Exceptionally talented individuals with the capacity to raise Australia’s standing in their field may be eligible for a Global Talent Visa. This Visa is a permanent residency Visa that offers a migration pathway to individuals who can bring exceptional skills into Australia.

Because the Global Talent Visa is not a temporary visa, the temporary resident tax concessions are not available and you will be taxed just like any other Australian citizen moving home to Australia.

As international tax specialists in Australia we are often asked by individuals moving to Australia on a Global Talent Visas, what the Australian tax implications of making this move are in relation to the assets back in their home country.

The tax implications of making this move will depend on the type of assets you have back home.

Below is an overview of what you can expect.

Moving To Australia With No Assets Other Than A Bank Account

When you move to Australia with no assets except the cash in your bank account, the tax consequences of holding onto your foreign assets are limited to foreign exchange (forex) issues. Since foreign currency is considered a taxable asset, Australia will tax realised exchange gains and will allow a deduction for realised exchange losses. 

This means that money sitting in a bank account with fluctuating values will have no tax consequence. However, if you spend or transfer that money, including bringing it into Australia at a later date, then you trigger a forex realisation event.

If the value of your qualifying forex accounts is less than AUD $250,000 then you can make an election (known as the Limited Balance exemption) which effectively allows an exemption so that you can disregard any forex gains or losses that might arise on the accounts. This is a simplicity measure for taxpayers who are considered to have low balances of foreign currency. The objective is to lower tax compliance costs. People moving to Australia should take advice on the effect of these rules on their foreign savings.

Moving To Australia With A Main Residence In Your Home Country

While an Australian resident is eligible for an exemption from capital gains tax on their main residence, it is unlikely that this exemption will apply to you. This is because you were not an Australian resident while you were living in your property, in your home country.

Once you are living in Australia the overseas property becomes a property that is not your main residence. This applies whether you rent the property out or not.

If you rent your former residence out it becomes an investment property. The rental income is taxable and the expenses associated with generating that rental income are tax deductible. This includes interest on any mortgage taken out to purchase or renovate the property, any local rates, repairs, and other costs. Travel costs incurred to inspect or repair the property are specifically precluded as an eligible deduction. If you pay income tax on the rental income overseas, then you will be able to apply that as a foreign tax credit in your Australian tax return. This way the Australian tax paid on this rental income is limited to any difference between the Australian tax assessed and the tax paid overseas.

If you don’t rent out your former residence (or otherwise earn income relating to the property), then there is no income to declare, and no ability to claim deductions relating to the cost of owning this property.

When you sell the property you will be subject to CGT. The CGT will be calculated on the difference between the value the property sells for and the value of the property at the time you moved to Australia.

Moving To Australia With Investments

If you hold assets in your country of origin, then you will be required to report any assessable income earned from those assets, as well as any capital gains or losses generated on the disposal of those assets.

Certain types of income, such as interest, royalties, and dividends, are typically covered by Double Tax Agreements (DTAs) in a way which limits the amount of tax that the country of origin can impose. This means it is important to advise your bank and investment managers when you become an Australian resident so that they can ensure the correct foreign tax rate is applied at the source.

Regardless of the tax rules in the country of origin, as an Australian tax resident you will be required to report income from all sources in your Australian tax return.

General Tax Information You Should Be Aware Of When Moving To Australia On A Global Talent Visa

It is important to keep in mind that moving to Australia on a permanent basis will mean you become an Australian tax resident.

For tax purposes this means you will need to declare your worldwide income in your Australian tax return, regardless of where the income is earned and whether the income is brought to Australia or stays in an overseas bank account.

All foreign investment income, including interest, dividends and foreign stock plans, are assessable in Australia, whether or not they are assessable in another country.

The foreign income must be reported in the relevant Australian tax year in which it was earned. This may be different to the tax year relating to foreign country in which the investment income was earned.

In general you will be able to offset the tax payable in Australia with any taxes already paid in the country of origin.

Also be aware that Australia has complicated rules if you have interests in overseas companies or trusts, even if you did not set up the relevant companies or trusts or even if they are just ‘family companies’ or ‘family trusts’.

Capital Gains Tax

Australia has a Capital Gains Tax regime. This means you may be required to pay capital gains tax on any assets that you retain in your country of origins.

CGT is assessed at the same rate as your marginal tax rate, however there is a 50% Discount on the value that is assessed on assets that have been owned for at least 12 months after becoming an Australian resident.

CGT discount example:

You purchase a property in 2020 for $500,000.

In 2024 you sell the property for $1,000,000.

This gives you a net capital gain of $500,000.

Instead of paying tax on the full $500,000 gain, tax is only applicable on 50% of the total gain, which means you only pay tax on $250,000.

Deemed Acquisition

At the time that you move to Australia, any assets that you retain overseas are considered to have been acquired for their market value on the day you arrive. This valuation will become their cost base for capital gains tax purposes in Australia.

You are also deemed to have acquired these assets on the date that you become an Australian resident. This ensures that any fluctuations in value between the original date of acquisition and your move to Australia, are ignored for CGT calculations. It also means that you need to continue to own your assets for at least 12 months from the date you move to Australia in order to access the 50% capital gains tax discount.

Summary

As an Australian tax resident you will be required to lodge an annual income tax return in which you must report:

• Income from your worldwide source

• Capital gains or losses on all assets held, regardless of the country in which they are held

• Any foreign tax paid, which may be applied as a credit to reduce the amount of Australian tax assessed on foreign earnings

When you move to Australia your assets will be deemed to be acquired at the market value on the date you become an Australian resident.    

