Ceasing to be an Australian resident; knowing in advance what’s important

Written by Tony Halcrow July 2016

Whether this is your first overseas assignment or you’ve done this before most of your working life, it pays to understand your tax/financial positions before you depart.

Working in Australia is hard work and so is working offshore. And you may work harder offshore but in many locations particular Asia, you will pay a lot less tax than if you stay in Australia. You owe it to yourself to maximise the career and financial advantages of this opportunity and it starts with finding the right taxation and financial adviser to be your trusted adviser in all respects.

As an Australian resident, you are taxed on your worldwide income/capital gains. If you cease to be an Australian resident you are taxed on your Australian sourced income and CGT is limited to Australian property. In your offshore location, you may find you are taxed only on your employment income and often at much lower tax rates. Meaning you are free to structure your investments offshore AND in Australia in a way that legally avoids/reduces tax liability.

In a discussion with your trusted adviser there will be the following broad topics which I have fleshed out to give you a guide to what’s important….

Residency (Australian and host country).

The High Court of Australia ruled long ago it is a question of fact of where you live and therefore reside for tax purposes. The High Court also ruled an individual can reside in more than one place, so you need to be mindful if you reside in say Hong Kong and you maintain your family in your Australian home you may be a dual resident. So what’s the practical approach if you are “domiciled” in Australia? You really need to depart Australia with your family and dispose of that Australian home (either sell or let to long term tenants).

But the tax laws have tentacles and you must also satisfy the Commissioner you have established a “permanent place of abode outside Australia”. The Federal Court long ago ruled this means you must have a place of abode offshore and it will be permanent in the sense of a substantial period of time (as opposed to permanent in the sense of forever) being for a period of at least 2 years.

And yes, you can come back to Australia while residing offshore, but you cannot live here.

Try this simple straight line test. Your position (at one end) is you reside offshore and you visit Australia on business trips or annual holidays etc. If that’s so you should retain your non-resident status. But consider what the Commissioner may think, particularly if you have family and/or a home in Australia. He may consider you reside in Australia and you commute to work offshore (at the other end of the straight line test).  It’s a question of fact and maybe you are in the middle of this straight line. That’s why you need good advice before departing and while you are offshore.

CGT liability applies to worldwide CGT assets but for a non-resident it applies only to “taxable Australian property” CGT assets.  On departure you can choose to trigger accrued gains and losses on foreign assets AND Australian shares/managed funds (and pay the tax or claim the capital loss) or you can disregard that CGT event on ceasing to be a resident by choosing to treat your foreign CGT assets AND Australian equities held just before ceasing residency as “taxable Australian property”. Any “taxable Australian property” CGT assets are not eligible for the 50% CGT discount concession on a pro rata basis for the period of ownership when you are a non-resident. This choice is made at the time you lodge your departure year tax return and in hindsight the markets will be clearer. Again this is why you need a trusted adviser. The good news is that once you have taken the “deemed disposal” those CGT assets are free of CGT thereafter. Any foreign CGT assets AND any Australian equities acquired after ceasing residency are also free of CGT. When you resume residency any such CGT assets are deemed acquired at that time at market value.

Australian investments. A clear distinction applies between property (subject to CGT with non-resident 50% CGT discount downside and non-resident tax rates) and equities/bank interest (subject to withholding taxes at 10-15% usually and exempt from income tax). Again this is why you need a trusted adviser for both tax advice and for making investment decisions in Australia and/or offshore. Negative gearing of property investments (there is no deduction allowed for interest expense on equity investment borrowings) is effective albeit any overall loss is carried forward indefinitely for offsetting against future assessable income. 

Family home is generally free of CGT under a combination of CGT Main Residence, Absentee and the “Market Value Substitution” rules. Land Tax will apply albeit scattering your properties in different States may mean the valuations are under the Land Tax thresholds. Again, you will need your trusted adviser on an ongoing basis to deal with investment/financing decisions and the Land Tax obligations.

Private Hospital Insurance memberships can generally be suspended for up to 2 years while offshore but you may need to maintain PHI for any members of your family staying in Australia (eg children at Boarding schools etc) and in any event you will need foreign insurance. Medicare is available only for residents BUT as Australian citizens you can still use Medicare for up to 5 years offshore. PHI and Medicare have their own tax rules and rebates and again you need your trusted adviser’s input on these matters.

Tax equalisation may be a consideration for you as your employer may be committed to pay your host country taxes. Most people have never heard of this concept but to put it into perspective imagine condensing the Australian tax laws into just two paragraphs in your offshore assignment terms and conditions. The concept is that from a tax perspective you are no better or worse off. You need your trusted adviser for this one.

Superannuation is complex. It is not well understood and because it has significant tax concessions it is “ring-fenced” with a very nasty penalty regime. For most members in Retail, Industry or Government Super Funds the issues may remain the same while you are offshore. However, if you are the member (and trustee) of a Self-Managed-Super-Fund you will need serious advice. There are opportunities to maximise your contributions while offshore.

Offshore tax rules of course, depend on the host location. Some regimes tax worldwide income (the USA for example). Others tax only employment income sourced in the host country (some Asian countries for example).  Other locations have a “source and remittance” based regime which may tax your non-host country sourced income where it is remitted to a bank account in that country (the UK for example). The opportunities for legitimately tax-free investments depend on understanding the interaction of Australian and offshore rules. This is where your trusted adviser can be invaluable.

Managing investments, offshore superannuation, Estate matters and Wills, life/income insurance all have their own considerations. Your long term financial and retirement planning entails all of these matters and access to trusted advisers is a must. Foreign superannuation decisions needs to be taken on a holistic approach of potential repatriation of monies to Australia AND the tax treatment offshore. Suffice to say you may pay less tax on foreign super and the Australian caps on foreign super transfers may be quietly attractive.

Career matters including termination of employment are often looked at only when it happens.  Be aware of the potential for being drawn back into the Australian tax net where you repatriate “too soon”. Termination of employment payments can easily fall into the Australian tax net even when you remain offshore past the termination event (particularly where your employer has a connection to Australia). Your trusted adviser can assist you with understanding that position BEFORE you sign the offshore assignment/employment contract.

Repatriation or transfers to another location require careful advice BEFORE the event to ensure local or foreign or Australian tax considerations are well understood. Insurances need reviewing and compliance matters dealt with quickly. Not the least of considerations will be the Visa & Migration laws governing your legal presence in the relevant country (you and your family members and your employer must get this one right). Your trusted advisers will play an essential role in this process.

Tax returns in Australia and offshore location are a fundamental component of a successful and financially rewarding offshore assignment. Taxpayers who lodge returns early generally pay less tax than tardy taxpayers for a number of reasons. While you are offshore and even if your returns are nil returns there are some very good reasons why you should lodge returns EVEN if you are not required to do so. In this respect your trusted adviser needs to play an active role.

That briefly is it. There used to be a joke years ago about getting out of Australia and working overseas where you get paid more. Negatively gear as much Australian property as you can and invest in the share markets (wisely) and when you repatriate take a redundancy. The termination monies will pay out the borrowings. The share prices will have moved upwards with no CGT if sold on repatriation and your experience overseas will get you another role offshore. Do that three or four times and you can retire early. Not sure that was always true but it’s worth thinking about.

Individuals are reminded not to rely upon the above commentary and should seek appropriate professional advice in relation to their own circumstances.

Tony Halcrow is a professional tax adviser and commentator. He was formerly a National Tax Technical Director with PricewaterhouseCoopers from 1989 and retired in 2015.