FocusOn - Relocating overseas

Relocating overseas may mean lifestyle and cultural benefits for some taxpayers, but there are a number of issues that need to be considered before you move.

Tax residency

Residency for tax purposes is different to citizenship.  This is an important determination, as how you are taxed in Australia whilst you are overseas is dependant on your tax residency status.

Whether you remain a resident of Australia for tax purposes once you move overseas is a question of fact.  Generally, if your intention is to be away for a period of less than 2 years you will remain a resident of Australia for tax purposes.  If your intention is to be gone for more than 2 years you are generally treated as a non-resident for tax purposes from the date of your departure from Australia.

Taxation of residents

If you are deemed to remain a resident for tax purposes while you are overseas, you will be subject to Australian tax on your worldwide income.  This means that any income earned from working overseas will be taxed in Australia, however you will receive a credit for any tax paid overseas.

Taxation of non-residents

Non-residents for tax purposes are only taxed on Australian-sourced income.  Any income connected with Australia (such as rental income) is required to be included in your Australian income tax return and taxed accordingly at non-resident rates.

Interest, dividends and royalties for non-residents are subject to withholding tax rather than income tax.  The withholding tax can be withheld directly by the payer, and in such cases this income would not be disclosed in your Australian income tax return. You should note that as dividends are subject to withholding tax rather than income tax, you will no longer receive a tax deduction for any related loan interest while you are a non-resident.

For employment and business income, the source is generally deemed to be the place where the work is physically performed, regardless of whether the money is paid from Australia, or into an Australian bank account.  In this situation, your overseas work has a foreign source and is not taxable in Australia even if no tax is paid in the country you are relocating to.

Taxation of your family home

In Australia your main residence is exempt from capital gains tax as long as it has not been used for income-producing purposes.  When you relocate overseas, your family home ceases to be your main residence and therefore this exemption may no longer apply.  However, there are circumstances that will enable you to extend this exemption.

If you leave your main residence and do not acquire another main residence, you can continue to claim the main residence exemption from capital gains tax for up to 6 years assuming you are deriving rental income from the house.

It is possible to obtain this extension on multiple occasions.  For example, say you moved overseas for 5 years and rented out your house during this period.  At the end of 5 years, you moved back into the home and re-established it as your main residence for a period.  If you were to then move out of the house and start renting it again, the 6 year window can start again as long as you do not purchase another main residence.

If you are not earning rental income from your home (for example, if a family member was to occupy the house rent-free), the exemption from capital gains tax is unlimited as long as you do not acquire another main residence.

Application of Capital Gains Tax to other assets

For small shareholdings (less than 10% of the listed shares in each company) and similar assets, you are deemed to have disposed of the assets at their market value on the date you left Australia, and capital gains tax is changed accordingly.  However, you can elect to defer taxation on these assets until such time as they are eventually sold.

When you return to Australia you are deemed to have acquired all assets at their market value on the date of your arrival, unless you have made the deferral election.  This is a powerful tax planning tool.  If you expect that the value of these assets will continue to grow while you are overseas, you can not make the deferral election.  This means that you will pay capital gains tax based on the value of the assets when you leave Australia, but any growth achieved while you are overseas will be tax-free in Australia.

Implications for Superannuation

Superannuation funds themselves must be tax residents of Australia to receive the benefits associated with a 15% tax rate.  To be a tax resident, a fund must be controlled by people who are Australian residents, and must have more than half of its assets held for the benefit of Australian residents.  If a fund fails these tests and becomes non-complying, the penalty is 47% of the market value of the fund’s assets.

For large commercial funds this is generally not a problem.  Issues will arise for self-managed superannuation funds.  In this situation, it is imperative that you meet with one of Saward Dawson’s superannuation experts prior to your departure to ensure that your retirement savings are protected.

You will not be able to make contributions into your superannuation fund while you are overseas.

Preparation of Australian Tax Returns

If you are renting your property but it is negatively geared (the interest and other costs exceed the rental earned) you may feel it is not necessary to prepare a tax return in Australia each year.  However, it is important that you continue to do this each year.  Any losses incurred while you are overseas will accumulate in Australia, and can be used to offset income when you return to Australia, or to offset capital gains on any assets disposed of prior to your return.

Published : April 2010