Australian expats who have been forced back to Australia because of the COVID19 pandemic, need to understand what returning to Australia might mean for their tax position.

The latest advice from the ATO on these issues can be accessed here.

Essentially, the ATO’s view is that if you are a non-resident of Australia and you are temporarily in Australia for some weeks or months because of COVID19, then you will not become an Australian resident for tax purposes provided that you usually live overseas and intend to return as soon as possible.

However, the ATO guidance acknowledges that tax residency issues can become more complicated if the non-resident ends up staying in Australia for a lengthy period or does not plan to return to their overseas country of residency. The ATO guidance also acknowledges that there will be unique situations with a range of potential tax outcomes. 

It is an important time to recognise that under Australian tax law a person is considered to be a resident of Australia in accordance with ordinary principles, essentially if they are dwelling permanently or for a considerable time in Australia or if they have their settled or usual abode here. 

We think a helpful summary of the state of the law of residency has been provided by Justice Derrington in Harding v Commissioner of Taxation [2018] FCA 837 in which he said: 

“Necessarily the question of where a person resides is a question of fact (and, perhaps, of degree per Dixon J in Miller at 103), the conclusion of which is reached by a consideration of all of the person’s circumstances.  Those circumstances will be directed to ascertaining whether a person has a physical presence or retains a “presence” in one location whilst at the same time maintaining an intention to reside there.  The consideration also involves identifying the person’s “habits and conduct within the period”, however, that will include a consideration of the events occurring prior to and subsequent to the relevant period as illuminating the relevance of the events in the relevant period.”

183 Day test of limited relevance

It is also important for Australian expats to be aware that the so called 183 Day test is not the main test, but a subsidiary test which is mostly aimed at determining whether a foreigner who might be in Australia for more than 183 days during the income tax year is a resident.

The 183 Day test only works in one direction. There is a misunderstanding in certain expatriate circles that a person cannot be a resident of Australia unless they have been in Australia for more than 183 Days. That is incorrect. The key test has always been whether the person is residing in Australia in accordance with ordinary concepts and a range of indicators have been considered by the Courts over 150 years to determine whether someone is residing in a country. 

With both the global and local situation changing rapidly as the coronavirus spreads, the government has already implemented new changes to support the Australian economy and the large number of businesses and individuals who are being impacted by the spread of COVID-19. On Sunday 22 March 2019 the government introduced measures that they have termed a financial safety net. These measures increase some of the provisions of the previous stimulus package and provide additional financial support for those facing loss of income.

These are unprecedented moves to support Australians and keep the economy going. Financial institutions have also made some major announcements to help ensure that people and businesses can get through this crisis.

Employers

Last week the government announced a refundable offset of 50% of the PAYGW remitted on your March-June activity statements. The offset was set to be a minimum of $2,000 (even if your PAYGW was lower than $4,000 for the March Activity Statement) and a maximum cap of $25,000. The government has now significantly increased this measure.

Eligible employers are those with an annual turnover of under $50 million. The payment will be made as a credit on the March and June activity statements. (If you are a monthly activity statement lodger then the April and May activity statements will also be included). 

The credit issued will now be calculated as 100% of the PAYGW (up to $50,000) for the March to June activity statements.

The minimum payment has now been increased to $10,000 and the maximum payment has been increased to $50,000.

An additional payment will be made in the July-October 2020 period. This payment will be equal to the payment made for the March to June 2020 periods. This means that the minimum total payment will be $20,000 and the maximum payment will be $100,000.

Non-for-profits who employ staff will now also be eligible for this payment. 

The reason for this payment is to help employers get through downturns and shutdowns without having to lay off staff. While it won’t be enough to help everyone, it is a chance to get more small businesses and their staff to get through this period of reduced income.

For more information on this see the Treasury’s fact sheet for cash flow assistance for businesses.

Coronavirus Supplement for JobSeekers

Jobseekers (formerly Newstart), both current and new, will now be eligible for the coronavirus supplement of $550 a fortnight for the next six months. See table 1 below for a list of eligible recipients.