As everyone’s situation is unique, and tax laws are frequently updated, it is important to obtain up to date advice for your specific situation. This will ensure that specific factors that may impact your situation differently are also included in the advice, as well as ensuring you are getting the most up to date information.

eBook: Key Items A Global Talent Visa Holder Should Know When Moving To Australia

Download ‘The Key Items A Global Talent Visa Holder Should Know When Moving To Australia’

If you are moving to Australia on a Global Talent Visa you are likely to become an Australian tax resident. 

This eBook covers the 5 common tax concerns that those moving to Australia on a Global Talent Visa have including:

1. When do I become a tax resident?

2. Keeping foreign assets when moving to Australia.

3. Foreign assets including foreign currencies, trusts, companies or retirement funds and pension loans.

4. Selling your foreign main residence after moving.

5. Using your foreign bank accounts.

Australia does not have an inheritance tax. When a person dies, the estate, or person who inherits the assets does not have to consider any special inheritance tax on the money or assets that are taking ownership of. While a beneficiary may be required to pay taxes from Superannuation death benefit payments, or capital gains on the sale of assets that have been inherited if those assets are sold, there is no specific tax levied on the value of inherited assets. 

However, there are many countries that do have inheritance taxes, including the United Kingdom. 

This means that when an Australian inherits money or assets from abroad, they may find themselves subject to an unfamiliar “inheritance tax”.

What is inheritance tax?

In a similar vein, estate taxes are levied on the value that is paid out of a deceased’s estate. The estate is required to pay these taxes, rather than the beneficiary. This means that the beneficiary receives the net assets after the estate has paid any required.

In some countries these taxes are referred to as “death duty”.

The laws around inheritance taxes vary between tax jurisdictions. There may be different tax rates, different inclusions on what type of assets are taxed and different types of exemptions or limits.

Some countries like the United Kingdom levy inheritance taxes where assets are transferred to trusts and for this reason many British expats should seek inheritance tax advice before establishing a trust in Australia.

When would an Australian resident be required to pay Inheritance taxes?

As an Australian resident you are not subject to inheritance tax, regardless of where the inheritance is coming from. However the deceased estate may be subject to estate taxes prior to paying or transferring your inheritance to you.

In essence this means you, as an individual taxpayer, do not have to be concerned about being assessed for specific inheritance taxes.

What taxes does an Australian need to be aware of when inheriting assets from overseas?

1. Ongoing earnings from the inherited estate

When you receive money from an inheritance you may be subject to taxation on any of the amounts that have been earned as income, and were not already taxed within the estate. This is because a deceased individual may continue to gather income after their date of death. If there is a delay between the date of ownership of the estate assets being transferred to you and the physical transfer of such assets to you then you may personally be assessed on such income. The executor of the estate would make you aware of any income amounts that this may apply to.

Furthermore, any ongoing income that you earn from inherited assets will be taxed under ordinary taxation laws. For example, if you inherit a business, you will be subject to any income tax on the ongoing business earnings once the business has been transferred to you. If you inherit an investment property then you will be subject to income tax on the ongoing rental income that you earn once the property has been transferred to you.

Since we are talking about inheritance from an overseas estate, it is important to note that you may also continue to be subject to taxes in the country in which the inherited asset is located. In this situation most countries have a double tax agreement with Australia which will typically ensure that you are limited to paying taxes based on the country that has the highest income (or capital gains) tax rate.

2. Capital Gains Tax

Sometimes a deceased estate may be liquidated so that the beneficiaries are simply paid out in cash. Other times beneficiaries may be bequeathed assets such as property, shares, a family business, collectables, or other assets.

Under Australian Capital Gains Tax laws the date of death is typically used as the date you acquired the asset, with the market value of the asset at this point in time being your cost base. This means that when you eventually sell the asset you will be subject to capital gains tax on any capital gain made on this sale.

There may be some exclusions. For instance if you inherit a family home and move into or continue to live in that home, then you may be exempt from capital gains under the main residence exemption.

3. Superannuation Death Benefits

A superannuation death benefit may be paid to you as a lump sum or an income stream. Typically a lump sum death benefit is tax-free where you were a dependent of the deceased. If you were not a dependent, or you receive a superannuation death benefit income stream, then you may be subject to taxes on part of the death benefit, depending on the components of the benefit paid.

4.  Bringing money into Australia

If you have inherited cash from an overseas estate you also need to be aware of the impact of transferring funds from overseas into Australia.

Foreign currency can be treated as a CGT asset. This means that when you withdraw money from an overseas bank account you are triggering a taxable event. This is because exchange rate valuations fluctuate and there can be a difference between the value of what you originally inherit and the value of what ends up in your Australian bank account, purely because of these exchange rate fluctuations.

This means that you may be taxed on any increased value of the overseas money, from the time of inheritance to the time the funds are transferred to your Australian bank account.

Inheriting money from overseas

In simple terms, inheriting money from an overseas estate is similar to inheriting money from within Australia. While you will not personally be assessed on inheritance taxes, you do need to consider other taxes based on the ongoing benefits earned through the inheritance.

The biggest difference is the added complications that inheriting from overseas may impose, including:

• Potential capital gains tax on exchange rate fluctuations when withdrawing foreign currency
• Estate taxes imposed on the estate that are paid prior to distributing your inheritance
• Foreign taxes imposed on continuing to hold onto any foreign assets or investments

Once you receive the inheritance the assets or money received are yours. This means that their ongoing use and benefit are assessed, where applicable, in your hands, just as any ordinary assets or finances that you earn or invest in yourself, would be. 

On 11 May 2021, the Australian Government announced that it is considering replacing Australia’s existing residency rules with a new ‘modernised framework’.

This update is intended to be based on a report by the Board of Taxation from March 2019.

The changes have not been passed into legislation at publication of this article.

Our Principal, Matthew Marcarian, analyses the changes and what it might mean for Australian expats in his – Australia To Change Personal Tax Residency Laws – article.

Below is a summary of the article.

Why might the Rules be Changing?

