Tax Issues For Expatriates Returning To Australia
By Michael Shulman, Stannards Accountants & Advisors Pty Ltd
Once your overseas assignment is over and you decide to come home, not only are you are coming home to family and friends, but you’re also coming home to a complex taxation system. There are some important issues to bear in mind, and address, before you return to Australia.
Resuming tax residency of Australia
When you return to Australia with the intention to stay permanently you will be treated as a resident for tax purposes upon the date of your return. This means that you will become subject to tax on income (wherever it is earned) as well as being liable to tax from the sale of assets no matter where they are located. In addition, there are some special rules associated with the application of Capital Gains Tax (CGT) and the taxation of superannuation benefits.
CGT rules
Where a person becomes a tax resident of Australia, that person’s assets become subject to Australian CGT (except if assets were acquired prior to 20 September 1985). The CGT rules look to the assets the person owns at the date they become a resident of Australia. To determine what tax might be payable on the sale of these assets, the CGT rules assume that you bought the relevant assets for their market value at the date you became a resident.
This "deemed" acquisition rule is intended to provide a fair application of the CGT rules (ie. gains which have accrued up to the date a person comes to Australia will not be taxed). The rules may have potential traps especially for foreign real estate. You have to be able to prove the market value. It is wise to get a market valuation of the asset at the date you become a tax resident of Australia. This gives you independent proof of the value of the asset. It is much easier to establish a value for assets which are listed on a stock exchange, such as as shares or listed trusts, so it is not normally necessary to get valuations for these types of assets.
You do not need to get valuations for assets which have remained subject to the Australian tax system during your overseas assignment. These are normally real estate assets. Further, if you made a tax return election that the deemed disposal rules did not apply to assets held (when you first left Australia), there is no need to obtain a valuation of those assets. Those assets were always subject to Australian CGT.
Foreign superannuation entitlements
Generally, it is preferable that foreign superannuation benefits are cashed out prior to returning to Australia. If this is done, there is little doubt that the amounts were earned while you were not a resident of Australia. In such cases the ATO will not tax those amounts.
It is not always possible for a person to get their foreign superannuation benefits ‘cashed out’ before they return to Australia. The ATO recognises this and provides a window of opportunity to cash out foreign superannuation entitlements without paying Australian tax. This window is open for six months from the date you become a tax resident of Australia. If the benefits can be paid within this period, you will not pay Australian tax.
Payments received outside of this six month window can be subject to tax. The amount which is taxable is the difference between the value of the payment and the value of your foreign superannuation entitlements at the date you became a tax resident. Remember, the value is calculated in Australian dollars. This means you have to convert your foreign benefits into Australian dollars at the date you become a resident and at the date payment is made. This means that foreign currency fluctuations can and will impact what tax you might pay.
Taxation of foreign income
As noted above, when you become a resident of Australia, income such as rental income from foreign properties, dividends paid by foreign companies and distribution entitlements from foreign mutual funds will be taxable in Australia.
Australian tax rules generally require you to include that foreign income in your tax return expressed in Australian dollars. The exchange rate depends upon what happens to the income. If the income is paid back to Australia, you use the tax rate at the date of receipt. If the income is held overseas eg. in a foreign bank account, the exchange rate is the rate at the end of the year.
Another issue to watch out for is that foreign countries may impose some tax on the income that you have earned from an investment in their country. This means that you will not receive the full amount of your investment income. The Australian tax rules require you to include in you tax return the full entitlement to income before any foreign tax has been deducted. The foreign tax paid can be used as a credit against Australian tax payable on that foreign income (ie to prevent double taxation occurring)..
You may have expenses associated with your foreign investment income. These can be claimed as tax deductions against your foreign income. There is a limit to how much of these expenses you can claim in any year. The deduction in any one year is limited to the amount of the foreign income that you receive. If your expenses exceed your foreign income, you can not claim them in that particular year. You need to carry them forward to claim against foreign income in future years.
Foreign investment fund rules
There is one particular tax issue which causes concern for many expatriates returning to Australia. This is the application of the foreign investment fund (FIF) rules. These rules were introduced by the Government as a means to stop people deferring the payment of Australian tax on investments in foreign companies, foreign trusts (including mutual funds) and investment policies issued by foreign life companies.
The rules are stringent. They may require you to bring to account the increase in the market value of your foreign held assets from year to year. You will be taxable on the increase in the value of the assets which means you could be paying Australian tax on unrealised foreign capital gains.
A number of exceptions do apply for shares held in listed foreign companies. However, not every listed foreign company is eligible for exemption. It is always wise to check with your Australian advisors as to whether investments you hold will be subject to the FIF rules.
Please note that the FIF rules do not apply to foreign real estate investments or foreign bank accounts.
Conclusion
Just as there are many tax implications associated with a person leaving Australia for an extended period, there are significant issues when a person returns to Australia. It is suggested you research these issues well in advance of your return to Australia in order to have adequate time to plan for any necessary action. The issues involved are complex and you should consult your taxation advisor and/or NTEU Taxation Services who can and will assist you with any advise you need in relation to the contents of this article.
Michael Shulman
Stannards Accountants & Advisors Pty Ltd
Level 1, 60 Toorak Road, South
Yarra, Vic, 3141
Phone: 9864
2143 Fax: 9867
5118