount cashed out will also be subject to a 10pc early withdrawal penalty in the US. As the person is taxable on worldwide income in Ireland (if resident and domiciled in Ireland), in general such withdrawals are liable to income tax in Ireland, with a credit for the foreign tax paid.

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