TooEasy

Going from 417 to 457 increased tax by 50%

14 posts in this topic

Hi all

I just had my 457 approved a few weeks ago (was on 417). Great news, BUT...

I was so gutted to see on my last payslip (Jul 14th) that I've gone from paying $1,370 in tax to $2,535! That's $1,165 more tax or a 48% increase—enough to pay my monthly rental cost twice over!

I understand it might just be the way the cookie crumbles, but can anyone with more experience than me with the Aussie tax system confirm that it sounds normal to be paying so much more tax on a 457? It works out around 25% of my monthly salary is tax.

Is there anything to be done? Will becoming a permanent resident help?

Any advice hugely appreciated!
TooEasy 

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No it's not normal. That's assuming you're on the same salary as before, of course.

Why not ask your employer to explain the difference?

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Hey mate,

It may be that you were undertaxed on your WHV or it maybe due to a YTD timing catch-up.  I don't know if they are still around but were you using a tax intermediary to get a LAFA etc.?  I thought they had closed the loopholes on that for WHVs a few years ago.  That is all I can think of. 

WHVs are tax non-resident and pay 15% tax on the first $37k (I think it is $37k) before moving onto the higher non-resident rates.  Non resident tax rates are higher than resident tax rates.

On a 457, you will be tax resident and will pay per the normal scale.  25% as an average rate is cheap btw - welcome to the real world.  Presuming your numbers are monthly, $2,535 tax per month is 25% of your Gross so your Gross is $10,140 pm or $121,680 pa.  Based on that salary, I work out that you should be paying closer to 29% tax, $2924pm (before any deductions and ignoring PHI/ Additional Medicare levies) see below (pasted a bit scewy).  They are last years rates but don't think they have changed.  There are calculators on the ATO site is you want to check it.

 

Taxable Income              121,680
       
2016-2017    
               -        18,200 0%                        -  
     18,201      37,000 19%                 3,572
     37,001      87,000 33%              16,250
     87,001    121,680 37%              12,831
   121,681    180,001 45%                        -  
       
Medicare levy 2.0%                 2,434
       
       
       
       
Total tax/Levy                35,086
Tax rate     28.8%

 

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Hi Collie

Thanks for the advice.

Quote

It may be that you were undertaxed on your WHV or it maybe due to a YTD timing catch-up.  I don't know if they are still around but were you using a tax intermediary to get a LAFA etc.?  I thought they had closed the loopholes on that for WHVs a few years ago.  That is all I can think of.

I'm not sure what is meant by a 'LAFA' but my tax is done through the company I work for.

Quote

WHVs are tax non-resident and pay 15% tax on the first $37k before moving onto the higher non-resident rates.  Non resident tax rates are higher than resident tax rates.

You said WHV is non-resident but the ATO website says you are a resident (for tax purposes) if you're here for 6+ months. Since I've been here for over a year and this is my second full time job I would be considered a resident for tax purposes.

Anyway, I think the tax I'm paying now is correct. My confusion is why it went up from last month when I was on a 417 (but still a resident for tax purposes).

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Ok - LAFA stands for Living Away from home allowance.  It was a loophole used by temp residents and backpackers for years to legally avoid tax.  They tightened up the rules on it some time ago.  Pretty much only available to politicians in Canberra now.

I'm not sure you are not interpreting the ATO site correctly.  I'm pretty sure that most people on 417 visa are non resident for tax purposes.  You seem to fall into the example they have on their site which is a change of behaviour, in which case you would be non resident when on your 417 and resident on your 457

https://www.ato.gov.au/Individuals/Ind/Residency---working-holiday-or-visit/

If my assumed numbers are correct, your company may be deducting too little tax although it may be a timing issue.  Worth an email or a chat with payroll for an explanation.  You don't want a big tax bill at the end of the year.

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If you want to PM me with how much your pay is I can check the calculation for you. There's no reason for the tax to have gone up because of the change of visa (if on a low pay it would have gone down, in all other cases it would be the same). We are in a new tax year but most rates haven't changed.

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18 hours ago, Ken said:

If you want to PM me with how much your pay is I can check the calculation for you. There's no reason for the tax to have gone up because of the change of visa (if on a low pay it would have gone down, in all other cases it would be the same). We are in a new tax year but most rates haven't changed.

Hey Ken,

It is already in a calculator based above on the numbers he posted.

His tax should have went down (on the same salary) as his tax residence will have changed from non-resident (backpacker) to resident.

I think it is a probably a timing thing relating to FY16-17 tax year as the rules only changed through the year (1 Jan - bizarre).  Either that or he is in for a large bill when he does his return for FY16-17. 

Without knowing the full details, it is hard to advise.

 

 

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21 hours ago, Collie said:

I'm not sure you are not interpreting the ATO site correctly.  I'm pretty sure that most people on 417 visa are non resident for tax purposes.  You seem to fall into the example they have on their site which is a change of behaviour, in which case you would be non resident when on your 417 and resident on your 457

On the website it says I'm a resident for tax purposes if I'm "visiting Australia, working and living in the one location and have taken steps to make Australia your home." It goes on to say that if I "live in Australia for more than six months in an Australian income tax year" then I'm also a resident for tax purposes. I have had no intention to return home. I don't have a home in any other country.

20 hours ago, Ken said:

If you want to PM me with how much your pay is I can check the calculation for you.

My base salary, less super, is $109,589.04. The calculation Collie did was based on my salary including super so would be a little off.

