Thousands of Australians head offshore each year to live and work overseas indefinitely, thereby ceasing their Australian ‘tax’ residency. However, there can often be confusion about the tax implications for taxpayers who take advantage of such offshore opportunities.
A taxpayer who is a resident for Australian tax purposes is taxed on their Australian sourced and worldwide income, whereas an individual classed as a non-resident is taxed only on Australian-sourced income. Further, an individual who is a non-resident is not eligible for the $18,200 tax-free threshold, so all assessable income is taxed from the first dollar. There are also variances in the marginal tax rates.
Here are 4 commonly missed tax implications in ceasing your tax residency.
1. HECS/HELP and TSL debts
From 1 July 2017, taxpayers with HELP or TSL debts will be required to report their overseas earnings to make repayments against their loan. Assessments will be based on worldwide income for the 2016-17 Australian income year (being, 1 July 2016 – 30 June 2017) and will be based on the current repayment thresholds. Taxpayers will also need to submit an overseas travel notification to the ATO within seven days of leaving Australia, updating their contact details while abroad.
2. Investments
When you cease being an Australian tax resident, you are deemed to have disposed of all investments that are not Taxable Australian Property (TAP). TAP includes Australian real property, an asset used in carrying on a business through a permanent establishment in Australia or an indirect interest in Australian real property where you hold 10% or more of the entity. Shares, managed funds and other investments that are not TAP would be considered to be disposed of as at the date residency is ceased, resulting in a capital gain or loss made on the difference between the market value of the asset at the time the taxpayer becomes a non-resident and the asset’s cost base.
This can result in a large unrealised capital gain – a taxable gain, whilst not necessary having the monies available to the pay the tax, as no actual sale has taken place. A choice is available, whereby the capital gain can be disregarded. However, once the choice has been made it applies to all assets (with the exception to those that are TAP). However, if the asset is disposed while being a non-resident, the gain is not eligible for the CGT discount (a reduction of 50% of the gain if owned for more than 12 months) and is subject to non-resident tax rates in Australia. Significantly more tax can therefore become payable where an election is made to disregard the capital gain arising from ceasing residency.
From 8 May 2012, foreign residents are no longer eligible for the 50% CGT discount on TAP. If you acquired the asset before 8 May 2012, the CGT discount can be apportioned according to the number of days you were a foreign tax resident. The ATO prescribes a worksheet to assist you in calculating your potential gain in this instance. For assets acquired after 8 May 2012, individuals, including beneficiaries of a trust and partners in a partnership, who are foreign or temporary residents, or Australian residents with a period of foreign residency may no longer receive the full CGT discount on a capital gain.
3. Existing corporate structures
If a taxpayer is a director or trustee of a Company or Trust, there could be implications on the residency status of that entity if the individual ceases residency. A corporate entity is deemed to be an Australian resident for tax purposes if the central management and control resides in Australia. If you are a sole director or trustee of a corporate entity, you may want to consider if incorporating an additional resident taxpayer to the corporate register is appropriate.
4. Primary place of residence
From 9 May 2017, foreign residents are no longer exempt from capital gains tax when selling their main residence. This rule is subject to grandfathering for existing properties held on this date and disposed of on or prior to 30 June 2019. This means that the timing of any sale can be crucial, and it is possible that some expatriates may be better placed selling properties with large current capital gains prior to 30 June 2019 – particularly if they have little or no intention of returning.
So how do expatriates invest in Australia?
Foreign residents are only subject to capital gains tax in relation to gains made on assets that are considered TAP (which excludes assets such as shares, options and managed fund investments). Effectively, a non-resident can potentially avoid paying any Australian capital gains tax on such assets (i.e. non-TAP) during the period of their non-residency. Where such assets are acquired whilst a non-resident, and the individual subsequently becomes an Australian tax resident again, these assets are treated as being acquired at market value for CGT purposes at the date the taxpayer becomes a resident. Note: The taxation consequences of holding such assets in the country of residency should be considered.
When investing in TAP, taxpayers can structure assets within a Trust by having an appropriate combination of resident trustees involved.
Seek advice…
Of course, there are further implications of ceasing your tax residency. It is crucial to obtain the right advice based on your circumstance when ceasing residency and investing in Australia. There are also various tests in determining your residency for tax purposes. Merely moving abroad for an extended period would not necessarily imply you have ceased residency.
If you need assistance identifying the tax consequences of your residency status, do not hesitate to reach out to us.
