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.

What Are The Tax Consequences Of Arriving In Australia And Becoming Tax Resident?

From the date of arrival into Australia, you will generally be regarded as a tax resident of Australia and be required to declare income from worldwide sources from this day forth. Where you are classified as a temporary resident, only Australian sourced income will be taxable in Australia. In the first year, your tax-free threshold will also be pro-rated based on the number of months you will be a resident of Australia for tax. All of your assets will be deemed to have been acquired for their market value as at the date of your arrival for capital gains tax purposes. Your foreign income may also be subject to income tax depending on the movement of the exchange from the date of arrival to the date of actual conversion

What Is The Minimum Time I Can Remain In Australia Without Being Tax Resident?

Australia has a 183-day rule with regards to determining whether you are a tax resident of Australia. However, there are also issues associated with one’s domicile which should also be considered.

Does Australia Tax Its Residents On A World Wide Or Territorial Basis?

Australian tax residents are subject to income tax on their worldwide income. Territorial tax only applies if you are classified as a temporary resident of Australia for tax purposes.

Is Foreign Income Taxable In Australia e.g. Foreign Rental Income, Foreign Interest Income And Foreign Dividend Income?

As an Australian tax resident you will be taxable on foreign income derived during the year.

Does Australia Tax Income On A Remittance Basis?

No – Australia taxes foreign income as it accrues regardless of whether the income is remitted to Australia.

Does Australia Have A Sales Tax Or VAT Tax On Purchases?

Australia has a consumption tax called the Goods and Services Tax (GST). The current rate of GST is 10%.

Does Australia Have A Capital Gains Tax That Taxes Me When I Sell Foreign Assets?

Yes – Capital gains tax applies in Australia on foreign assets for any capital growth arising from the date of commencement as an Australian tax resident to the date of disposal.

Does Australia Have An Estate Tax Or Death Tax?

No – Australian does not currently have an estate or death tax.

What Is The Top Tax Rate In Australia?

The top marginal tax rate for individuals in Australia is 45% with an additional 2% Medicare Levy and 2% Temporary Budget Repair Levy. This top rate applies on taxable incomes greater than $180,000.

Does The Tax Rate Vary For Different Types Of Income And If So What Are The Rates?

The income tax rate applies to all forms of income , however there may be rebates which apply which will reduce the tax payable.

What Are The Common Tax Deductions Available In Australia?

You may claim a deduction for any payments made in relation to the generation of income. Common deductions associated to employment income include out-of-pocket expenses such as:

• Motor vehicles
• Communications – cell phone, internet
• Travel
• Uniforms
• Self-education

Does Australia Require Joint Tax Returns To Be Filed For Me And My Spouse Or Are Separate Tax Returns Required?

In Australia each taxpayer must file a personal return. However the joint incomes will be considered in determining eligibility to certain rebates.

If I Have A Foreign Company Or Foreign Trust Before I Arrived In Australia Is The Income Of That Company Or Trust Taxable?

In Australia, the Controlled Foreign Company (CFC) and Transferor Trust rules will apply to attribute income to you personally if you are considered to control the assets of a foreign company or trust.

Do Children Under 18 Pay A Higher Rate Of Tax On Certain Types Of Income?

Yes – Children who are not working or regarded as an Excepted person are taxed at a higher rate than adult individuals. There are also certain forms of income receipts (such as a distribution from a deceased estate) which are not subject to the higher rates of tax in the hands of a child.

Is There A Gift Tax In Australia?

No there is no gift tax in Australia, however when assets are gifted capital gains tax may be relevant.

What Are The Personal Tax Exemptions In Australia e.g. A Gift From An Overseas Relative Or A Foreign Insurance Payout?

Gifts and insurance payouts from overseas relations are generally not taxable in Australia.

If I Receive Shares As Part Of My Salary Is This Taxed In Australia?

Shares are regarded as payments in lieu of salary and wages and taxed at your marginal rate of tax in either the year they are granted or the year in which they vest (depending on the terms and conditions associated with the employee share scheme).

When I Leave The Country Is A ‘Termination Payment’ Taxed By Australia Before I Leave?

