Becoming Non-Resident

Your final paragraph summarises the key issue and I consider that appears correct.

 

Great post Paul, does this sound like an accurate summary?

1. The biggest disadvantage of being non-res is you lose the tax free threshold (currently $18,200?) so you must pay tax on every dollar derived in Australia.
2. The 2nd biggest disadvantage of being non-res is you lose the CGT discount for assets held more than 12mths (avoidable if you don't sell).
3. The biggest advantage of being non-res is you don't have to declare any rental income from property owned in another country.
4. The 2nd biggest advantage of being non-res is you don't have to declare any capital gains made from trading Australian shares, as long as those shares were bought and sold while you're a non-resident (at the same time you can't use any capital losses to offset any capital gains that you make).

If the above is correct, are there any strategies a non-res can use to minimise tax in regards to property owned overseas if they intend to return to Australia on the near future? Can a non-res sell an IP in another country and avoid declaring any capital gain before becoming resident again?

If the sale was done after they returned and became a resident, I assume theu would need to declare the gain and pay tax in Oz? It seems unfair if they are also required to pay tax on the sale in the other country?

 

I was doing some reading around this on slightly different scenario....Australian Resident for tax purposes but Temporary Residents.... It appears people in this category are well placed as they can get tax free thresholds from Australia as well as their original country. I've not checked the property, shares, capital gain rules...nonetheless two tax free thresholds are better deal...

Foreign income exemption for temporary residents - introduction

 

TAX TIPS FOR NON-RESIDENTS:

* Sell your international IP's before becoming an Australian resident for tax, this way you can avoid paying any CGT or tax on rental income.
* Depending on the country you hold IP's, it's possible they don't have a reciprocal arrangement with the ATO so you have a high chance of avoiding taxes in Australia if your rental income is paid into a bank account in the same country.
* If you were a non-resident when you bought the international IP's then you have a greater chance of avoiding tax in Australia.
* If you decide to keep your overseas IP's when you return to Australia and become a resident again, any CGT payable if you sell would be pro rata so it could be negligible.

I'm not an accountant but this is my understanding and others may also provide more info.

 

Being non-resident in Australia is a big financial cost for me, taxes and crazy regulations for residents (especially those with money) are horrendous where I am now (Spain), so it really depends on where you are moving to regarding advantages/disadvantages.
I want my Australian residency back..... one day.

 

1. Factually correct.
2. Incorrect. Tax evasion remains a crime no matter whether there is a tax treaty. There are many ways agencies detect evasion. Self assessment means the individual commits a potential crime when they lodge a false return to exclude it. Further crimes occur if they access benefits from other agencies also.
3. 100% incorrect. Ownership of property is one concern. The other is income production. Evasion occurs only when a AU tax resident fails to declare the income or the CGT issues.
4. Incorrect. No pro-rata applies for a inbound tax resident. Foreign property is not real Australian property hence its costbase is the market value on the date your acquired AU residency. When sold the difference is taxable here under CGT rules (generally)

 

I'll have a go at replying, see red below..

 

Considering tax payable on unfranked dividends and lose of franking as a non-resident, if retired how would this compare to money held in an Australian super fund? ie: no tax and still get the benefits of franking?

 

By the way, I understand some Aussie super funds (and banks and brokers) will not allow non-resident customers and in my case I have spoken to AustralianSuper and they allow non-residents.

Might top up a bit but if what I'm thinking (above) if the tax benefits held within super is better for a non-resident, there's fees, performance etc as well to compare. ie a super fund vs outside of super as a non-resident.

Also, I've only found a couple of brokers happy to accept non-residents. Have checked numerous and so far have found only Saxo and Comsec..

 

1+2. Its is one of the disadvantages. No 0% tax rate and no 19% tax rate. However benefits include not paying medicare levy. Other disadvantages include far reduced CGT discounts but some Australian source income is not subject to AU tax eg share and interest income, CGT on listed shares. The major disadvtage for AU property is loss of the 50% CGT discount and also proposed (lets call it certain but the start date is up in the air) laws to prevent use of the main residence concessions.
3. As a non-resident you dont declare (to Australia) any income that is not Australian.
4. Maybe, maybe not. Trading shares may still be taxable. Buying and realising capital gains is not taxable and gains and losses are both ignored. A offshore frequent share trader must still pay AU tax on profits etc

Two issues many overlook:

1. Super can still be used (ie deductible contributions) and can open some new strategies. However a SMSF or a trust or a company can expose some complex issues which require legal advice BEFORE leaving
2. Issues with non-property assets owned when you cease to be a resident and when you recommence residency. Many miss some strategies as they ignore it, or in some cases end up paying excessive tax.


