Becoming Non-Resident

Discussion in 'Accounting & Tax' started by Paul@PAS, 1st Nov, 2016.

Join Australia's most dynamic and respected property investment community
  1. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

    Joined:
    18th Jun, 2015
    Posts:
    23,319
    Location:
    Sydney
    I'm often asked questions about residency that are asked as if there may be some form of choice. From a property perspective I thought I would explain the key concepts and issues that occur when an AU resident taxpayer may depart Australia ....For a long time, a while or a indefinate period. Perhaps even permanently.

    Are you becoming a non-resident for tax purposes ?
    This isnt always clear at the time you depart. The issue can occur after you depart.
    Becoming non-resident likely needs tax advice. Self-assessment is fraught with errors and mistakes and "self-assessment" that fits the most favourable tax outcome.

    What does it take to be non-resident for tax purposes ?
    How long is a piece of string ? The key concept is that the departure is "permanent"and return is not expected. This does not mean forever though. Some idicators your tax adviser may consider:
    - Do you have a right to reside permanently in the new country ?
    - All your family go with you ?
    - Sell your home in AU ?
    - Relocate all possessions ?
    Signs of caution :
    - You have a temporary arrangement that is open-ended
    - You do not buy or own real estate
    - Sponsored or other special work arrangements

    Tax concerns IF you are non-resident on the date you depart OR on the date you finally become non-resident (ie you apply for a perm residency after 18mths and decide to stay).
    • Australian real estate. No CGT triggers occur. Loss of the non-resident CGT discount occurs. Limited use of the 6 year absence rule may be available (however it may also taint the residency issue). Not renting your former home ? 100% exemption may be retained. Seek advice IMO.
    • Non-Australian Real Estate. A CGT event is triggered and tax may become payable. You can even be detained and questioned at the border. (Yes it happens!) However a choice occurs. I will discuss this below. It comes with a catch.
    • Non-Australian investments. A CGT event is triggered.
    The CGT catch ? OK read this bit carefully. You get a choice. Pick one of them and make the choice before the due date for lodgement of your tax return !!
    1. Pay CGT based on market value at the date you cease residency. Australian taxing rights end at this point. OR
    2. Choose to defer the CGT by not reporting a capital gain (or loss) by the due date for your return. In such cases the CGT issue is deferred BUT with a sting. You cannot use the present market value as a deemed disposal. You must later calculate the resulting gain and apportion for the period between acquisition and the sale using the standard CGT rules (remember the loss of the discount!!). You ignore the market value at the date you cease residency. It can be a lucky dip but it does defer the tax. You cannot later use the more preferred least cost option if you are out of time to amend (4 years ?). If you do amend you can expect to pay interest on the tax shortfall too.
    Taxation of property income after you cease residency - NonResident tax rate
    • AU property is taxed in Australia. Return to be lodged whether its income a loss or break even. If a loss occurs the loss carries fwd indefinately and can be used to offset a future capital gain.
    • Capital gains and losses on Australian property must be calculated and included.
    • Ignore all non-Australian property income, expenses and capital gains that occur after the date you cease residency.
    • Land tax may apply - Higher rates in some states.
    Taxation of non-property income after you cease residency - NonRes tax rates
    • Dividends. Only unfranked income is taxed on a withholding basis (advise registry to avoid this obligation) If withholding has been deducted do not include in tax return. . Franked dividends are exempt. Do not include in a return.
    • Interest. Also taxed ona withholding basis. Advise bank to deduct. If so do not include in return. If not withholding will be assessed (only). If paid to a non-bank seek tax advice !!
    • All Australian source income must be declared. ie ignore foreign income paid by a trust.
    • Capital gains and losses on shares in PUBLIC companies are ignored unless your own more than 10%. If a CGT event was deferred above then a CGT event will need to be calculated and reported on those investments.
    • Ignore all non-Australian income of all sources
    Other key issues
    • ASIC...A company must always have a single resident AU Director (Sec too if it has Sec)
    • Trust - May become non-resident triggering serious tax consequences.
    • SMSF - May become a non-resident superannuation fund. A VERY serious breach. Complex planning for trust and funds is required prior to extended departure from Australia.
    Each taxpayers situation will vary but importantly all taxpayers are bound by the same rules. So personal advice is really essential to avoid concerns later.