Australian sourced income will be subject to Australian withholding taxes. This is the cases regardless of whether payment of the termination amount is done before or after you leave the country.

What Are Other Tax Consequences Of Leaving The Country?

As a resident of Australia, you will be deemed to have disposed of your non-real property assets for their market values on the date of disposal. This will give rise to a deemed capital gains tax event and an associated tax liability. However, you may choose to defer this taxation event to the point when you dispose of the asset in the future.

If you do not declare a capital gain on the assets in the year that you cease being a resident of Australia, it will be assumed by the Australian authorities that you have elected to defer the taxation point.

Are There Any Tax Consequences Of Me Transferring Money From Australia To My Say Home Country?

There are no tax consequences arising from the transfer of money back to your home country unless the source of funds is Australian income in which case there will generally be a tax liability.

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.

As we reported in our blog last year – the Australian Government announced that it would remove the CGT main residence exemption for foreign residents.

It was said that this reform was being introduced as part of measures to address housing affordability in Australia. Due to other legislative priorities a bill to enact the change was not introduced and we had hoped that the Government would have taken the time to ensure grandfathering of all existing properties.

However the bill was re-introduced earlier this month as Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures No. 2) Bill 2018, apparently unchanged after the exposure draft consultation period last year.

The Bill has now been referred to a Senate Standing Committee which represents the last opportunity to lobby for changes to be made to the Bill. Submissions close 5 March 2018.

What Is The Problem?

In trying to tighten our CGT laws, the Bill denies Australians living abroad access to the “CGT absence concession”. This existing concession gives many Australian expats the opportunity to retain the CGT exemption on their former home for up to 6 years, even if they rented their home out after they had moved overseas. This exemption will be removed.

Disastrously though, the changes seem to be more fundamental. The Bill, as drafted, denies even a partial CGT exemption by providing no CGT relief even for the period of time when the person had lived in their home before departing Australia. The Explanatory Memorandum to the Bill makes this alarming problem crystal clear (see Example 1.2 which is extracted below). We do not believe this was the Government’s intention.

The only way out under the draft Bill is that taxpayers seem to be allowed to move back into the property after returning to Australia (as a resident) and to then sell the home on a CGT free basis (assuming the absence exemption otherwise applies). This creates a tax-driven ‘lock-in’ effects which is likely to create significant issues for taxpayers and rather than assist housing supply could in fact create further supply constraints.

Does This Apply To You?

If you are an Australian expatriate then the Bill provides that unless you sell your former home prior to 30 June 2019, you will be subject to CGT on the sale of the property if you sell it after that date while you are still a non-resident of Australia for tax purposes. Unfortunately, as currently drafted, the Bill would not even provide you with a partial CGT exemption to recognise the period of time that you lived in your home prior to your departure. To preserve your CGT exemption you would be left with the choice of either selling prior to 30 June 2019 or else keeping the property until you one day return to Australia.

The tightness of the 30 June 2019 deadline has seen concerns expressed in the Australian Financial Review recently about a fire sale in expat owned property. While predictions of a fire sale may not be true, it is nonetheless a highly unfair position to put home owners in and the Bill represents poor policy implementation.

Artificially ending the absence concession by using a ‘drop dead date’ on 30 June 2019 is highly equitable. It will mean that failure to sell by 30 June 2019 could mean that an Australian living overseas could be exposed to hundreds of thousands of dollars of tax, given the increases in Australian property over the last 3 years.

What Should Be Done To Fix This?

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.

We believe that the flaws in this Bill are an oversight that will be rectified once these problems are better understood. In our experience most Australians living abroad who keep their home in Australia do pay taxes and continue to contribute to the Australian economy.

If the Government wishes to persist with the change of law to only permit CGT exemptions for those who are tax resident in Australia –  then they should ensure that they are fair to the thousands of Australians who have moved overseas (most of whom will return) but who have retained their former homes in Australia.

Final submissions are now being requested and we strongly recommend that interested parties make a submission on this inequitable change.

You can contact your local member of parliament and forward this blog.

If you are concerned about the unfairness of this change submissions can be made to.

