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As Australia edges towards reaching its 80 per cent double-vaccination goal, the opening of its borders for international travel is becoming an imminent reality.
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Australians returning home need to plan ahead
03 November 2021
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13 minute read
It is expected that approximately 38,000 Australians will be welcomed back to Australian shores although, returning individuals must be wary of entering the country without careful financial planning, with a failure to do so potentially leading to tax consequences.
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It is recommended that preparations commence six to 12 months prior to entering Australia and with Qantas scheduling international flights from 18 December 2021, it is clear that planning must begin immediately.
It is crucial to forward plan based on a global perspective, making it easier to create nimble plans that will help you avoid tax implications and potentially bring about tax benefits.
Consider the timing of your exit
It is imperative that Australian expatriates who are established in a foreign jurisdiction take into consideration their tax position and the timing of their move back to Australia. Unless a person qualifies as a “temporary resident”, they will be taxable on their worldwide income as soon as they become an Australian resident for tax purposes – which often coincides with the time they first arrive in Australia. Those who are unaware of this are more likely to end up paying more tax than they planned for.
This is often exhibited in cases where there are vast differences in tax rates, particularly those who earned income in the Middle East and South-East Asia, where individuals may be subject to tax rates of 15 per cent or even lower, but upon returning to Australia, may be subject to a marginal tax rate of as much as 47 per cent (including the Medicare levy). This is also amplified in cases where Australians benefit from concessional short-term residency regimes such as the remittance basis of taxation in the UK or Ireland.
To avoid surprises, individuals intending to take up residency in Australia should plan for Australian tax implications on every item of income or gain that may arise after they arrive. The timing of the residency start date is important as it determines whether a particular item of income is subject to Australian tax, and the precise date of commencement may not be easily determined.
While a “bright line” test is currently under development, current tax concepts of residency are based around an analysis of various matters of fact and rely heavily on “intention”, “place of abode” and other factors that are difficult to discern by a person in the process of transitioning from one place to another.
It is also crucial to understand the exit rules of the country of departure and the rules for individuals returning home to Australia. Potential double-tax situations may arise when the domestic laws of the outbound and inbound jurisdiction both seek to tax the same income.
In higher taxing countries such as the UK and the US, double-tax agreements often provide relief in these situations, noting that double tax agreements do not exist with a number of common expat destinations (Hong Kong being a notable example). By having a planned exit, potential tax liabilities arising from relocation can be identified and budgeted for, if not reduced through appropriate pre-residency planning.
Employee share plans
The timing of taxing events under employee share plans can be particularly relevant to consider as, depending on where the relevant services are performed, individuals may be required to pay dual taxes.
For example, if an Australian expatriate is looking to return home from Hong Kong with $1 million worth of employee shares, the timing of the deferred taxing point (which often occurs at vesting or exercise) will be critical to identify – as it could be the difference between either a 19 per cent or a 47 per cent tax rate depending on their Australian residency start date. A total of $280,000 could make a substantial difference to their lives!
Foreign retirement plans
Most countries encourage some form of retirement saving through concessional tax rates or compulsory contributions. These plans are not usually designed with Australian income tax principles in mind, and as a result, tax treatment of money in these accounts can vary wildly once a person becomes an Australian resident.
Transfers of a foreign retirement account to Australia may be entirely tax-free if made within six months of commencing Australian residency and the fund qualifies as a “foreign superannuation fund”.
In contrast, if a foreign plan does not satisfy these strict conditions, the ATO would be likely to regard the plan as a foreign trust resulting in accumulated earnings being taxable at rates of up to 47 per cent, even if the amount was earned while the individual was a non-resident. This is often the case with US or Canadian-based retirement plans.
Income from a foreign government or social security pension in some instances can be tax-free in Australia under a double-tax agreement. If not, there may be concessions available that allow the individual to claim a deduction against the taxable amount of their pension if their pension has an undeducted purchase price (UPP). The UPP is the amount contributed (personal contributions) towards the purchase price of the pension.
Foreign investments
Australian capital gains tax rules generally provide for a “deemed acquisition” of investments at market value at the time a person becomes an Australian tax resident. This may provide planning opportunities depending on the relevant “exit” tax rules applicable in the outbound country.
For example, a person who ceases to be a resident for US tax purposes may not be subject to a deemed disposal of their assets, as would generally occur when a person leaves Australia, providing they meet certain conditions. If such a person holds investments that are highly appreciated, they may save significant capital gains tax by deferring sales until after their US residency has come to an end.
On the other hand, certain assets (such as real estate) may continue to be subject to tax in the outbound country. While the deemed acquisition rule will often be helpful to avoid double-tax situations, these can still arise as a result of foreign exchange rates or other tax base differences.
Foreign tax credits must then be relied on to relieve double tax however, foreign tax credits may be only partially effective once the CGT discount is applied.
Foreign investment entities
Individuals with foreign investments, particularly those coming from the US, should be mindful that in some cases they are able to elect whether to be taxed on a “look-through” basis (which may be favourable where the investment vehicle primarily generates capital gains) or when funds are distributed (this may be preferable if the investment vehicle retains and reinvests profits).
While each situation is different, it is common for inbound residents to be unaware of the options available leading them to miss out on a planning opportunity.
Foreign currency exchange
Unbeknown to many, the withdrawal of funds from a foreign account can trigger the Australian foreign exchange taxation rules, even in circumstances where currency remains offshore. If foreign currency is exchanged after a period of weakening in the Australian dollar, taxable gains may arise representing the increase in Australian dollar terms of the foreign currency.
Currency exchanges can be difficult to plan around and often cannot be entirely avoided, but tax liability may be reduced using available elections such as the limited balance election or the retranslation election, both of which are designed to reduce the complexity of complying with these measures.
The excitement of returning to Australia may be great but it must not overshadow the need to make suitable plans, otherwise you may risk having to pay a hefty tax bill.
Daniel Sparks is a partner at Pitcher Partners Sydney.
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