Casuals and sole traders who are now earning less than $1,075 a fortnight will also be eligible for the full coronavirus supplement of $550 a fortnight.

To meet the criteria you need to ensure that you are enrolled for the jobseeker allowance and reporting your fortnightly income to Centrelink.

To make the coronavirus supplement easier to access the government is expanding the eligibility and qualification criteria from 27 April 2020, for a period of six months. Waiting periods and exclusions are also being waived for certain payments. This will ensure that sole traders meet their mutual obligation requirements simply by continuing to operate their business. It also ensures that people who are unable to work due to caring for someone who is infected, or due to a requirement to be isolated, will be eligible.

For more information see the Treasury fact sheet.

Unemployed, Casuals and Sole Traders: Access to Superannuation

Individuals who have been made redundant due to the coronavirus, as well as casuals or sole traders who have lost income due to coronavirus restrictions may be able to access taxfree lump sums from their superannuation. Individuals who are still working must have lost at least 20% of their income or working hours to be eligible. Eligible recipients can access up to $20,000 of their superannuation, entirely taxfree.

Access to taxfree superannuation lump sums is in two parts. The first lump sum of $10,000 must be withdrawn before 1 July 2020. A second $10,000 can be withdrawn after 1 July 2020. The exact timing of how long an eligible individual will have to apply for the second payment will depend on passing legislation. At this stage it is believed this will be accessible for around three months.

The lump sum withdrawals are taxfree and will not affect Centrelink or Veteran’s Affairs payments. Applications for withdrawal need to be made to the ATO through your myGov account. For more information see the Treasury fact sheet.

For more information see the Treasury fact sheet.

Households: Economic Stimulus Payments

Households who are not eligible for the coronavirus supplement may be eligible for a second $750 stimulus payment. This is in addition to the first $750 previously announced for welfare recipients. See table 1 below for list of eligible recipients for the first and second economic stimulus payments.

This $750 will be paid from July 13 to eligible individuals who receive the age pension, disability pension, carers allowance, family tax benefits, hold a DVA gold card or commonwealth senior card.

For more information see the Treasury fact sheet.

Pensioners

Deeming rates have been reduced. This means that pensioners will receive more income through their pension.

For more information see the Treasury retiree’s fact sheet.

Opportunities for Further Help

Centrelink is making changes to crisis payments in order to support people who are suffering financial hardship due to requirements to self-isolate.

Major banks have announced access to discounted loans for businesses and homeowners, as well as mortgage deferrals for property owners who find themselves struggling to meet their payments. The government has announced that they will provide 50% guarantees to the banks to help ensure that small businesses are more likely to be able to access the loans that are essential to get them through these times. 

Table 1: Overview of who gets the Economic Support Payments and the Coronavirus supplement.

*If an individual is eligible for the coronavirus supplement due to being on an eligible payment for this then they will not get the second economic support supplement even if they are eligible for this due to a separate welfare criteria.

Stay Tuned For More

With the uncertainty that surrounds the spread of the coronavirus the government has made it very clear that this is not the end of the safety net. The situation will continue to be monitored and necessary additions will be announced until the crisis has passed.

On 12 March 2020 the government announced the first phase of an economic stimulus package in response to the impact of the coronavirus (COVID-19) pandemic.

Welfare Recipients:

Eligible welfare recipients will receive a once off economic support payment of $750. This includes people receiving family tax benefits and anyone with a Veteran gold card. This will be paid after 31 March 2020 (pending legislation approval).

This is a non-taxable, non-assessable lump sum paid. To ensure recipients can spend the money, it will not be withheld to cover existing debts such as child support or Centrelink debts.

Employers:

Employers with less than $50 million turnover will receive between $2,000 and $25,000 to alleviate the cashflow burden of paying employees.

