An increasing number of Australian expats who have been living and working overseas are taking advantage of international borders reopening and are planning to relocate home to Australia.
Such a move brings many personal and financial issues to consider, and tax forms an important part of the equation.
When it comes to tax, planning is key and this is no different for returning expats. Arguably, planning is more important given there will be multiple tax systems to navigate.
The first important issue will be understanding your tax residency status. Expats who have been overseas for a few years will usually be non-residents for Australian tax purposes, and will become tax residents when they land back in the country with the intention of living here again. The date tax residency changes can be critical for a number of reasons, and once that is determined it may drive a number of other important decisions or transactions.
Capital gains tax (CGT) is another important area. 2020 saw a major change in the CGT main residence exemption that caught a lot of people short. The biggest impact is for expats who sell their former family home while still living overseas, so if the home is still owned, the best approach from a tax perspective is usually to hold off selling the property at least until after you resume your status as a tax resident.
With Australian investment properties, there are fewer planning opportunities, as you will still be taxed on an eventual sale on the capital gain for the whole period of ownership, regardless of your tax residency status. The main focus would be on identifying all possible items that can be included in the CGT cost base, including renovations and other capital costs, to reduce the taxable gain.
The CGT treatment for financial investments such as shares and managed funds (whether Australian or foreign-based) is different. Generally, no capital gains on these assets accrue while you are a non-resident, and you have a “deemed acquisition” when you become a tax resident with a cost base equal to the market value at that time. This means that on a future sale you will be taxed only on the growth in value while you have been a resident. It does also mean for the 50 per cent CGT discount the clock starts ticking then too, and it will be necessary to hold an asset for at least 12 months after returning to Australia to be eligible for the discount.
Another important area to plan for is ceasing foreign employment and commencing new employment in Australia, including within the same multinational group. It’s usually preferable to wrap up your affairs in the foreign country as cleanly as possible and start fresh in Australia, especially where you move back from a lower-tax country such as Singapore or Hong Kong. This may include receiving bonus payments or termination payments relating to your foreign employment before returning to Australia to avoid any suggestion they should be taxed here.
Employee share scheme (ESS) awards also raise some complex issues, and it’s important to understand what you have received and exactly how the particular ESS plan is structured.
Then there is the vexed issue of foreign pension plan entitlements built up while working overseas. This is a complex area and requires careful planning to minimise any possible tax liabilities both in the foreign country on withdrawal from the relevant pension plan, and in Australia on bringing the funds in.
Once you become a tax resident, you are expected to hold qualifying private health insurance for you and all of your dependents from day one, or you will have to pay the Medicare Levy Surcharge depending on your level of income. This is an easy problem to avoid if you plan for it in advance, but can be quite costly if you delay taking action.