The Government has indicated that the rules are changing in order to:

• make them easier to understand and apply in practice
• deliver greater certainty
• lower compliance costs for globally mobile individuals

 What is Changing?

Under the current rules an individual is a tax resident if they:

• reside in Australia
• have their domicile in Australia
• live in Australia for at least 183 days of the year, or
• are a member of certain Commonwealth Government superannuation funds.

Unfortunately, due to the lack of measurable criteria in these tests there is a lot of grey area when it comes to the more complex situation involving travellers and individuals with more ambiguous mobile living situations.

The intended change will update these rules to focus on a framework that centres on three things:

• Physical presence in Australia
• Australian connections
• Objective criteria

While the precise nature of the intended update is not yet known, the Board’s recommendation has indicated specific, measurable tests that an individual should pass to meet the residency test. To this end there are three proposed tests to be considered.

1: The 183 Day Physical Presence Test

It is expected that the new primary test will be as simple as determining that an individual has spent at least 183 days physically present in Australia during the given tax year.

2: Commencing Residency Test

When an individual moves to Australia and is only here for between 45 and 183 days they would also need to satisfy at least 2 of the following factors

1. The right to reside in Australia (citizenship or permanent residency)

2. Australian accommodation

3. Australian family

4. Australian economic connections such as:

     a. Employment in Australia

     b. Actively involved in running a business in Australia

     c. Interests in Australian assets

Ceasing Residency Test

To cease residency an Australian would need to spend less than 45 days in Australia during the year, as well as the preceding two years. However, residency would cease immediately where the individual moves overseas to take up overseas employment and the individual:

1. Was an Australian resident for three previous consecutive income years

2. The overseas employment is for at least two consecutive years

3. Has overseas accommodation for the duration of their overseas employment

4. Is physically outside of Australia for less than 45 days in each year they are living overseas

Summary

The proposed rule changes are intended to simplify and clarify the law around determining residency. However, there is still work to do to develop the tests and factors. Further consultation in drafting the legislation is encouraged.

Australia To Change Personal Tax Residency Laws has been written by our Principal, Matthew Marcarian

Download the Australia To Change Personal Tax Residency Laws Paper Now

When it comes to providing tax advice, Matthew believes it is about more than the simple tax consequences. It is about gaining a deep understanding of the client’s situation to formulate clear, robust tax and business advice that deals with both current and potential tax concerns.

With over 20 years of experience providing international tax advice to a wide range of clients, Matthew is well adept at helping clients manage and plan for the tax outcomes and opportunities, both domestically and abroad.

With extensive qualifications in international taxation and personal experience living as an expat, Matthew is a leader in his field with specialist expertise in relation to trusts, controlled foreign companies, international taxation and advising Australian businesses expanding overseas.

It can understandably be confusing to determine the difference between being an Australian tax resident for tax purposes compared to visa residency.

If you’re an Australian citizen who was born and continues living in Australia, then it’s pretty straightforward. You are an Australian for both citizenship and tax purposes.

But what about when things aren’t so clear? Can you be an Australian citizen but not an Australian tax resident? Can you be an Australian tax resident without being an Australian citizen? And what about Visa status? How does this change things?

Citizenship and visa residency are pretty clear cut. You are either a citizen or you aren’t. You either have an Australian residency visa, or you don’t. Tax residency, whilst linked to some degree to having visa residency or citizenship, is not as straightforward.

Australian Citizenship

You are an Australian citizen when Australia is legally your home country. This could be because you were born in Australia, or because you were born to Australian parents, or because you applied for citizenship. As an Australian citizen, Australia is considered to be your default country for all purposes, including taxation. This is why an Australian citizen may, in certain situations, continue to be treated as a tax resident, despite living in another country.

However, what about for those citizens from another country, living in Australia?

Australian Visa Residence 

People who are citizens of other countries are only permitted to stay in Australia per the terms of their Visa. There are many different types of visas, ranging from short-term holiday visas, through to permanent residency visas.

The type of visa you hold will play a part in your circumstances when determining tax residency. For instance, individuals on short-term visas are less likely to be considered Australian tax residents, while individuals on long-term or permanent residency visas are more likely to be considered Australian tax residents.

Australian Tax Residency

Despite what your citizenship and visa status is, tax residency is a matter of fact and intention. There is no application form to be completed nor automatic rule to become a tax resident.

When considering whether you are an Australian tax resident the primary factor is whether you, the individual, is living in Australia (see the “resides test” below). Conversely, you may be a foreign resident for tax purposes if you live outside of Australia. Living in Australia is distinguished between having a holiday in Australia, or staying in Australia for an extended period, whether temporary or permanent.

To help distinguish “permanency”, an individual must typically be living in Australia for at least six months to be considered a tax resident. Conversely, Australian citizens who are living overseas are typically still considered to be Australian tax residents if they are living overseas for less than 2 years. Indeed an Australian citizen may be living overseas for up to 5 years and continue to be considered an Australian tax resident if there are sufficient ties remaining in Australia to demonstrate that the nature of their overseas stay is “temporary”.

In order to determine tax residency specific residency tests are considered.

Tests for Australian Residency

To determine whether an individual is a tax resident there are a number of tests that can be applied. Passing any one of these tests will determine residency status.

             Resides Test

The first test for residency is the ‘resides test’. If you are physically present in Australia, intending to live here on a permanent basis, and have all the usual attachments in Australia that one would expect of someone living here, then you are a tax resident.

Factors considered include whether your family lives in Australia with you, where your business and employment ties are, where you hold most of your assets and what your social and living arrangements are. If you pass this test then there is no need to consider further tests. 

It is possible to be found to be a resident of more than one country. In cases where you are found to be a dual resident, you may need to consider tie breaker rules in any relevant Double Tax Agreement. 

If you don’t pass the resides test then you may still be a tax resident if you satisfy one of the three statutory tests instead.