The benefit will be calculated at 50% of the PAYGW remitted in your March and June activity statements (as well as April and May if applicable). If you have less than $4,000 in PAYGW, then you will simply receive the minimum $2,000 payment after lodging your March Activity Statement. If your total PAYGW exceeds $50,000 over this period, then your benefit will be capped at the maximum payment of $25,000.

Instant Asset Write Off

To encourage businesses to invest in asset purchases, until 30 June 2020 all businesses with a turnover of up to $500 million will be able to instantly write off any assets costing up to $150,000. These write-offs will be claimed as tax deductions in your 2020 tax return.

For the 2021 tax year businesses with a turnover of up to $500 million will be able to immediately deduct 50% of the cost of new assets.

Eligible assets include any new asset that is installed to be used by your business and any second hand asset that you purchase and install to be used for the first time by your business. Normal deductibility rules apply, meaning that if the asset would otherwise have been depreciable, you can now claim an instant write off deduction in your tax return. If the asset is used for a mixture of business and personal use then only the business portion can be claimed as an immediate deduction.

For example:

Say you purchase a ute that is exempt from the car limit (because it qualifies as a commercial vehicle that is not designed for the principal purpose of carrying passengers), for $60,000. It is to be used exclusively for your business. In this situation you would be able to claim the entire $60,000 cost in your 2020 income tax return.

However, if you purchased a motor vehicle for $60,000 that is to be used exclusively for your business then you would still be limited by the car limits for depreciation. For the 2020 financial year, the maximum you can claim for a fuel-efficient vehicle is $57,581.00. If the car was used partially for work purposes and partially for business purposes then you would further be limited to only claiming the work related percentage.

For further details see the government’s fact sheet.

Further Assistance:

Additional support measures include:

• Wage subsidies for employers hiring apprentices or trainees
• Unspecified funds to support the regions and industries most impacted by the coronavirus (to be determined).
• Fee waivers for significantly impacted industries such as the tourism industry.

If you are having trouble paying ATO debts you can contact them for debt deferrals, extensions and repayment arrangements. If you need help, please give us a call.

Stay Tuned:

The government is set to monitor the situation and deliberate on further decisions this week. This could include the next phase of a stimulus package.

This article relates to foreign business founders with an active business, who are moving to the US. There is a risk that foreign earnings may be double taxed when your organisation is taxed as a US entity. This is due to the application of US attribution rules (Controlled Foreign Corporation (CFC) rules) and Passive Foreign Investment Company (PFIC) rules.

To avoid being double taxed and ensure that foreign tax credits can be appropriately applied, it may be advisable to make a check-the-box election. This election essentially means that foreign corporations are choosing to elect their US tax status at the point in time that the US tax system becomes ‘relevant’ to them.

This check-the-box system is a tax regime that doesn’t just impact organisations that are set up in the US. It can also impact Australian businesses and global businesses when the foreign founder of the corporation moves to the US.

When does the US tax system become ‘relevant’ to a foreign corporation:

The US tax system is considered to be ‘relevant’ to a foreign corporation when one of the following applies:

a) the foreign corporation derives US sourced income;

b) the foreign corporation is required to file an income tax return in the US; or

c) the owner of a foreign corporation becomes a US tax resident (ie a US Person).

Why might a check-the-box election be made?

The most basic reason for making the check-the-box election is to ensure that the owner of the corporation in the US is properly credited with the foreign tax payments. A check-the-box election will avoid the attribution of income under CFC rules or the loss of long term capital gains tax rate discounts when shares are transferred in a passive foreign investment company (PFIC).

When will a foreign corporation be a CFC?

When US shareholders own more than 50% of the shares, either directly or indirectly, then the foreign corporation will be considered to be a controlled foreign corporation (CFC). To be considered a ‘US shareholder’ the person must own more than 10% of the voting rights or stock value of the foreign company.

When is a foreign corporation a PFIC?