    Remember that a change is residency is not a choice. And sometimes it is unclear.​



     
    Last edited: 1st Nov, 2016
    skyfall, truong, samiam and 4 others like this.
  2. Blacky

    Blacky Well-Known Member

    Joined:
    25th Jun, 2015
    Posts:
    2,066
    Location:
    Bali
    @Paul@PFI

    Great post. As someone who has lived through this change it is certainly important to get it right. I have tried to help many people understand the complexities and the 'catch outs' which are often overlooked.
    Things as simple as "what did you do with your belongings" catches a lot of people out.
    The ATO looks at each case individually and there are very few "hard and fast" rules.

    Ive seen guys who work overseas 9months of the year who assumed they were NR get busted by the ATO. In one case it was a bill exceeding $100k and he had to sell his house to cover the debt. He vowed never to return to Australia. However, the entire thing could have been avoided had he followed the correct steps in the first place.

    I was audited by the ATO. Total cost to me of the audit was over $10k in accountancy and legal fees. Not to mention 12months of work and worry (try finding that bloody document from 5years ago which the ATO are asking for).
    The ATO agreed that I had been paying all taxes I was required to pay.

    A common misconception is that non-residents don't pay tax. This is very incorrect - and in many cases NR miss out on a lot of tax discounts/benifits.

    As you say - residency is not an option. You can't choose. However, you can take steps to ensure that you fit within one (or the other) sides of the fence comfortably.

    Blacky
     
  3. wombat777

    wombat777 Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    3,565
    Location:
    On a Capital and Income Growth Safari
    So what happens with existing properpty/investment loans in these scenarios? Not an issue if you don't need to refinance? What LVRs apply for non-residents?
     
  4. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

    Joined:
    18th Jun, 2015
    Posts:
    41,675
    Location:
    Australia wide
    remain as is.
     
  5. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

    Joined:
    18th Jun, 2015
    Posts:
    23,319
    Location:
    Sydney
    A recent AAT case held a taxpayer who lived and worked in Oman for nine years was a tax resident of Australia. His wife stayed here. He returned from time to time for brief periods. He retained a property (his former home and his wife's actual home). Many tax advisers would suggest that a 2 year + period makes you non-resident. This case is a good example of taxpayer who did not depart "permanently".
     
    sanj likes this.
  6. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

    Joined:
    18th Jun, 2015
    Posts:
    23,319
    Location:
    Sydney
    As Terry says ...Nothing. Once a loan is settled it remains until discharged or recovered. Refinance is far harder. Applications for new finance become far more difficult after that date if for example you wanted to buy a further property and refinance etc. Following the APRA changes to lending many lenders have severely reduce lending to non-residents and policies vary. One for the brokers to explain current policy
     
  7. Rob G

    Rob G Well-Known Member

    Joined:
    16th Oct, 2015
    Posts:
    966
    Location:
    Melbourne
    The 2 year myth results from misreading tax ruling IT2650 guidance on whether the taxpayer has established a permanent place of abode in another country.

    The Commissioner merely states that he considers an intended stay of less than two years as failing to be a "substantial intention", see paragraph 25.

    However, if a taxpayer departs Australia with a two year contract after which they intend to return then this may fail to be substantial, see example at paragraph 34.

    i.e. a two year fixed term contract is not enough by itself to be a substantial intention. There must be a real possibility that it could be extended and the taxpayer is amenable to staying longer. Collect your evidence.

    Of course, intended and actual stay is only one consideration. It is mostly a question of considering all relevant facts and similar cases may have different outcomes depending upon relative importance of those facts from the context.

    The ATO online residency test tools are simplistic. Consequently, record your access and reliance on this guidance in case you end up in dispute.
     
    Paul@PAS likes this.
  8. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

    Joined:
    18th Jun, 2015
    Posts:
    23,319
    Location:
    Sydney
    The two residency tools (in and out bound) are a improvement and if a taxpayer clicks ALL the links that explain concepts and terms and approaches each question slowly they can get a reliable record to rely on in most cases. And like Rob said keep a printed record. It still has a annoying "cant be determined" outcome which doesnt help a lot but at least it doesnt suggest a false outcome.