             Domicile Test

The domicile test states that you will be found to be an Australian tax resident unless you have a permanent home elsewhere. An Australian citizen will have Australia as their domicile by origin. This means that even if an Australian citizen is living or travelling overseas their default home will be Australia. 

In such situations residency only changes when there is an intention to permanently set up a new domicile overseas. (For this reason people holidaying overseas or living overseas on a short-term basis can continue to be Australian tax residents even if they don’t step foot in Australia for years). Individuals who were domiciled in Australia but who do not cut their connection with Australia, will continue to be Australian residents.

             183-Day Test

The ‘183 day test’ is the day count test. This test is typically to capture foreign residents coming to Australia, rather than applying to Australians moving overseas. Individuals who come to Australia from overseas for at least 183 days may find themselves being Australian tax residents. Note that being in Australia for 183 days of the year does not automatically make such an individual a tax resident. Non residents who come to Australia for more than 183 days but do not have any intention of taking up residence in Australia may, depending on their intent and actions, be considered visitors or holiday makers, and therefore not qualify as tax residents.

             The Commonwealth Superannuation Test

Australian Government employees in CSS or PSS schemes, who work in Australian posts overseas, will be considered Australian residents regardless of other factors. 

Examples of Tax Residency and Foreign Tax Residency

To understand the difference it might help to look at a few examples of different scenarios.

             An Australian Citizen who is a Tax Resident

Tom is an Australian citizen who was born in Australia. He has lived in Australia his whole life, and intends to continue living here. During the year he goes on a 6 month holiday, travelling around Europe. At the end of his 6 months he decides to take advantage of another opportunity and stays in Africa for 3 months. After this time, he returns home to Australia. 

Tom’s tax residency never changes. Despite travelling overseas for 9 months of the year, he continues to be an Australian resident for tax purposes. This is because Australia is always his home, and his time overseas is not in the nature of a permanent move.

             An Australian Citizen who is not a Tax Resident

Jill is an Australian citizen who was born in Australia. She has lived in Australia for her whole life. However, in 2019 Jill accepts an opportunity to take a job in England. The position is a permanent position and requires Jill to move to England on a permanent basis. After acquiring the necessary visa to work and live in England, she sells her home and uses the proceeds to make the move to England, where she buys a new home and settles down. Jill brings her son to England with her, and closes down her Australian bank accounts. She does not expect to return to Australia, other than for occasional holidays.

On the day that Jill departs Australia she becomes a foreign resident for tax purposes. The fact that she is an Australian citizen does not change this. This is because it is clear from her actions and intentions, closing off ties to Australia, and establishing a new home in England,  that she is moving to England on a permanent basis. 

             A Tax Resident Living in Australia on a Permanent Residency Visa

Bob is from the United States of America. While in Australia on a working holiday visa, where he travels around the country, his final stop is at a small country town that feels like home to him. He makes friends and is even offered a permanent job there. Bob’s visa is almost up, so he goes back to the United States as planned, then takes the necessary steps to return to Australia and apply for a permanent residency visa. Bob effectively cuts his ties with the US and intends to make this small country town his new home and moves into a room with one of his new mates.

On Bob’s initial time in Australia under his working holiday visa, he will be considered a non-resident, or a temporary resident, depending on his visa. Even though he started thinking about making a permanent move at this stage, he had yet to take any steps to show this intention. However, on his return, which was made with all the actions necessary to show that this was a permanent move to Australia, he then becomes an Australian tax resident. 

             A Foreign Tax Resident with an Australian Permanent Residency Visa

Jane is a British citizen who has been living in Australia on a permanent residency visa for the past ten years. She just received news that her parents were in a bad accident and both need permanent care. Jane decides to pack up and move back home to care for her parents. She sells off her assets, closes her Australian bank account, and returns home to live with her parents. She also finds a part time job overseas.

Even though Jane has a permanent residency visa in Australia, she is no longer living here on a permanent basis. This means she is now a foreign resident for tax purposes.

Permanent and Temporary Residents

Even if an individual is deemed to be a tax resident, the ATO further distinguishes between temporary residency and permanent residency. Temporary residency typically occurs when an individual is genuinely residing in Australia on a “permanent” basis, however, are only in Australia on a temporary Visa, as opposed to living in Australia on a permanent residency Visa or obtaining Australian citizenship.

Temporary residents are only taxed on their Australian-sourced income.

Tax Residency is based on your Permanent Residence

As you can see from the above examples, tax residency is based on where an individual is permanently residing. If you are in Australia on a holiday, or only for a short time (less than 6 months), then you would not be considered an Australian resident for tax purposes.

However, holding a permanent residency visa, does not necessarily mean you are a tax resident. If you actually live in another country on a permanent basis, having your social and economic ties in another country, then you will be a foreign resident for tax purposes. 

It is important to note that there must be a permanent home elsewhere. If an Australian resident decided to travel the world for several years, although they may think they have departed Australia permanently, as they do not have a permanent home elsewhere, this would not constitute a decision to permanently reside in another country. Australia would continue to be their home, even though they are absent from Australia for a prolonged period of time.

Since determining tax residency can be quite complex, it is important to speak to a tax specialist to understand your situation.

Discretionary trusts provide flexibility in relation to revenue and capital distributions. This is one of the reasons they are a common choice for families. However, when there is a potential foreign beneficiary, the discretionary trust can find itself facing additional costs in the form of foreign surcharges. Foreign surcharges are additional fees that various state jurisdictions impose on the duties and/or land taxes over and above the original impost.

The 2020 changes to foreign surcharge requirements mean that administration for Australian discretionary trusts became a lot more complex.  