A passive foreign investment company (PFIC) exists when one of the following two conditions are satisfied:

1. Passive investments generate at least 75% of a corporation’s gross income (as opposed to regular business activities); or
2. At least 50% of the corporation’s assets create passive income. Passive income includes interest, dividends and capital gains.

What is a foreign eligible entity?

A foreign eligible entity is defined by whether a member has limited liability or not. This is a default classification under the check-the-box regulations. When all members of the corporation have limited liability the US taxes the foreign eligible entity as a corporation. When at least one member does not have limited liability the entity is not a foreign eligible entity.

An eligible entity may make a check-the-box election to opt out of the default classifications.

Warning on making an election after default classification has been made

It is important to make your election prior to the default classification being applied. This is because making a later election will change the organisation’s classification. Such a change in classification can trigger a liquidation event.

When you should make a check-the-box election:

To ensure the check-the-box election is made appropriately you should consider making the election when you meet all of the following conditions:

1. you own a foreign corporation
2. the US tax system is relevant for your corporation
3. you need to apply foreign tax credits against your US corporate tax regime
4. you wish to avoid applying the CFC or PFIC rules.

Burton’s case [Burton v Commissioner of Taxation [2019] FCAFC 141] has set an interesting precedent for claiming foreign tax credits on capital gains made from the sale of overseas investments in the United States.

In simple terms, if you own a capital asset in the USA, and you are taxed in the US the capital gain, then you may not be able to claim all the US tax paid as credit in Australia.

The reason for this is because the ATO will only allow you to claim the foreign tax offset that relates to the portion of taxable discounted capital gain being declared in your Australian tax return. The Australia-US Double Taxation Agreement will not assist you in this regard.

Since Burton’s application to appeal the decision was denied on 14 February 2020, the position under the law has been clarified in a situation where an Australian taxpayer makes a capital gains on US real estate (or other assets which are considered effectively connected with the USA).

While some articles claim that this case means the ATO is clawing back the 50% discount on Australian residents with foreign held assets, this isn’t strictly true. It’s actually that not all of the US tax paid would be creditable here.

Example – Comparing the net tax effect on an Australian tax resident selling capital assets owned under different tax regimes. 

To understand the situation let’s consider the example of Jack, an Australian taxpayer who sells a long-term capital asset held in the US, NZ and Australia.

The US taxes capital gains in full, however they tax the capital gain at a different tax rate. NZ does not tax capital gains. Including NZ as a comparison makes it clear that the ruling from Burton does not claw back the discounted 50% capital gain.

For our purposes Jack is an Australian tax resident.

Let’s assume:

• For ease of calculations Jack makes a capital gain of $1,000,000 on the sale of each of the following assets.
• Jack’s first $1,000,000 capital gain is on an asset that he held in the US for more than 12 months. While the US taxes capital gains, it applies a concessional tax rate for assets held over 12 months. For ease of calculations we will assume the top concessional rate of 20% applies.
• The second $1,000,000 gain is on an investment that was held in NZ for more than 12 months. NZ does not tax domestic capital gains.
• Finally, Jack also sells $1,000,000 investment in Australia, which he has also held for over 12 months. Accordingly, Jack will only be taxed on 50% of the Australian capital gain. For ease of calculations we will assume the flat top marginal rate and Medicare levy applies, 47%.
• Jack sells all 3 investments in the same financial year for a capital gain of AUD$1,000,000 each.
• For ease of calculations Jack has no capital losses to apply and he is able to apply the 50% CGT discount in full when preparing his Australian tax return. 

As you can see from this example, Jack ends up paying more tax on the US asset. This is because the US taxes the full gain at a discounted rate. Australia then taxes half of the gain at the Australian tax rate and only allows the 50% portion of the foreign income tax credits to be applied.

Conclusion

The net impact of applying this precedent is that Australian taxpayers will end up paying up to 33.5% income tax on capital gains made on US investments that are held for more than 12 months. This is in contrast to the 23.5% income tax that they will pay on capital gains that are limited to only paying Australian income tax.