Committee Secretariat Contact:

Senate Standing Committees on Economics
PO Box 6100
Parliament House
Canberra ACT 2600

Phone: +61 2 6277 3540
Fax: +61 2 6277 5719
economics.sen@aph.gov.au

Extract from Explanatory Memorandum to the Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures No. 2) Bill 2018

Example 1.2 — Main Residence Exemption Denied

Vicki acquired a dwelling in Australia on 10 September 2010, moving into it and establishing it as her main residence as soon as it was first practicable to do so. On 1 July 2018 Vicki vacated the dwelling and moved to New York. Vicki rented the dwelling out while she tried to sell it. On 15 October 2019 Vicki finally signs a contract to sell the dwelling with settlement occurring on 13 November 2019. Vicki was a foreign resident for taxation purposes on 15 October 2019. The time of CGT event A1 for the sale of the dwelling is the time the contract for sale was signed, that is 15 October 2019. As Vicki was a foreign resident at that time she is not entitled to the main residence exemption in respect of her ownership interest in the dwelling. Note:

This outcome is not affected by:

• Vicki previously using the dwelling as her main residence; and

• the absence rule in section 118-145 that could otherwise have applied to treat the dwelling as Vicki’s main residence from 1 July 2018 to 15 October 2019 (assuming all of the requirements were satisfied).

Background

Many Australian citizens who leave Australia and become non-residents (i.e foreign residents for tax purposes) rent their former main residence while they are living overseas.

Presently these Australian citizens are able to benefit from a CGT main residence exemption under the ‘6 year absence’ concession (Section 118-145 of the ITAA 1997).  In essence the absence rule means that a person can move out of their main residence, rent it out, and then move back into it before the end of 6 years and the property will retain its 100% CGT free status when it is sold.

Further, where a former main residence is not rented out at all – the property can remain exempt from CGT indefinitely (See Section 118-145(3)).

CST has many expat clients who have moved overseas and who are renting out their family homes.

New Budget Announcement

On the 9 May 2017 the Treasurer announced that the Government “would stop foreign and temporary residents from claiming the main residence capital gains tax exemption when they sell property in Australia from Budget night”. The a transitional rule is to be provided so that people who own such property on 9 May 2017 can sell by 30 June 2019 without paying capital gains tax.

However the announcement was included in a series of measures aimed at improving the integrity of Australia’s CGT rules for foreign investors.

Naturally enough, most Australian expats living abroad would not consider themselves to be ‘foreigners’ and the loss of a CGT exemption on their former main residence would be a very bad outcome.

Unfortunately it is not yet clear whether this announcement was actually intended to apply to foreign residents (meaning foreign tax residents, which would include Australian citizens who are non-resident of Australia) or whether the announcement is intended to apply to foreign nationals only.

Given the lack of detail in the announcement we will have to wait until legislation is introduced before being sure of the Governments intentions in this area. If you are an Australian expat living abroad please do not hesitate to contact us to discuss any concerns you may have or if you require advice.

Please see – http://www.budget.gov.au/2017-18/content/glossies/factsheets/html/HA_16.htm

CST Tax Advisors in partnership with Littler and the Trade and Investment offices of Australia, invite you to attend this event aimed at providing essential information to companies looking to expand into Australia.

Topics include:

• Setting up initial operations
• Obtaining investors
• Available visa options
• Engaging contractors
• Sending employees to a new market on international assignment or secondment — what is required? Is local employment necessary?
• Immigration and tax considerations
• Other global issues to consider in international expansion

For further details please click here.

Many Australian companies expand into the UK without a full understanding of the tax issues and advantages of effective tax and finance structuring between the Australian and UK operations.

Here are some of the issues and factors to consider:

• Choosing the right business structure
• Taxation of profits
• Profit repatriation
• Residency issues
• Transfer pricing and thin capitalisation
• CGT concessions

Choosing The Right Business Structure

Generally speaking, there are two main ways an overseas company can establish business operations in the UK:

1. Incorporating a private limited company, or
2. Setting up a branch (referred to as a UK “permanent establishment”).

What are the pros and cons of each?