Foreign Surcharges are subject to a complex array of rules

Each state and territory has its own rules for determining when a beneficiary is a “foreign person”. They also have their own rules for governing foreign surcharges, with some states even imposing clawback rules in the event a beneficiary later becomes a foreign resident. For this reason it is important to obtain specific advice for the relevant state or territory when a discretionary trust intends to purchase property. 

Ultimately, any discretionary trust that is determined to have foreign beneficiaries will be required to pay both the ordinary state duties and/or land tax, as well as the relevant foreign surcharge. For this reason most discretionary trusts aim to avoid having foreign beneficiaries. Where this is not practical for the purpose and primary aim of having the trust in the first place, the trustee must be aware of how having foreign beneficiaries will impact their financial considerations.

Changes for NSW discretionary trusts that own residential property

On 24 June 2020 the State Revenue Legislation Further Amendment Act 2020 came into effect in NSW. This Act changed the foreign person surcharges for both land tax and duties where residential land located in NSW was owned by a discretionary trust. 

The change means that a trustee is deemed to be a foreign person unless the trust deed explicitly excludes all foreign persons from being beneficiaries or potential beneficiaries. This clause in the trust deed must be irrevocable. This means an individual beneficiary who has children overseas, who are defined as foreign persons, would not be able to amend the deed to include their foreign child as a beneficiary. 

Non-compliant trusts, i.e. trusts that do not exclude both foreign persons, and potential foreign persons, as beneficiaries, will deem the trustee to be treated as a foreign trustee. The trust then becomes subject to the foreign surcharge rate of duty. 

In NSW the rate of foreign surcharge is presently 8% of dutiable transactions relating to residential land while for land tax the rate is 2%. These charges are payable in addition to ordinary rates. 

Retrospective Impact of the change in NSW

One of the most concerning things with the change in NSW is that the law applies retrospectively from 21 June 2016 for dutiable transactions, and from 2017 for land tax surcharges. 

If you don’t have any foreign beneficiaries then you have until 31 December 2020 to amend your trust deed to irrevocably remove both foreign persons and potential beneficiaries who could be foreign persons, if you wish to avoid the foreign surcharge. 

If you have previously not had foreign beneficiaries, but you do not wish to amend the trust deed because you will, or potentially will, have foreign beneficiaries, then you will need to consider if you are liable for any retrospective duties and land taxes.

Victorian changes

Victoria has also implemented some changes as of 1 March 2020. While these changes essentially have the same impact as in NSW, the law does not apply retrospectively.  

What should you do if you have a discretionary trust with property?

If you have a discretionary trust that holds property, or is intended to hold property then you need to assess the importance and likelihood of having beneficiaries who are foreign persons, or could potentially be foreign persons. This includes assessing your current trust deed, evaluating the goals and purpose of the trust, and reviewing the financial impact of having, or potentially having, foreign beneficiaries.

This may result in a change to your trust deed in order to intentionally exclude any foreign, or potentially foreign beneficiaries, or it may involve a change in your investment strategy. 

The Australian tax system is surprisingly different to the UK tax system.

This makes a simple comparison between the two challenging. 

Determining, from an individual taxpayer perspective, which country has higher taxes, isn’t straightforward. Both countries apply progressive rates of tax, as well as a range of potential adjustments and offsets.

Income taxes are lower in the UK due to the progressive rates of tax applying at higher levels of taxable income, but as the UK also has much higher medical contribution taxes than Australia, the UK taxpayer may end up with a higher overall tax burden.

In Australia, income tax is assessed on the taxable income of a taxpayer which is assessable income less allowable deductions while in the UK specific “allowances” may reduce the different types of income before that income is taxed. 

Australian resident taxpayers have a standard tax free threshold, regardless of the type of income or income level, while UK taxpayers have access to different allowances (tax free amounts) that can vary based on income level and the type of income they are earning.

Foreign sourced income is also treated quite differently in the UK, with a threshold applying before tax is imposed.

The following table highlights some fundamental differences between the two tax systems:

Residency

Australian residency is generally dependent on whether an individual actually resides in Australia, however Australian citizens may continue to be Australian tax residents while temporarily residing overseas. There are a number of tests that can be used to help determine residency.

UK residency is based on the number of days an individual is physically present in the UK during the tax year. For more complex situations that do not meet the automatic test, other factors may apply.

Tax Rates

Both Australia and the UK apply progressive rates of tax ranging from 0% to 45%.

However, while Australia has a standard initial tax free threshold for all taxpayers, the UK utilises a system of allowances that taxpayers deduct from their income before tax is assessed. The amount of allowance changes depending on a range of factors, and different allowances are applied for different types of income, such as employment income, investment income and capital gains.

Medicare/ NHS

Australians pay a flat rate of medicare (2%), unless they are exempt. High tax payers pay an additional medicare levy surcharge of up to 1.5%, unless they pay for private hospital health insurance. 

In the UK both the employer and the employee are required to pay a contribution towards national health insurance, at rates varying from 0% up to 13.8%.

Capital Gains

Both Australian and the UK impose a capital gains tax.

In Australia capital gains are simply added to an individual taxpayer’s assessable income and taxed at the marginal rate at which the income falls. Assets that have been owned for more than 1 year can be discounted by 50% before being included as assessable income. Other exemptions may also be applied to reduce or rollover capital gains.

The UK tax system gives taxpayers an annual allowance for capital gains. Any capital gains up to the allowance each year are tax free. Like Australia, there are also other exemptions that may be applied to reduce or rollover certain capital gains. 

In the UK, capital gains are taxed at a different rate to other income, and residential property is taxed at different rates to other assets. Higher/additional rate taxpayers pay 28% on residential property and 20% on other chargeable assets. Basic rate taxpayers will pay either 10% or 20% on capital gains, unless it is on residential property, in which case the rate is either 18% or 28% (depending on the size of the gain and the taxable income of the taxpayer.

Both countries have an exemption for the sale of an individuals’ main residence.

