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Tax and Residency – Arrivals and Departures

Posted by Northadvisory on May 28, 2018

The law treats residents and non-residents differently, where residents are taxed on all worldwide income but non-residents are taxed only on Australian sourced income. Tax rates are different for residents compared to non-residents, where non-residents do not get the tax-free threshold ($18,200) and pay tax at 32.5% from the first dollar of income up to $87,000. Residents pay Medicare levy, non-residents don’t (generally) pay Medicare levy (but also can’t claim Medicare benefits), non-residents pay tax on bank interest at flat 10% and Non-residents liable for CGT only on “real property” (e.g. Australian land/houses), not shares and other investments.

  1. The main test is the “resides test” (s6(1) ITAA 1936) being “To dwell permanently, or for a considerable period of time, to have one’s settled or usual abode, to live, in or at a particular place” Shorter Oxford Dictionary. The following from TR98/17 are taken into account in determining whether the taxpayer resides in Australia:
    • Intention and Purpose of Stay
    • Family and business/employment ties
    • Maintenance and location of assets
    • Social and living arrangements
    • Physical presence in Australia

    If taxpayer passes the “resides” test, they are resident and no further tests need be considered

    If taxpayer fails the “resides” test, consider the other three tests. If any ONE of those tests is passed, the taxpayer is resident

    • Domicile Test – place considered by law to be your permanent home and cannot have more than one, determined by domicile of origin, domicile of choice or domicile by operation of law
    • 183-day test – being physically present in Australia for more than 183 days in a year (not required to be continuous), and does not apply if your usual place of abode is outside Australia
    • Superannuation test – eligible employee under Superannuation Act 1976 or spouse/child of such a person e.g. current public servant
  2. Once a taxpayer is a resident, they must disclose all worldwide income earned from date of arrival such as interest on overseas bank accounts, foreign pensions, rent from investment properties, disposals of foreign assets, shares/proceeds from employee share schemes and wages and salaries. A foreign tax offset may be available to avoid double taxation, and money brought into Australia when taxpayer first arrives is not taxable (e.g. overseas savings, profits from asset disposals)
  3. New migrants tax action plan:
    • Get a Tax File Number (can only apply once in Australia)
    • Get a market valuation of any assets that may be subject to CGT – such as property, shares or business interests – which owned on the date of entry to Australia
    • Get an ABN if there is an intention to start a business
    • Choose and sign up with a superannuation fund
    • Lodge first tax return for the period from the date of arrival through to the following 30 June
    • Note: If coming to Australia permanently, taxpayer will be tax resident from the date of arrival and will be entitled to a partial tax-free threshold depending on date of arrival. The full tax-free threshold consists of two elements:
      • A flat amount of $13,464 which is paid in full
      • An additional $4,736 apportioned for the number of months the taxpayer was in Australia during the income year, including the month of arrival
  4. CGT for arriving residents:
    • CGT assets are deemed to have been acquired on the date the taxpayer became resident in Australia (possibly – but not necessarily – the date of arrival)
    • Taxpayers will need to get a market valuation of any assets that may be subject to CGT – such as property, shares, business interests, personal items like jewellery – which owned on the date of entry to Australia
    • If the asset is already TAP (such as real estate located in Australia) it is already in the Australian tax system and a valuation is not required
    • After that, normal CGT rules apply
    • Assets must be held for 12 months from date of becoming resident in order to get the 50% discount
    • Taxable Australian Property (TAP) includes items such as:
      • Land and building situated in Australia (e.g. family home, residential or commercial investment property, land (including farmland), and mining, prospecting and mineral rights
      • CGT asset used to carry on business through an Australian permanent establishment (i.e., most business assets)
      • Shares in an Australian listed company
  5. Foreign/Overseas Pensions:
    • Foreign pensions are generally assessable
    • A deduction may be available for the Undeducted Purchase Price (UPP), the amount which equates to the original contributions to the pension fund out of taxed income
      • Some UK pensions are entitled to a standard deduction (8%) as are some Dutch pensions (25%)
      • Otherwise, apply to the ATO using UPP determination form
      • Some foreign pensions are tax-free: such as pensions paid by the US government (at any level, state or federal), UK war widows pension and New Zealand pensions which would be exempt from tax in New Zealand
  6. If leaving Australia and becoming a non-resident, consider:
    • Whether you intend to return permanently to Australia
    • The roots put down in new country, such as buying a house or marrying
    • Duration and frequency of visits to Australia
    • Continuing family connections to Australia (e.g. spouse, children)
    • Continuing financial, social and emotional ties to Australia (e.g. family home, car, salary paid into Australian bank account)
    • If you leave Australia and do not set up a permanent home in another country, you are generally considered an Australian Resident and be taxed on worldwide income.
  7. On becoming a non-resident, the following CGT consequences apply:
    • CGT event I1 happens, where all CGT assets are deemed to be disposed of at market value, except TAP
    • Taxpayer may elect to disregard deemed disposal (s104-165(2)) where no deemed disposal happens and assets remain with Australian tax net. This election is “all or nothing” so all CGT assets must be included. The way the tax return for the period of departure is completed is evidence of whether or not the election is made.
    • There can be advantages in choosing deemed disposal if the value of assets will increase in future
    • From 9 May 2017, foreign and temporary tax residents cannot access the CGT main residence exemption.
    • Foreign and temporary tax residents who hold property on 9 May 2017 can continue to claim the exemption until 30 June 2019
    • As the legislation proposes to apply to ‘foreign residents, the new legislation will also apply to Australian citizens or permanent residents who dispose of their Australian main residence whilst a foreign resident, e.g. whilst working overseas on secondment.
    • The determining factor is the residency status of the taxpayer at the time of the CGT event (i.e. when the contract for sale is signed). Therefore, for Australian citizens and permanent residents who may be a foreign resident for a period of time the CGT main residence exemption should still be available if they come back to Australia and dispose of their main residence after re-establishing Australian tax residency.
  8. On returning to Australia and becoming a resident again after being a non-resident:
    • If no election was made to defer disposal
      • Assets will be deemed to have been acquired at date of becoming resident. Any increase in value whilst overseas will escape Australian tax when ultimately disposed of
      • The family home is TAP and therefore not subject to the deemed disposal rules
    • If election was made to defer disposal:
      • Assets never ceased to be ATP so returning to Australia has no impact

If you have questions on any of the above issues raised, please do not hesitate to contact us.

Kim Edwards
Chartered Tax Adviser
Chartered Accountant
T: 02 9984 7774
E: kime@northadvisory.com.au