A company has the benefit of being a separate legal entity. This means that the Australian head company, generally, cannot be held liable for the debts accruing to the UK subsidiary.

A permanent establishment is when the business is carried on via a fixed site or office. It can include an agent who is authorised to do business on behalf of the overseas parent.

The right business structure for your operations will depend on tax considerations, the proposed activities of the UK business and financing considerations.Taxation Of profits

Both business structures above are subject to UK tax on profits at the current UK corporate tax rate of 20%. It is proposed to fall to 17% by 2020.

Under Australian tax law, any profits of the UK branch are generally not taxable in Australia under the Branch Profits Exemption.

Repatriation Of Profits

Generally, the repatriation of profits (via dividends) from a UK company to the Australian head company can be done in a tax-efficient manner. Generally, there is no withholding tax on dividends from the UK. Furthermore, where the Australian company has a greater than 10% voting shareholding in the UK entity, the dividend is generally not taxable to the Australian company in Australia.

In relation to the UK branch, generally inter-office remittances between the UK and Australia are not taxable.

Residency And Decision-Making

An Australian head-quartered company decides to incorporate a UK company. All the Directors of the UK company live in Australia, and key decisions in respect of the UK company are also made in the Australian board meetings. In this situation, there is a risk that the ATO may deem the UK company to be tax resident in Australia, rather than the UK. To help mitigate the risk of potentially being subject to tax in Australia (as well as the UK), it is important to consider appointing UK directors and ensure board meetings and key decisions are made outside of Australia.

Transfer Pricing And Thin Capitalisation

Transactions between Australia and the UK will be subject to transfer pricing rules of both countries. Apart from the purchase and sale of goods, transactions covered include financial transactions (including loans), transfers of rights and licences and letting of property. It is important that advice is obtained from both a UK and Australian tax perspective.

Furthermore, the UK thin capitalisation provisions operate to ensure the UK entity does not claim interest deductions where the UK operations have excessive debt above the safe harbour limit. Advice should be obtained prior to funding the UK operations to ensure the financing is optimal from both an Australian and UK tax perspective.

UK CGT Concessions – Entrepreneur’s Relief

The UK also offers generous CGT concessions, including “entrepreneur’s relief” in respect of “qualifying business disposals”. Gains qualifying for entrepreneur’s relief are subject to a reduced rate of CGT at 10%. It is crucial that advice is received at the time of structuring the UK business to ensure that the concessional rate of CGT will be available.

Please visit our page for more information.

_{^{Disclaimer
This document is intended as an information source only. The comments and references to legislation and other sources in this publication do not constitute legal advice and should not be relied upon as such. You should seek advice from a professional adviser regarding the application of any of the comments in this document to your fact scenario. Information in this publication does not take into account any person’s personal objectives, needs or financial situations. Accordingly, you should consider the appropriateness of any information, having regard to your own objectives, financial situation and needs and seek professional advice before acting on it. CST Tax Advisors exclude all liability (including liability for negligence) in relation to your reliance in this publication}}

Australian expats living and working in the UK that are considered “non-domiciled” have significant tax advantages compared to UK domiciled individuals.

A UK resident and domiciled individual will be subject to UK tax on both their UK and foreign income. In contrast, a UK resident but non-domiciled individual may elect to be taxed on their foreign income only to the extent that income is remitted into the UK.

How Is A Person’s Domicile Determined?

This is often a complex area of law. However, generally your domicile is determined according to the domicile of your father at your birth.

Everyone starts with a “domicile of origin”, and if your parents were married, this will be the domicile of your father.

A person may acquire a “domicile by choice” in another country if they decide to move permanently to a different country.

However, from April 2017, new rules are to be introduced that will result in an individual to be “deemed UK domicile” for all UK taxes if:

• They are UK resident and non-domiciled for more than 15 out of the past 20 tax years; or
• They were born in the UK with a UK domicile of origin and later become UK resident (a returning non-dom).