Inheritance tax

Australia does not have an inheritance tax.

Neither inheritances nor deceased estates attract any specific form of tax. Any property or investments that are inherited will attract taxes in the same way as any property or investments that were acquired personally and subsequently sold. (There are some provisions for inheriting a main residence that allow the main residence exemption to be carried over).

The UK has a standard inheritance tax rate of 40% above the tax free threshold (the standard tax free threshold is currently 325,000 pounds).

Where everything is left to a spouse, civil partner, charity or community amateur sports club, there is normally no inheritance tax to pay. When your home is given to your children (including adopted, step, and foster children), the threshold can increase to 500,000 pounds.

If an individual who is married (or in a civil partnership) passes away with an estate that is worth less than their threshold, then the unused portion of their threshold can be added to their partner’s threshold for when they die.

The inheritance tax may be reduced to 36% on certain assets if at least 10% of the net value of the estate is left to charity in the will. There are some other reliefs and exemptions to help reduce inheritance taxes on gifts donated prior to death, business relief, and agricultural relief.

Australian and UK Tax Systems

Each tax system has a range of complexities that are unique to the respective country.

In some ways the basic Australian tax return is more straightforward for the individual taxpayer.

On the other hand, the UK system’s use of deductible allowances for different types of income, provides for a range of tax planning avenues that are not available to Australians.

Since the tax systems between each country are so different, and residency changes can trigger complex tax issues, it is important to seek expert advice in both countries when making a move between Australia and the UK.

One of the top questions we are asked by Australians who are moving to the UK, is “how am I taxed on my non-UK sourced income in the UK?”

Since a UK non-resident would only be taxed on any UK sourced income, this question is predicated on the basis that the Australian is moving to the UK on a permanent basis. A permanent move means that they are ceasing to be an Australian tax resident and instead will be considered a UK tax resident.

In general, just like Australia, the UK taxes residents on their worldwide income. This means that UK tax residents have to pay tax on any income they earn, regardless of where the income is sourced. However, there is a clause for what they consider “non-domiciled” residents, whereby taxes are instead paid on a remittance basis. Since many Australians moving to the UK would fall into the definition of a “non-domiciled” resident, this is an important question. We cover what this means below. 

Australian Tax Rules on Non-Australian Sourced Income

For comparison, let’s consider the Australian rules on residency. Most people are aware that as an Australian tax resident you are required to pay Australian income tax on income you receive, regardless of where it is sourced. However there are certain exceptions for individuals who are temporary residents. Once you cease to be an Australian resident you are only required to pay Australian income tax on income that has an Australian source.

The UK operates on a similar basis, however their exemption for “temporary” residents is measured and treated differently than Australia’s exemption.

UK Residency Rules

In general, tax residents of the UK are liable for income tax in the UK, on their worldwide income. This means that it doesn’t matter where the income is sourced, it is included in the resident’s tax return.

In the UK you are automatically considered a tax resident when either one of of the following applies:

• You spend over 183 days in the UK during the tax year.
• Your only home was in the UK (owned, rented or lived in for at least 91 days, with at least 30 days spent there in the tax year).

Conversely you are automatically considered a non-resident if either of the following applies:

• You spent under 16 days in the UK (or 46 if you haven’t been classed as a UK resident for the previous 3 tax years). 
• You worked on average 35 hours a week abroad, and spent less than 91 days in the UK, of which less than 31 days you were working in the UK.

Keep in mind that in instances where an individual would be considered dual tax residents of Australia and the UK, then the tie breaker rules in the Double Tax Agreement require consideration to determine which country has taxing rights on the different sources of income.

However, while the general rule is that tax residents are assessed on their worldwide income, there is, as indicated previously, an exception. This exception is for tax residents whom the UK considers to be “non-domiciled residents”.

Non-domiciled UK Residents

Non-domiciled residents are individuals, including Australian citizens, who are only living in the UK for the short to medium term.

A UK resident who has a permanent home outside of the UK is considered to have a domicile in that other country. This doesn’t necessarily have to be a specific, physical house, but more so that the ties to their home country mean that this country is considered to be their ‘permanent’ home. When an individual has a permanent home outside of the UK they are considered to be a “non-domiciled” tax resident of the UK.

In the UK a ‘domicile’ is typically the country in which your father permanently resided when you were born. For instance, the country in which you are a citizen by descent. However, this may not be the case if you have legitimately and permanently moved to another country, with no intention of returning to your original home country. This would mean that your ‘domicile’ changes to the new country in which you begin to permanently reside.

“Remittance” Rules on Taxes on Non-UK Sourced Income for Non-domiciled Residents

For non-domiciled residents, non-UK sourced income is treated differently depending on the total amount of the non-Uk sourced income. 

Under 2,000 Pounds

If you are a “non-domiciled” UK resident then you ignore all foreign income and gains if that income is under 2,000 pounds for the tax year and you do not bring that income into the UK. You must have a bank account in your home country, and the funds from that income must stay back in the home country instead of being transferred into the UK. If this is the case then you don’t have to do anything about your foreign income when lodging a tax return.

However, if the income you earn from overseas sources exceeds 2,000 Pounds, or you bring any income into the UK, then you must report that income in a self-assessed tax return.

Over 2,000 Pounds

When the non-UK sourced income exceeds 2,000 pounds (or the income is brought into the UK), the income can’t just be ignored. The rules under which foreign income is taxed in the UK, for non-domiciled residents, is the ‘remittance basis’. This essentially means that you have a choice on how you treat the reported income.

Choice of how UK Taxes are Sorted Out

Choice 1: You can Simply Choose to Pay UK Taxes on the Income. 

If you choose this option then you will be assessed for income tax on your foreign income. If tax is paid on the Australian sourced income (or may be taxed elsewhere if it is income relating to another country), there are a number of rules that ensure you are not taxed twice on this income. In some cases this will result in a reduction to your UK taxes. 

