Investments when planning to work overseas

Which investment class ( property or share) and investment structure ( individual or trust or company) is advisable if you intend to work overseas (US) for significant period of time (say 5 yrs) ?

 

It depends on what you want to achieve and the circumstances.

Non-residents don't pay tax here on their overseas income.

 

All taxpayers considering changing residency should get personal tax advice if they have any tax issues beyond simple affairs. This includes ALL investors. A taxpayer with basic affairs should also obtain tax advice on the main residence exemption and its retention or sale. A range of matters impact incl CGT costbase issues, loss of CGT discounts, super issues, company and trust issues and more. Existing investments may lose franking credits and more.

After the tax advice a broker should also be consulted as their ability to refinnace may be impacted. It may be wise to consider finance applications asap before the potential move is progressed to a stage when a lender must be advised.

 

as non residents dont pay capital gains tax on disposal of shares they have been a favoured vehicle for many

 

Not to be confused with ETFs which may have other adverse tax issues. They arent "shares" from a income perspective but can have the same CGT benefits as shares for CGT.... They are trust interests with some strange issues. Many taxpayers incorrectly think of ETFs as shares. And each ETF may vary in its income composition.

 

agree an ETF isn't a share. Re the structures as well if you have corporate trustees or companies you need to look at who are the directors as you do need at least one director who is "ordinarily resident in Australia"

 

If you are going overseas to live you would have to consider whether you should be investing from over there instead of setting up an entity here to invest.

 

If so also consider what may occur on return. On resumption of tax residency the costbase may reset to that of market value on the return if personally owned or some other ssues could arise with a tax entity. Selling prior to resuming residency isnt a fix for many since it starts the CGT clock all over. The CGT clock is also reset on change of residency.

And also consider if a entity is involved any interest issues. While onlending to a trustee under a written agreement doesnt in itself produce a tax issue for a resident it does for a non-resident. Witholding tax obligations.

 

Also need to consider CGT Event I1 which arises when a resident ceases to be a resident.

The individual will make a capital gain/loss on the shares at this time and will need to include this capital gain/loss in their Australian tax return. If the value of the shares increase from the time they cease to be an Australian resident until the time they sell the shares, the individual should not be taxed on this increase in Australia if he is a non-resident at the time he sells the shares.

The individual can choose to disregard the capital gain/loss made under CGT event I1

The choice must be made by the time the income tax return for the relevant year is lodged or within a further time allowed by the Commissioner (subsection 103-25(1) of the ITAA 1997).

Subsection 103-25(2) of the ITAA 1997 provides that the way you prepare your income tax returns is sufficient evidence of the making of the choice.

If you didn't include a capital gain or capital loss in your income tax return in the year you became non resident then it would be evident by your income tax return that you have made a choice for these shares to become taxable Australian property.

If this choice is made the shares will become taxable Australian property until the earlier of the individual selling the shares and becoming an Australian tax resident again. This will mean that if the individual sells the shares while they are a non resident and makes a capital gain, the entire capital gain will be included in their Australian tax return (ie, it is not apportioned based on period of non-residency).

 

If a person is going to invest in Oz shares it probably doesn't matter too much if they do it before or after becoming a non-Australian resident due to the reasons Mike outlined.

But take the example of Bart

Bart is a pilot and is moving to south america where he can get plenty of work with the cartels. He has $500,000 cash and is going to set up a discretionary trust and get his dad to be the trustee while Bart is away. A trust means flexibility right.

But that would mean the trust would remain a tax resident of Australia and all future capital gains would be tax.

If Bart waited until he became a tax resident he could invest in his own name from overseas and then all capital gains would be tax free, until he becomes a resident again (it may end up being too costly to become a resident again) - of course he would need to check the tax laws in the jurisdiction where he resides. He might find one that doesn't tax capital gains at all.

 

When an Australian resident discretionary trust sells assets that are not classified as TAP and realises a capital gain, then that is included in the trust’s taxable income calculation.

Draft TDs issued by the ATO (TD 2019/D6 and TD 2019/D7) and a recent case dealing with this area (the Greensill case) suggest that if a resident discretionary trust makes a capital gain then this would normally be taxable in Australia regardless of whether the gain is distributed to a non-resident beneficiary and regardless of whether it relates to an asset that is classified as taxable Australian property (TAP) or not or has a foreign source etc. The outcome can be different in situations where the trust is a fixed trust or where the trust is not a resident of Australia for tax purposes.