A few strategies that still need advice :
- Avoid selling any AU property while offshore without advice BEFORE leaving...Incl withholding tax issues
- Dont put a property that was the family home on the market without tax advice before listing the sale
- Super ? Super is preserved and maintaining it needs some thoughts. For those with aSMSF this is quite complex and it may even be a strategy to consider rolling back to a public offer fund.
- Insurances ? Any you still covered ?
- Wills ? Are they valid still and how are they affected ? (Legal advice)
- Guardianship ? Who will support the kids if you die while offshore eg The US grandparents or the AU ones ? How would a dispute be resolved if they disagree ?
- Employer equalisation schemes ? Many employers offer what is called salary equalisation. eg a $150K AUD salary in Melbourne wont compare to $120K USD in New York. Or $89K in Delhi.
- Loans and finance. Refinancing or new borrowings while offshore etc may be unavailable or very limited.

 

The 183 days is more a issue for a person arriving here, not departing.

The complexity in the ATO views is based on the simplicity of the tax laws which rely on common law. eg : What does departing "permanently" mean. It does not mean forever. But means a fair time. The courts bounce around on this one and why there are multiple tests but as a simple rule 2 years seems a fair while but other factors can impact.

So lets say Dave has lived in Australia his whole life and has family here etc and he and his wife and kids over to the USA for a period of two years to work and with every intention of returning just prior to 2 years because of a employer / Visa limit and there is no intent at all (in fact its not even allowed) to stay longer and the employer only wants him to gain US experience for a term of under 2 years with no extensions. They retain their home here etc. Its very different from Peter who leaves Australia to return to the USA. He was born there and doesnt associate with Australia other than having to work here for the past 5 years heading up a US branch of a US Bank. So when he departs he ceases residency that very day.

Many depart for a "year or two" and later (eg 18mths) apply to stay longer eg five years +. That point may trigger non-residency - at that time.

You can and should apply for an ATO ruling to get certainty to your tax position. Thats why their tool often reports the inability to determine your situation.

 

Thanks, that's what I was thinking.
Any tips on this?

 

That would require (licensed) financial advice

 

Thanks Paul, understand.

I was just interested in general strategies such as has already been discussed above. Good to know ahead of time!

One thing I've read, using super to reduce tax on rental income derived from Australian property. Not something for me but good to know.

 

Super is taxed as a separate entity, at much lower rates than most tax payers. You can't just use super to reduce tax on rental property, but a superfund could acquire a property and pay lower tax rates than its members would if they acquired the same property.

 

Thanks Terry, this is what I found about the idea...

Case study
Kathy is a non-resident of Australia for tax purposes. She owns two investment
properties in Australia, which produce combined rental income of $60,000
annually. Withholding tax does not apply on this rental income.

Kathy makes a personal deductible contribution to super of $25,000, which
entitles her to a tax deduction for the same amount.

Kathy will reduce her personal income tax by $9,950, although this saving is
partially offset by additional super contributions tax of $4,500. However her
retirement savings within super will immediately increase by $25,500.

Welcome to Citigold.

Cheers.

 

yes that is correct

 

There are some catches to the concept of a non-resident making tax deductible super contributions to reduce AU tax on personal property rental income etc.

1. $25Kpa max deduction limit
2. Super deduction must be received by fund prior to 30 June of that year
3. Deduction notice requirements MUST be met prior to lodgement
4. Age of the member ?
5. Is the fund a SMSF ? That may be a serious concern. A public fund may be a better strategy for a non-resident
6. Preservation rules will trap the super
7. Tax on withdrawal must be considered. eg If not taken as a pension after age 60
8. Death nomination/s and estate planning issues (super cant be left in a will and the trustee of the fund is the one who pay choose who to pay)
9. Fund fees

and dont ignore potential 100% tax on the gain for any (personally owned) property sold v's 50% for resident taxpayers. The ability for non-residents to use any other structure (eg company, trust, SMSF) will require legal advice. Its not easy to do.

The $25K pa will reduce with 15% contributions tax leaving $21,250 net to invest. Tax is $3,750.

All this is wrong.....

I believe someone cut / paste the old $30kpa example.

 

- Loans and finance. Refinancing or new borrowings while offshore etc may be unavailable or very limited.[/QUOTE]

If you are classed a resident but living and working overseas do the banks only recognise a certain percentage of your overseas earnings for servicing? Any other issues to contend with when refinancing?

 

If you are classed a resident but living and working overseas do the banks only recognise a certain percentage of your overseas earnings for servicing? Any other issues to contend with when refinancing?[/QUOTE]

So classed as a tax resident here, but living over there? such as DFAT?

That generally won't be a problem/