Choice 2: You can Claim the ‘Remittance Basis’.

If you choose to be taxed on the remittance basis, then you only have to pay tax on any of the income that you actually bring into the UK.

However, in a trade off for this consideration, you will lose any tax-free allowances for income tax and capital gains. You will also be required to pay an annual charge if your residency in the UK exceeds a certain timeframe. This annual charge is 30,000 pounds if you have resided in the UK for at least 7 of the past 9 years, or 60,000 pounds if you have resided in the UK for at least 12 of the past 14 years.

The remittance basis may be a great option if you are living in the UK for less than 7 years, however, beyond this you would need to assess your situation to determine your optimal position.

Seek Appropriate Advice for your Situation

Since the remittance basis can get complicated it is best to talk to a UK tax adviser for specific advice. You need to consider your own position, your long term intentions, and where you hold your investments, including rental properties, that are generating taxable income.

See here for a brief comparison of the Australian and UK tax system.

On December 5th 2019 the contentious law denying non-residents the Capital Gains Tax (CGT) main residence exemption was passed.

This means that the update we previously provided on this legislation is still in force. If you are no longer an Australian resident, or are permanently moving overseas, and you still own a property that was your main residence in Australia, then you need to know what this means.

Existing Non-Residents with Main Residence Property In Australia

Did you purchase your Australian main residence before 9 May 2017? If you did then you only have until 30 June 2020 to sell your property if you want to claim the CGT main residence exemption.

After this date non-residents will not be able to claim the exemption. Basically this means you will be assessed on the full capital gain.

On the other hand, if you plan to return to Australia in the future then you may still be able to claim the exemption. If this is the case then you can wait to sell your former main residence once you return to Australia. Once you are a tax resident again then you will be assessed as an Australian tax resident. This means the law will again allow you to claim whatever main residence concession you would ordinarily be entitled to. Given the rise in Australian property prices over the last decade, this change could see an Expat caught unaware, being exposed to capital gains tax of several hundred thousand dollars (if not more), depending on the situation.

For a more detailed look at what the law entails please refer to our “Update on CGT Main Residence Exemption for expats” post.

Seek Tax Advice

The change in law has the potential to significantly impact non-residents. While you can get a general overview from the information provided in our blog, it is important that your specific situation be assessed by a tax specialist. This is important because your individual situation will be dependant on many variables that can’t be adequately covered in a general blog. A personalised assessment will ensure that you understand your options and can make the best decision for your situation.

Update: Since publication of this post the Bill has passed and is now law. The law passed is the Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures) Bill 2019. ) It was passed with no further amendments. This means non-residents will not be able to claim the CGT main residence exemption from 1 July 2020. The scenarios below currently apply under the new law.

For the past few years Australian expats have been waiting to see if the axe will drop on their ability to claim the capital gains tax (CGT) main residence exemption.

The current main residence exemption allows individuals to claim an exemption on paying CGT when they sell the home that they have been living in. Under the normal CGT rules, an individual may continue to claim their former home as their main residence for up to 6 years of absence. This applies unless and until the homeowner purchases and moves into another house that becomes their main residence in Australia.

The new measure has been in the works since the 2017-2018 budget, with non-residents potentially becoming ineligible to claim the main residence exemption since May 9th 2017.

Main residence exemption removed for non-residents in new Bill

The shortcomings of this bill continue to be of concern. After the Bill lapsed in April 2019, we have waited to see whether it would reappear. The hope was that a new Bill would be rewritten in a way that was fairer to taxpayers.

Unfortunately it was reintroduced on the 23rd of October 2019 in largely the same form. Like the original bill, it applies retroactively and allows no consideration for long term Australian residents who may end up caught out by the changes.

While many concerns with the original bill remain unaddressed, there are a few changes.

These changes have extended the transitional measures and added in some compassionate exceptions. The transitional measures ensures that existing foreign resident home owners have some time to sell their main residence under the existing rules. Previously they had until 30th June 2019. Under the new Bill they now have until 30th June 2020 to sell under the existing CGT rules. The additional exceptions that the revised Bill introduced means that there are now limited situations in which the main residence exemption may still apply for foreign residents. 

So, if you’re an expatriate with a former main residence in Australia you should consider now what strategy you wish to take. It’s time to consider if you need to sell while you can access the existing CGT exemption.

Summarised below is an outline of what these new laws could mean for you and what you can do about it.

What Happens If I Hold Onto My Australian Home When I Move Overseas?

Once you’re a foreign resident then any Australian property home you own is treated as a CGT asset. You are no longer able to apply the main residence exception that is available to Australian taxpayers.

Basically this means you will be liable for full CGT on any profit from the sale of the property. This applies even if you lived in the home for 20 years before becoming a non-resident. Since the main residence exemption can potentially save you tens of thousands of dollars in CGT this is a big change for temporary residents and Australians looking to move overseas.

As mentioned, there are limited situations where non-residents may still access the main residence exemption. This includes the transitional provision that allows you to sell your main residence under the existing CGT exemption if you sell before June 30th 2020. It also includes concessions that equate to compassionate grounds on the event of death, divorce, or terminal illness.

As a Non Resident Can I Use the CGT Main Residence Exemption When I Sell My former Australian home?

Normally when you satisfy the criteria for claiming the main residence exemption for CGT then you can apply this exemption (in part or in full). However, if this bill passes into law, foreign residents will no longer be able to access the main residence exemption. Well, in most situations.

Let’s take a look at when the exemption may still apply:

1- Did you purchase your main residence before or after May 9th 2017?

If you purchased your property after May 9th 2017 then you’re out of luck. You will not be able to claim an exemption for your principal residence if you sell it while you are a non-resident. That’s because you purchased your main residence after these new measures were proposed.