20 hours ago, Ken said:

There's no reason for the tax to have gone up because of the change of visa (if on a low pay it would have gone down, in all other cases it would be the same). We are in a new tax year but most rates haven't changed.

According to my payslips, my salary nor taxable income hasn't changed. It's just that the amount of tax paid changed drastically. I've run the numbers on the paycalculator website, and if I was a non-resident before then I would have been paying MORE tax, not less. So, still no explanation for the increase.

2 hours ago, Collie said:

I think it is a probably a timing thing relating to FY16-17 tax year as the rules only changed through the year (1 Jan - bizarre).  Either that or he is in for a large bill when he does his return for FY16-17.

When you say a "timing thing" what exactly might that mean? At my previous job, our finance controller split my group certificates at Dec 31st. However, I only started at my current job in May this year, so I've only had two full payslips so far (one either side of the FY).

I've already done an estimation of tax owed for FY16/17 and I'm owed money.

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1 hour ago, TooEasy said:

I have had no intention to return home. I don't have a home in any other country.

FYI - Both the 417 and 457 visas are temporary visas with no automatic right to PR or citizenship.

I'm pretty sure the ATO would differ to your interpretation of their rules.  The vast vast majority of people on 417 visas are in the special backpacker non-resident tax category (regardless of your intentions).  This can later change to tax resident based on a change in circumstances but you would be tax non-resident while on the 417 visa.  Look, I'm only a CPA so check with the ATO directly, they have a chat function on their website and you can do so annonymously.

The timing thing relates to what schedule and allowances the payroll team applied to you, they may have allowed for a YTD catchup of allowances.  It will all wash through on your FY17 tax return anyway but you could ask them if you really wanted to know.

On the salary you have declared, I calculate that you should be paying tax/levies of $2,531pm (27.7%) which is pretty close to what you said was deducted  This excludes any additional medicare levies for not having private health insurance (PHI).  If you are single, earn >$90k ($180k for family) and do not have PHI you will be charged an addtional medicare levy (think it is 1%).

If you are single, it may be worth taking out some PHI, the premium may not be too different to the addtional tax you would otherwise pay.

Hope this was of some help.

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5 hours ago, TooEasy said:

My base salary, less super, is $109,589.04.

In that case $2,535 is the correct monthly tax deduction for this year and your net pay is $6,597.42

I've looked in to what happened with the WHV for you and weirdly it looks as if the $1,370 was the correct deduction (based on you only having worked for them a couple of months). Most taxes in Australia do not take into account the year to date, they just assume you earn the same amount every pay period for the whole year however the WHV system has a year to date component.

While your total pay from an employer in a tax year is less than $37,000 your monthly tax (on your salary) would be $1,370 - so in your case (if you were still taxed as a WHV holder) that's for the first 4 months of the year.

Once your total pay goes over $37,000 but is still under $87,000 your monthly tax deduction increases to $2,968 - so in your case that's for the next 5 months of the year.

Once your total pay goes over $87,000 but is still under $180,000 your monthly tax deduction increases again - this time to $3,379 - in your case that would be for the final 3 months of the year.

 

As a normal employee your total tax deductions are: 12 x $2,535 = $30,420

As a WHV holder they would be: 4 x $1,370 + 5 x $2,968 + 3 x $3,379 = $30,457

 

Note that in both case these are only the deductions that your employer is required to make they are not the actual amounts of tax you have to pay. Your actual tax bill is calculated at the end of the year when your tax return is submitted and the amount that your employer has already deducted is offset against that. Most people get a tax refund but you can be landed with more to pay.

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Good reply, Ken.

 

So the $1,370 is on a month 1 basis, $109,589/12*15%.  His employer assumes that he had no other income in that TY. 15% being the WHV non resident tax rate for the first $37k

I've learnt something - thanks

 

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Ken & Collie, thanks so much.

I finally understand. It would've taken me ages to figure that out!

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14 hours ago, Collie said:

I've learnt something - thanks

 

Me too. I was aware that the new rules for taxing WHV holders had come in but as I don't have any clients who employ WHV holders I hadn't bothered to look into the detail of how they worked until now. Quite eye opening. While all the publicity has been about WHV holders having more tax deducted, it's only those on low pay that applies to (since they now get taxed from the first dollar earned). Because WHV holders can only be with one employer for a maximum 6 months and each employer will start from scratch (on what you've called a month 1 basis) any higher paid WHV holders out there will end up with less tax being deducted.

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What was weird was that they brought it in on 1 Jan, instead of in line with the tax year.  Admin nightmare.

Bad policy also IMO.  Whatever WHVs earn here they generally spend here in the local economy and more in the rural economies as they backpack around Australia.  As an ex backpacker, I can't remember many leaving Australia with too much money, it went on travel, tours, booze etc.

 

2 hours ago, Ken said:

Because WHV holders can only be with one employer for a maximum 6 months and each employer will start from scratch (on what you've called a month 1 basis) any higher paid WHV holders out there will end up with less tax being deducted.

And a tax bill at the end of the year - good luck to the ATO in chasing that.  Law of unintended consequences from a bad policy decision.

Are you an accountant in practice Ken? or a tax agent?  Thinking of setting up my own business in that line (I'm CIMA and CPA) here in Perth.  My history is more corporate Mgmt Reporting, FP&A, Decision Support type stuff in Fin Services in Sydney but not much of a Fin Services market in Perth and finding it hard to break into other industries in a very competitive market. 

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