Relocating Overseas – The Tax Implications
By Michael Shulman, Stannards Accountants & Advisors Pty Ltd
Along with the career and cultural opportunities, relocating overseas brings with it a number of personal and taxation issues. Set out below are some of the more important Australian tax issues which you should consider, when you leave the country and become an expatriate.
Can I be taxed in Australia when working overseas?
One of the major issues when relocating to another country is whether you remain a “tax” resident of Australia. If you are a tax resident, you can and will be taxed in Australia on all your income and gains wherever they are earned. An exception to this is some forms of foreign employment income which may be exempt from Australian tax (refer further below).
In contrast, a person who is a not a tax resident only pays tax in Australia on income and gains derived in Australia. Being a non resident is attractive if you are moving to a low tax-rate country.
Residency - the basic rules
The Australian income tax system does not have a definitive set of rules regarding your tax residency. A number of factors are taken into account, including:
- intended length of stay overseas;
- term of foreign employment contract;
- whether your family accompanies you;
- whether you maintain a home in Australia or overseas; and ultimately
- where is your permanent place of abode.
The longer you stay away, the more likely it is you are a non resident for tax purposes. As a rule of thumb, the Australian Taxation Office (ATO) generally requires a two year stay away from Australia before you will be treated as a non resident. Unfortunately, this is not a set rule and cannot be used as a guarantee of non residency. Further, in certain circumstances, if you derive salaries and wages for a continuous period of 91 days or more whilst abroad, and susch salaries and wages were not exempt from tax in the country of source, they should be exempt from income tax in Australia. You should seek professional advice on this issue.
Important tax issues
There are a number of important tax issues for people who become non residents, including:
1. Capital Gains Tax (CGT) and non residency
The CGT rules assume that you have disposed of certain assets when you become a non resident, even though you still own them. This rule does not apply to real estate that you own or interests in private companies and private trusts. It typically affects:
- small (< 10%) holdings in shares, options or rights in listed companies; and
- units held in investment trusts such as a managed funds or property trusts
The ATO treats these assets as having been sold at their market value at the date you stop being a resident of Australia.
The CGT rules do allow people to elect out of this situation. A written election with the person’s tax return (for the financial year in which they become a non resident) is required. The election must be made in respect of all assets affected, not just selected assets. If you make this election you only pay CGT when you actually sell the assets.
The deemed sale rule also provides some tax saving opportunities. If you expect your managed funds and listed shares to increase in value in your period away from Australia, you may not want to make the election. By not making the election, the growth in value of these assets during your period away from Australia will not be subject to Australian tax. You should assess how much tax, if any, you might pay if you do not make this election and compare it with the future tax savings you might make.
You get time to make a decision on this issue. The election must be made with your tax return for the financial year in which you leave Australia. The gives you at least four months after the end of the relevant financial year to decide, based on the earliest tax return lodgement date of 31 October.
2. Self managed superannuation funds
Critical tax issues arise for people who operate their own self managed superannuation fund if they relocate overseas.
To keep the 15% superannuation fund tax rate, the fund needs be a complying superannuation fund. To be complying, the fund must satisfy a residency test. If a fund becomes a non resident, it will be taxed at the rate of 47% of the market value of the assets in the fund.
To make sure the fund remains “resident”, bear in mind:
- The fund must be controlled by people who are Australian tax residents. You may need to resign as a trustee of the fund or as a director of the trustee company.
- It is a requirement of residency of a fund that more that half the benefits are held on behalf of Australian resident members. If the person(s) going overseas has more than half of the benefits in the fund, no contributions for that person should be made to the fund in the financial year that they leave Australia or while they are overseas.
In situations where contributions have been made for the person in a financial year, that person’s entitlements in the fund should be transferred to a large Australian based superannuation fund before the person becomes a non resident. Moving the benefits out of the self managed fund should protect its tax status. A large Australian based fund is unlikely to ever fail the residency test.
3. Taxation of Australian investments
Income and gains from Australian investments are still taxable in Australia, but concessions apply depending on the country you are a resident of and the existence of double tax treaties. Generally:
- interest on bank accounts and term deposits is subject to a final withholding tax of only 10%;
- dividends paid which are not fully franked are subject to a final withholding tax of either 15% or 30%, depending on which country you relocate to. No tax is payable on fully franked dividends;
- royalties will be taxed between 0%-5%;
- you are only taxable on the Australian income and gains distributed by a managed fund. You are not taxable on the foreign income and gains made by the fund. Interest and dividend income of a managed fund is also subject to the final withholding taxes noted above; and
- you can avoid Australian capital gains tax on managed funds or share investments while overseas.
These concessions may mean that much of the income distributed to you will not be taxed, or will be taxed at reduced rates. This is likely to be the case for managed funds which invest in international assets.
4. Borrowing against Australian shares
As noted above, once you become a non resident, the system for taxing dividends from shares changes. A final withholding tax applies which means you do not disclose dividend income on your tax return. As a result, you cannot claim any deductions against that income. If you have borrowed money to purchase those shares, the interest will not be an Australian tax deduction.
5. Renting out your own home
Rental income on your own home will be taxable in Australia. You will get tax deductions for rates, maintenance and agency fees. Some or all of the interest on your home mortgage should also be tax deductible. Where the interest on your mortgage is likely to exceed the net rental income, the ATO may deny you a tax deduction for the excess interest.
Your own home is normally exempt from CGT, provided you do not use it to produce income eg. renting out part or all of your home. Where you have to relocate, you can rent out your home for up to six years without losing its CGT exemption. If you sell your home, a tax return election is required to have this rental period disregarded.
Conclusion
Relocating to an overseas destination brings with it many complex tax issues as well as opportunities. You should contact your tax adviser to get professional advice on these matters. NTEU Taxation Services can and will assist with any advice you need in this regard.
Michael Shulman
Stannards Accountants & Advisors Pty Ltd
Level 1, 60 Toorak Road, South
Yarra, Vic, 3141
Phone: 9864
2143 Fax: 9867
5118