However, if you purchased before May 9th 2017 (and post 20 September 1985) then you are covered by the transitional provisions. This means you have until 30th June 2020 to sell under the current CGT rules and access the main residence exemption. Wait any longer and the exemption is no longer available if you sell your main residence while you’re a non-resident.

The big drawback of selling after 30th June 2020 is that the main resident exemption will not even apply for the period of time that you lived in the property. That means you won’t even get access to a partial exemption.

2- What If a serious life event happens to you within 6 years of becoming a non-resident?

With the new bill being introduced, there are now some situations where a non-resident may continue to access the main residence exemption for CGT. These concessions only apply if you’ve been a non-resident for less than 6 years. As a non-resident you may still be eligible for the main residence exemption if one of the following life events happens:

• You, your spouse or your child (under 18) get diagnosed with a terminal medical condition.
• You, your spouse or your child (under 18) pass away.
• You get divorced or separated.

Basically, if something unexpected happens within several years of becoming a non-resident for Australian tax purposes, then you may still be able to access the same concessions that Australian residents can. While no one can factor these contingencies into a tax strategy it’s good to know that this exists if the worst happens.

3- Will You Become An Australian Resident Again?

If you come back to Australia and become an Australian tax resident, then the main residence exemption is available to you again under the normal rules. This means you will have the opportunity to apply the CGT main residence exemption, either in part (if the property hasn’t exclusively been your main residence) or in full. Keep in mind that this only applies if you sell while you’re an Australian tax resident.  

This means that if you’re planning to return to Australia then it might be worth holding onto the property so that you can reduce your CGT liability. That’s great news if there’s a chance of returning to Australia to live in your home (or elsewhere) again. Of course, this should not be the only factor to consider when deciding whether to hold onto or sell your former home under the main residence exemption.

What If I Die While I’m a Non-Resident?

You might decide to hold onto your property because you’re planning to come back to Australia. But what if that doesn’t happen?

If you die within 6 years of becoming a non-resident then your estate may still be able to access your main residence exemption. However, when you pass away more than 6 years after becoming a foreign resident then your estate will be caught by the changes and the main residence exemption will not be applicable. That means your estate will be stuck with the full CGT liability.

What Do I Do With My Australian Property Now?

The answer to this is very personal. It depends on your ongoing plans, whether you’re concerned about the tax impact of these legislative changes, what the market is like, and what the best decision is for both your immediate and long term needs.

For instance, selling a property now for a $50,000 profit with no CGT to worry about would still net you less than selling it down the road for a $200,000 profit with a $45,000 CGT liability.

Ongoing income or costs also weigh into your decision, as do any plans to return to Australia down the track. Unfortunately, it also depends on unknown factors, including the unpredictable nature of tax law changes that may happen in the future. As always, it’s important to get tailored advice for your unique situation when considering what to do. Individual situations can involve complexities that extend beyond generic information.

As always, it’s important to get tailored advice for your unique situation when considering what to do. Individual situations can involve complexities that extend beyond generic information.

In our blog of 25 February this year we reported on what we consider to be highly inequitable capital gains tax changes that the Government has introduced into parliament. The changes are contained in the Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures No. 2) Bill 2018.  

The Bill, as drafted, denies foreign residents (including Australian expats) access to the capital gains tax (CGT) main residence concession if they sell their former main residence while they are living overseas. In short, no CGT relief would be available to Australian expats who sell their property while they live overseas even for the period of time they lived in their home before departing Australia. 

The Bill has still not been passed and seems for now to be held up in the Senate, which we hope augurs well for Australian expats.

Main Residence Exemption Removal still possible

Unfortunately despite a number of sensible submissions to the Senate (including our own CST Tax Advisors Submission), the Senate Committee has recommended that the Government proceeds with the proposals as announced.

Essentially the Committee indicated that it ‘considers that the measures contained in these bills will form an essential part of the government’s comprehensive and targeted plan to improve outcomes for Australians across the housing spectrum’.

The Committee did not explain why it thought that removing the CGT main residence exemption is a targeted plan to improving housing outcomes. We believe the natural reaction for most Australian expats to a potential loss of the CGT exemption would be not to sell their property until they one day return to Australia. Essentially a lock-in effect will be created rather than improving the quantity of housing stock available for sale. The Senate Committee Report can be access by following this link.

Our Recommendations

We sincerely hope that despite the Senate’s recommendation to proceed that the Government will rethink their proposal to ensure that Australian expatriates are treated equitably.

We strongly urge the Government to fix the Bill by ensuring that amendments are made so that:

• all Australian expatriates who were already non-resident of Australia when the changes were announced on 9 May 2017, should continue to be able to access the absence concession regardless of where they reside; and
• all persons should be able to access the partial CGT exemption for at least that part of the ownership period during which they lived in the property and were resident of Australia.

If the Government does not fix the equity issues in the Bill, at the very least we hope that the Government can extend the transitional period end date from 30 June 2019 (way too close) out to 30 June 2020 or 2021 to give people sufficient time to consider their options. Expecting Australians living overseas to be aware of ‘legislation by press release’ is not satisfactory.

Given that the changes are so fundamental in our view the Government owes a minimum duty to write to all foreign residents taxpayers who are lodging tax returns in relation to Australian rental income, in the event that these fundamental changes apply to them.

In this regard we note the Committee’s recommendation that it “recommends that the Australian Government ensures that Australians living and working overseas are aware of the changes to the CGT main residence exemption for foreign residents, and the transitional arrangements, so they are able to plan accordingly.“(Recommendation 1, Paragraph 2.34 of the Senate Committee Report on Page 17).

Want to make a Submission?

If you wish to make a submission to the Government it would not be too late to write to the Federal Treasurer. Alternatively you can contact CST for more information.