    The departing resident tool has a hidden trap I have seen many make. It discusses emigration and the fine print hidden in the background (who reads that right ?) indicates the right to permanently reside and discusses Visa's etc. This one can catch aussies headed to NZ and even some to the UK very easily. You need to have a right to permanently reside and not rely on a visa or any waiver etc. That generally means a open ended right to work and reside with the freedom to depart and return. BUT...dont exercise the right to depart back to AU too often :)
     
  9. Casteller

    Casteller Well-Known Member

    Joined:
    29th Jun, 2015
    Posts:
    1,413
    Location:
    Barcelona, Spain
    Thanks for the comprehensive info. My situation is the opposite... I would like to become an Australian resident again eventually (financial and personal reasons) while maintaining as much time as possible overseas. Have been non-res over 12 years now.
    Would the following be sufficient for Australian residency ? or really depends on other criteria from overseas ?
    * Live in and own PPOR in Australia
    * Have more than 50% of assets in Australia
    * Spend around 3-4 months a year in Australia
    Criteria against: Own property in Spain (but rent PPOR), have 2 kids in Spain (but separated), have EU passport (but soon to be useless since British passport).
     
  10. Alex_Alex

    Alex_Alex Active Member

    Joined:
    13th Oct, 2016
    Posts:
    41
    Location:
    Sydney
    Hi Paul,

    In regards to superannuation, if my preservation age is 57.

    As a non resident if I withdrew the "low-rate cap" (currently $195K) at 57, would I have to pay 32.5% tax as it is an income derived from Australia?

    Thanks.
     
  11. Blacky

    Blacky Well-Known Member

    Joined:
    25th Jun, 2015
    Posts:
    2,066
    Location:
    Bali
    They look at the 'total position'. Im not sure about the return but for the depature they look at how you have 'established' yourself overseas. Including things like social life, recreation, clubs etc. Are you a 'member of the community' or just a traveler?
    I would imagine the return is the same.

    Its not just the physical 'having' a PPOR. Are you actually a resident, is this actually your home. Etc.
    The above would go a long way to assisting in this assesment, however, other facts may work against you. eg - you spend 8-9months living in a house you own in spain while you are with your family...

    Im not a tax expert, but that is how I see it.

    Blacky
     
  12. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

    Joined:
    18th Jun, 2015
    Posts:
    23,319
    Location:
    Sydney
    You can be a non-resident in AU and still retain a 100% main residence exemption under CGT laws. Its a technical absurdity to be absent from the country and still eligible for the main residence exemption sometimes for just 6 years and sometimes forever. (Conditions apply)
     
  13. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

    Joined:
    18th Jun, 2015
    Posts:
    23,319
    Location:
    Sydney
    I cant comment as that is financial advice. Each taxpayer is different :)
    Preservation v's condition of release ?
     
  14. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

    Joined:
    18th Jun, 2015
    Posts:
    23,319
    Location:
    Sydney
    A person inbound to Australia has a different test of tax residency. Firstly there is a common law test. Then there are three statutory tests. One of these is the 183 day test. However that rule isnt always a fixed state as a person may have a place of Abode elsewhere (USA) and have no intention to take up residency here (a US actor for example).

    Personal tax advice and a ruling on your residency may be required to avoid underpayment of tax.

    Living in and owning a residence here is a very compelling argument that indicates residency (domicile). You would need to convince the Commr your "permanent place of abode" is elsewhere.
     
  15. Alex_Alex

    Alex_Alex Active Member

    Joined:
    13th Oct, 2016
    Posts:
    41
    Location:
    Sydney
    Hi,

    We rented our place for 1 year before moving into it and understand we may pay some CGT for that period.

    After living in our home for 10 years, we then leave Australia and become non-residents after 180 days.

    Can we return after one year (leaving our home vacant, no income) and pay exactly the same CGT as if we were residents? ie: no extra because we became had non-residents.

