1. Residency Rules Are Misunderstood
Despite a number of proposed changes our personal tax residency laws remain unchanged.
No statutory days test has been enacted and the proposed 45 day rule seems to have been either forgotten or dropped.
Australians moving overseas must ensure that they have a permanent place of abode overseas if they wish to assert that they are or have become non-resident.
They also need to be able to evidence that they are not residing in Australia under common law principles.
The 183 days test remains widely misunderstood – its meaning is often reversed by those who incorrectly believe that simply because they have been in Australia for less than 183 days they are not resident here.
2. Residency Of Foreign Structures
We often come across situations where an overseas structure, most often a trust or company, is unwittingly dragged onshore because a person has moved to Australia to become resident here.
While the Temporary Resident rules of Subdivision 768-R offer significant tax concessions to an individual who is a temporary resident for tax purposes, there is no exemption dealing with the residency rules relating to these entities.
Australia’s trust residency rules are particularly unforgiving if the trustee (or one of the trustees) of a foreign trust moves to Australia. Time and time again we see that foreign trusts are caught by Australia’s tax laws because of this unforgiving rule. Even if residency matters are properly identified and considered, the impact of the CFC rules or the transferor trust rules of Division 6AAA require careful attention in many situations.
3. Cross Border Employee Share Scheme Rules
We often see people moving to Australia with overseas Employee Share Scheme interests where the proper analysis of how Division 83A applies has not been undertaken.
It should not be assumed that overseas schemes will be designed with Australian laws in mind even if the overseas employer has some Australian staff.
Depending on how schemes are structured they may be treated as upfront and not deferred schemes under Australian law. The removal of the termination of employment as a cessation time for deferred taxation can be a major problem for inbound clients.
In some situations there may be tax relief because of the operation of double tax agreements.
4. Overseas Pensions Plans Are Not Understood
People often assume, if they are even aware of the issue, that their foreign pension or retirement savings schemes will be concessionally taxed in Australia because they are concessionally taxed in their country of origin. That assumption is often incorrect.
More often than not foreign retirement trusts will be treated as non-residents trusts under Australian law, meaning that distributions would be taxed heavily, and if interest applies, excessively.
Even where our rules do provide concessions, such as the concessions in Subdivision 305-B for lump sum transfers from foreign superannuation funds within 6 months of residency, there is a need for clients to consider their position.
5. Forex Rules Are Overlooked
According to the Tax Institute, the forex rules of Division 775 are ‘of such complexity and incomprehensibility that they are at risk of being ignored in practice’ and that people are ‘favouring common sense accounting-type approaches rather than trying to divine which particular forex realisation event (FRE) applies to each step of the transaction’.
Notwithstanding this well deserved criticism, high net worth clients will be expected to deal with the compliance burden of the forex rules. Therefore proper analysis and discussion in relation to overseas accounts is vital.
