Australian Tax Issues for Expatriates & Immigrants

Including Superannuation

Murray Howlett, DirectorTaxation Services+61 7 3023 1300

→Residents taxed on income from all sources (including accruals taxation)→Non-residents taxed only on Australian sourced income→Temporary residence since July 2006

Basic principles

Tax rates from 1 July 2007Resident Non-resident

Income Range % Income Range %

0 - 6,000 0 0 - 30,000 29

6,001 - 30,000 15

30,001 - 75,000 30 30,001 - 75,000 30

75,001 - 150,000 40 75,001 - 150,000 40

150,001 + 45 150,001 + 45

Maximum rate differential = AU$5,100

→ Four tests→Superannuation test→183 day test→Domicile test→Resides test

Determining residency

→Superannuation test→Member of specified government superannuation

schemes are automatically residents.→Commonwealth Superannuation Scheme &

Public Sector Superannuation Scheme.

Determining residency

→183 day test→Individuals in Australia for 183 days or more

are residents unless they have a “usual place of abode” overseas and have no intention of taking up residence in Australia.

Determining residency

→ Usual Place of Abode→Less stringent test than a permanent place of

abode

→Test covers people who are holidaying in

Australia for an extended period of time.

Determining residency

→Domicile test→An individual is a resident if they have an

Australian domicile.→To avoid residency under the Domicile test,

must have a permanent place of abode outside Australia.

→Also, must have a clear intention not to return to Australia in the foreseeable future.

Determining residency

→Resides test→Based on “ordinary concepts” →Factual indicia include:

→intention or purpose of presence→family and business/employment ties→maintenance and location of assets→social and living arrangements

Determining residency

→ A temporary resident is a person:→Holding a temporary visa granted under the

Migration Act 1958;→Who is not an Australian Resident within the

meaning of the Social Security Act 1991 (SSA); and

→Whose spouse is not an Australian Resident under the SSA.

Temporary residents

→ An Australian Resident under the SSA is:→A person who resides in Australia; and→Is either of the following:

→An Australian Citizen;→A holder of a permanent visa; or→A Special Category Visa holder who is a

“protected SCV holder” – broadly, New Zealanders residing in Australia on 26 February 2001

Temporary residents

→ Concessions available:→Foreign sourced income (exept employment

income) is treated as non-assessable non-exempt income;

→CGT only applies to taxable Australian property;

→The CFC, FIF and transferor trust rules do not apply; and

→Interest paid to a foreign lender may not be subject to withholding tax.

Temporary residents

→ Australian income taxed at resident rates

→ 457 visa a common trigger

Temporary residents

→Residency change has tax ramifications→Can occur on:

→ Non-resident → resident→ Temporary resident → resident

→Main impact is on investments and offshore structures→Capital Gains Tax (“CGT”)

Becoming a resident

→Important concept: Taxable Australian Property (since December 2006)→Includes Australian real estate and certain business assets→Real estate can be held directly or indirectly→No impact when commencing residency

Becoming a resident - CGT

→Foreign investments

→Consider whether to transfer to tax-effectivestructure before commencing residency

→Ownership transfer after residency = CGT

Becoming a resident - CGT

→CGT implications when commencing residency

Becoming a resident - CGT

Taxable Australian Property?

Effect of commencing

residency

CGT if sold before

recommencing residency?

No effect

Deemed acquisition at market value

→Temporary residents - no tax implications→“Normal” residents face potentially complex, costly rules→Several potential traps:

→CFC/FIF/FLP measures→Tranferor trusts→Foreign trusts & s99B→Foreign tax credits

Overseas income

→Australia’s attribution measures:→Controlled Foreign Company (“CFC”)

→ Foreign companies which an Australian taxpayer controls (broadly, > 40% ownership)

→Foreign Investment Fund (“FIF”)→ Any foreign entity in which an Australian taxpayer

holds an interest

→Foreign Life Policy (“FLP”)→ Potentially includes life assurance, foreign

superannuation, and foreign pension funds

Overseas income

→Mainly impacts companies with passive investments→Generally, does not apply to:

→Active businesses (> 95% of income derived from genuine business activities)

→Companies resident in: Canada, France, Germany, Japan, New Zealand, United Kingdom, and United States of America (although certain types of income may still be targeted)

CFC attribution

→Where a CFC exists, and attribution applies:→Australian resident interest-holder is taxed on their

attributed proportion of the CFC’s profits→Taxed even if profits not actually paid to investors→No double tax if attribution applies and profits later

paid e.g. by a cash dividend

→Determination of attributable amount is complex and costly

CFC attribution

→Targets offshore investment vehicles that are not CFCs but in which an “interest” is held

→E.g. foreign trusts controlled by a specialist offshore trustee

→Similar outcome to CFC rules

FIF attribution

→Technically part of the FIF regime

→Different calculation methods

→Practically, the FLP measures most often impact retirement funding

FLP attribution

→Interests valued < AU$50,000→Complying superannuation entities→Employer-sponsored superannuation

equivalents→Widely-held, listed companies→Lloyd’s members’ Premium Trust Fund income

FIF/FLP: some exemptions

→Non-resident trusts to which value has been transferred by way of property and/or services

→If transferor were non-resident when the transfer

occurred the rules will not apply unless they also retain

control of the trust

→Broad definition of control, includes de facto control

Transferor trusts

→Applies only to trusts→Taxes distributions made at any time during an income year.→Does not apply to distribution of corpus→Goes beyond the FIF de minimus rule

The s.99B trap

→Individual resident in Australia from March 07→Holds Jersey-based investment trust→Transfers ownership to individual names before commencing residency→Ownership transfer is a distribution within s.99B’s ambit→Individual is taxed despite distribution being foreign income received by a non-resident

s.99B: practical application

→Consider alternatives:→Take advantage of Temporary Resident

concessions?→Defer commencement of residency to the next

financial year?

s.99B: practical application

→“Normal” residents receiving un-attributed foreign income are taxed in Australia→Income may have already been taxed in country of origin – e.g. withholding taxes→Australia may allow credit for the foreign tax paid “by the taxpayer”→No credit for underlying corporate taxes

Foreign tax credits

Superannuation

→Attractive tax environment→Substantial re-write of applicable rules effective July 2007

Superannuation→15% tax on earnings and some contributions→10% tax on capital gains if asset held >12 months→0% tax to extent monies are dedicated to paying pensions

Superannuation→Funds in superannuation are for retirement purposes→Cannot access until age 55 or older→After age 60, withdrawals are tax free→Non-citizens can withdraw on departure from Australia with a 30% tax penalty

Superannuation

→Therefore, if paying pensions to someone over age 60 – no tax is payable

Superannuation→Limitations:

→Stringent regulatory requirements→Cannot borrow to fund investments→Cannot invest in / loan to related entities→Subject to exceptions, cannot acquire assets

from members

Superannuation→Contributions:

→$50,000 per person p.a. tax deductible contributions

→$150,000 per person per annum undeducted contributions

→Additional contributions attract excess contributions tax (effectively 46.5%)

Superannuation→Foreign retirement funding:

→Individuals with existing overseas retirement funds can transfer their balances into Australian superannuation without penalty if the transfer is done within 6 months of commencing residency.

Superannuation

→ Types of funds

→Estate planning implications must be considered

Australian Tax Issues for Expatriates & Immigrants

Including Superannuation

Murray Howlett, DirectorTaxation Services+61 7 3023 1300