Tax planning for Australian expats
Anyone considering a move overseas should plan their financial strategy well in advance if they don’t want to end up worse off on their return home. Living and working in another country – even for a short period of time – requires careful thought and planning if people want to avoid being welcomed with a tax bill on their return to Australia.
It’s not something that people can start thinking about a month or two before they return home – planning should be done well in advance and they should keep on top of their plan throughout their time overseas. This is particularly important in an environment where the government is looking at different ways of broadening the tax base. We’ve already seen plans to introduce capital gains tax on the family home for expats, which would have included removing their access to the much-loved ‘six-year absence rule.
While the proposal had the support of both major parties, it was shelved in the lead-up to the May 2019 Federal Election and highlights the potential for wide-ranging changes that could derail travel plans.
There are a number of technicalities that could adversely affect Australians who have worked in another country, which could be minimised with advance planning. People need to consider what to do with any pension savings they have from another country, such as the United Kingdom, and how to bring the funds back into Australia in order to roll them into the tax-advantaged superannuation system here.
Another common situation is when people have changed tax residency and paid tax in another country, they may be able to claim a credit for the foreign tax paid upon their return but only if they have the proper records and structures in place.
The issue of tax residency needs to be carefully considered, as this will affect how investments and tax liabilities are treated by the Australian Tax Office. Ascertaining tax residency during the period living overseas is key, but it can be highly subjective – a person’s intention is very important, but the ATO will also look at other points.
One advantage of remaining an Australian tax resident is it reduces the chance of having issues with CGT; however, it also means that all of one’s foreign salary (which can include entitlements under employee share schemes and option plans) and investment income will be taxed in Australia, with a credit for any foreign tax paid on the income.
The ATO has made several recent statements making it clear that foreign income is a key item on its agenda, and with greater levels of cooperation and information sharing between tax authorities, better technology and a focus on hiring experienced data analysts, its better placed than ever before to identify and tax unreported income.
Other areas for consideration for tax planning for Australian expats include:
- Shares or managed funds – if someone becomes a non-resident, these types of investments are generally treated under the CGT rules as having been sold at their market value at the time that tax residency changed, triggering deemed capital gains or losses. The good news is there would be no further Australian CGT implications if these assets are actually sold while a non-resident. However, if they are still owned when Australian tax residency is resumed, they – along with any new investments – will be deemed to be re-acquired at that time for their current market value, so any future capital gains or losses on sale would relate only to the movement in value during the second period of Australian tax residency
- Investment properties – the CGT discount on the sale of investment properties is not available for any period after 8 May 2012, during which someone is a non-resident. For investment properties already owned at the time they left to move overseas, there will need to be an apportionment of the CGT discount for the relevant periods. The same applies for periods between the date they return to Australia and a later property sale
- Withholding tax – non-resident withholding tax is payable on unfranked dividends, interest, and managed funds distribution. However, any withholding tax deducted should be available to claim as a credit against income tax payable in the other country
- SMSFs – if members and trustees of an SMSF cease to be Australian residents, for instance, a couple who moves overseas for several years and loses their Australian tax residency status, then the fund can become non-complying. Careful planning is required to anticipate and overcome the negative consequences that might otherwise arise.