Similar to the need for you to plan your departing tax issues on the way out of your home country there is a major need to plan what your tax profile will be when you arrive in your new country.
Sometimes, however, it is easy to assume that arriving in another country has no tax consequences and that can make things difficult.
A recent client example springs to mind.
David Smith (not his real name), an expat relocating from Singapore to the US (upon his retirement), decided to access his Australian superannuation fund.
What a mistake that was.
In Australia, pension payments for those over 60 years of age are tax free.
This is, however, not the case in the US.
David had worked out that he and his wife could afford to live in the US the way they envisaged, based on paying no US federal or state tax.
They were quite shocked when we told them that the US would tax David’s Australian-sourced pension stream.
It was not a great conversation.
Key Items To Consider
Set out below are some of the key things you need to consider ahead of your arrival:
- Complying with the requirements of more than one tax jurisdiction (are tax credits available for any foreign tax paid?)
- Accounting for a new tax and legal system (are you moving to a country that has a civil law regime or a common law regime?)
- Understanding the tax issues associated with moving to the arrival country (does the country you are moving to have a general anti avoidance regime that targets tax planning?)
- Considering how foreign assets are accounted for (is foreign income exempt or is it non-taxable there is a big difference between the two)
- Locating other professional service providers to work with (do not assume your foreign tax advisor has international tax experience as this is often not the case)
How Will Your Assets Be Treated?
In some jurisdictions the moment you arrive in the country you are treated as having bought all your foreign assets at the market value of the date you became a tax resident.
This means that a ‘cost base’ has been established for your foreign assets.
Then when you sell those assets in future – a gain or loss can be worked out in relation to those assets. Australia is one such jurisdiction that treats your assets this way.
Other jurisdictions such as the US – do not give you this ‘step up’ in value.
This is a serious problem as you can end up paying a lot of tax to the Internal Revenue Service – based on the original cost of your assets which may have been many years ago.
This is grossly unfair, as most of any gain will have happened while you were a US non-resident – particularly if you sell the asset shortly after you arrive in the US (you may want to sell foreign assets to buy a house in the US for example!)
Your arrival must be carefully planned as the ramifications of an ill-prepared arrival can be costly.
If you undertake a proper tax planning exercise before you leave, then the thrill of arriving in your new country is not shaken up by the bad news of unintended tax issues.