Current Rules

Income Tax and CGT

A UK resident non-dom currently has a significant tax advantage over a UK domiciled individual in that they may elect to use the remittance basis of taxation in respect of foreign income and gains such that foreign gains (e.g. a disposal of an Australian property) will only be subject to UK tax to the extent such income and gains are actually remitted (brought into) into the UK. However, the following points should be noted:

• The remittance basis will apply automatically for foreign income less than £2,000;
• If unremitted foreign income or gains exceed £2,000 and you elect to use the remittance basis, you will lose your entitlement to your UK tax-free personal allowance and CGT annual exempt amount;
• There is no charge on claiming the remittance basis in the first six years. Once you have become UK resident for 7 out of 9 years, you will be required to pay the Remittance Charge of £30,000 to use the remittance basis. The charge increases thereafter, and the cost may then outweigh the savings.

Whether it is beneficial to claim the remittance basis will depend on the amount of your foreign income and availability of foreign tax credits (noting the loss of the personal allowance and the Remittance Charge payable after year 7).

A “remittance” is interpreted widely by HMRC to include:

• Physical cash brought into the UK;
• Electronic bank transfers;
• The use of foreign credit cards in the UK;
• Purchase of assets in the UK; and
• Remittances of income by family members.

There is a complicated definition of “clean capital” which may be remitted tax-free into the UK. Extreme care should be taken when remitting capital from an overseas “mixed fund” bank account (containing clean capital and income) into the UK as this may trigger a taxable remittance. This area is highly complex and we recommend advice be obtained prior to remitting such funds.

We note that if you have interest bearing accounts in Australia or overseas, you may wish to consider closing these accounts down once in the UK, or having the interest paid into another non-UK account so that you can remit the underlying capital into the UK free of UK tax.

Inheritance Tax

Currently, non-domiciled individuals are exempt from inheritance tax on non-UK assets.

However, a non-dom is considered “deemed domicile” for UK inheritance tax purposes if they are tax resident in the UK for 17 out of 20 years and therefore are potentially subject to UK inheritance tax on their worldwide estate.

Previously, it was relatively easy for non-doms to shelter UK assets from UK inheritance tax by holding them through an offshore structure, such as an offshore company, as only assets held directly are included. However, from April 2017, this position will change (refer below for more details).

New “Deemed Domicile” Rules

There are three significant changes proposed from 6 April 2017 which will impact UK non-doms:

• Non-domiciled individuals will be considered “deemed domiciled” for income tax, CGT and inheritance tax purposes once they have been UK resident for 15 out of 20 years;
• Residential property situated in the UK will be subject to inheritance tax if held through an offshore structure such as a trust or company; and
• Any individual born in the UK will be treated as domiciled in the UK if they are UK resident, even if they have left the UK and acquired another domicile of choice.

There are various planning opportunities available for individuals that are to become deemed domicile from next April to mitigate the impact of these changes, however it is critical that action is taken now. Potential planning opportunities include:

Inheritance Tax And Offshore Trusts

Offshore trusts that are set up by an individual who is non-domiciled should remain outside the scope of UK inheritance tax even after that individual becomes deemed domiciled. Therefore, an individual who does not have a UK domicile of origin, but will become deemed domicile under the 15/20 year rule may consider transferring property to a trust prior to April.

Rebasing For CGT

Offshore assets of individuals who become deemed domicile may be rebased so that only gains accruing after April 2017 will be subject to CGT.

Cleansing Relief

Individuals will have a one-year window to rearrange their mixed funds and separate them into clean capital, foreign gains and foreign income. This will allow clean capital to be remitted into the UK tax-free.

Further details on the proposed changes can be found here:

https://www.gov.uk/government/consultations/reforms-to-the-taxation-of-non-domiciles/reforms-to-the-taxation-of-non-domiciles

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This document is intended as an information source only. The comments and references to legislation and other sources in this publication do not constitute legal advice and should not be relied upon as such. You should seek advice from a professional adviser regarding the application of any of the comments in this document to your fact scenario. Information in this publication does not take into account any person’s personal objectives, needs or financial situations. Accordingly, you should consider the appropriateness of any information, having regard to your own objectives, financial situation and needs and seek professional advice before acting on it. CST Tax Advisors exclude all liability (including liability for negligence) in relation to your reliance in this publication}}