As a non-resident taxpayer cannot generally access the CGT discount or the tax-free threshold, that would impact the amount of tax that the trustee would be assessed on in relation to the capital gain distributed to the non resident beneficiary.

 

Spot on. Generally the trustee may be assessed on the income and gains of a trust beneficiary who is non-resident. Greensill and Martins Holdings decisions remain subject to appeal to the High Court. Mike - You seen any progress on any appeal ? I dont recall any. It seemed as if it may be futile but someone usually likes to try.

CGT withholding is now a risk indicator to the ATO for later review.

 

That is why it may be best not to set up a trust before you leave.

 

On top of this you need to consider what the relevant DTA says, as the tax implication can be very different depending on which country you move to and become a tax resident of. It's usually Article 13 - Alienation of Property.

Examples:
UK: It's specifically mentioned, and you only pay tax to the UK on disposal of shares acquired while an Australian resident but disposed of while a UK resident:

5 An individual who elects, under the taxation law of a Contracting State, to defer taxation on income or gains relating to property which would otherwise be taxed in that State upon the individual ceasing to be a resident of that State for the purposes of its tax, shall, if the individual is a resident of the other State, be taxable on income or gains from the subsequent alienation of that property only in that other State.

Norway, Finland: DTA specifically states that capital gains on other that real property are paid only in the country of tax residence:

5. Gains of a capital nature from the alienation of any property, other than that referred to in the preceding paragraphs, shall be taxable only in the Contracting State of which the alienator is a resident.

Sweden, Denmark: The DTA is silent on capital gains on other than real property in Article 13. However "Article 21 - Income not expressly mentioned" then comes into play, and could be interpreted that Australia has taxation rights on the disposal of shares:

1. Items of income of a resident of one of the Contracting States which are not expressly mentioned in the foregoing Articles of this Agreement shall be taxable only in that Contracting State.

2. However, if such income is derived by a resident of one of the Contracting States from sources in the other Contracting State, such income may also be taxed in the Contracting State in which it arises.

Once you have determine which country(s) have taxation rights then you need to look at the actual taxation rate. In many countries there is the headline rate (e.g. 30%), but then there can be various cost base adjustments applied for long term holdings, resulting in a different tax rate.

 

Thank you. I will be moving to California, US.

 

Do you mean to say that unlike PPOR and investment property, where you loose the CGT discount in event of sale of property after becoming non-residential for tax purposes in Australia, you can continue to hold shares and get CGT discount in event of sale say after 5 yrs of becoming non resident?

I have share portfolio of $100k but intend to invest another $200k when market goes south.

 

Unfortunately moving to the US means you are in for a lot of complexity with your tax and financial affairs. On the plus side, there are many Australians in the US so specialist advice can be found.

The Australia - US DTA appears to allow Australia to have taxation rights on shares retained as taxable Australian property and subsequently sold. You will also loose the CGT discount if you sell while a US resident.

The bigger problem is super. How much control do you have over your super? Have you made personal contributions? Do you have an SMSF? If your super is classified as a "Foreign Grantor Trust" then the increase in value of your super - even if you can't access it - becomes taxable in the US.

Can't recommend enough getting specialist advice well before moving.

 

No. Non resident taxpayers get no cgt discount. This is long standing tax law from the Rudd era

 

If non resident does not get any CGT discount when selling PPOR , investment property and shares/ ETF, then does the following approach make sense?

1. Invest using a family trust
2. Before moving overseas add a resident family member as trustee
3. Divert all trust earnings to a company beneficiary (30% tax)
4. When you come back from overseas remove the resident family member as trustee.
5. If you dont comeback , sell investment in australia , since it is a trust you will get CGT benefits and divert profit to the company beneficiary. Myself as a Non-resident can be shareholder to the beneficiary company and recieve profit from the sale ( hopefully US will not tax for overseas income as I will be on work visa not citizen yet)

 

Going overseas means you can completely avoid Australian CGT from the date you become a non-resident. Using a resident trust means the shares would always be subject to CGT, but with the 50% CGT discount potentially.
Dividends could be tax free while a non-resident with the franking credits lost, or franking credits retained with a resident trust but the dividends taxed.

But you have to consider the tax laws of the country you are going to.