    Just wondering if better to sell earlier than later :)

    Thanks
     
  16. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

    Joined:
    18th Jun, 2015
    Posts:
    41,675
    Location:
    Australia wide
    It could be possible.
     
  17. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

    Joined:
    18th Jun, 2015
    Posts:
    23,319
    Location:
    Sydney
    There is not a 180 days test applying to ceasing Australian tax residency. You have misinterpreted the INBOUND residency rules and far harder test is applied for ceasing tax residency. A great example of why personal tax advice rather than DIY is recommended.

    You will not be tax non-residents in your situation. The 6 year absence rule likely may apply if that concerns you so the CGT exemption continues while away. (Even if rental income is earned !). However overseas income may still be subject to AU tax with a credit given for foreign tax paid depending on the country.
     
  18. Alex_Alex

    Alex_Alex Active Member

    Joined:
    13th Oct, 2016
    Posts:
    41
    Location:
    Sydney
    Thanks Paul, yes and as far as I understand (ie: ATO online residency test) we will meet them.

    I didn't mention but I meant after one year (and decide to stay overseas) we may return to sell our home then go back to where we will permanently live overseas.

    What I was thinking if a non-resident, the difference (compared to resident) we could be losing the 50% CGT discount.

    BTW the reason for selling is the 32.5% tax on rental income plus all the things that go with tenants/renting.

    We will be retiring with no overseas income. Any income would be from Australian investments but not including rental income :)
     
  19. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

    Joined:
    18th Jun, 2015
    Posts:
    23,319
    Location:
    Sydney
    A person departing AU for a year does not meet a test of non-residency. The requirement is to depart Australia permanently on the date of departure. The fact you may return and choose to depart at a later date would be the key point and that residency issue would be determined at that future point. The outbound residency test is not a statutory test but based on common law principles and the word "permanent" doesnt need to mean forever but just getting on plane doesnt cut it . You also must emigrate to the new country having a permanent right to reside and depart / return. A visa or temp residency wont meet the test.

    A word of caution about the online issue. Work out your tax residency and Calculators and tools_Host


    There are two calculators. You may have used the wrong one if you are talking about 183 days. The second also requires care. Click ALL terms and read what they mean. The outbound calculator has a underlined word to read...emigrate. Sorry they changed it. It has a * and you need to click help ? above. That hides the issue. Grrr ATO. When understood your YES response may become a NO and alter the output. This is very common. A error in the calculator caused by input is not a ruling and provides no protection if you get it wrong.

    What is Emigrating?
    If you are abandoning Australia as your home country, adopting a new home country and you have a migration visa for the new country. While your intentions are important, you can only be classed as emigrating if you have the right to stay in the new country indefinitely.


    When a person meets the 6 year absence rule it provides a 100% CGT exemption which prevails over tax concessions such as the 50% discount and its loss which may apply to a non-resident CGT calc etc.
     
    Last edited: 18th Jan, 2017
  20. Alex_Alex

    Alex_Alex Active Member

    Joined:
    13th Oct, 2016
    Posts:
    41
    Location:
    Sydney
    Thanks Paul, I used the correct tool and if I select less than 2 years, staying overseas in the one place (abode) I get:

    "This tool is unable to determine your residency status for tax purposes after you leave Australia".

    ATO not very helpful! :)

    Also, not really relevant to my question as it's greater period but if I select 2 to 5 years and answer the extra questions ie: "stay with friends, relatives" (yes), "traveling with all family members" (yes), "plan to return to Australia more than four times every year" (no), I get:

    "You are not an Australian resident for taxation purposes"

    In both cases, I selected "no" to Emigrating.

    Also, the place I picked up on the 183 day test is here: Taxation Ruling No. IT 2650. Damn this is a hard read!
    OK thanks. We leave Australia and intending to return after 12 months and decide to sell our place (and staying a short period if possible) will be as a resident for tax. The second leg, after we sell and go live overseas for say 5+ years we will be non-residents for tax.
     

Buy Property Interstate WITHOUT Dropping $15k On Buyers Agents Each Time! Helping People Achieve PASSIVE INCOME Using Our Unique Data-Driven System, So You Can Confidently Buy Top 5% Growth & Cashflow Property, Anywhere In Australia