Many Australians dream about living and working overseas. However, there are a number of steps that need to be taken to ensure you don’t end up with a big tax bill.
Proposed CGT changes impacting the family home
The family home is usually your biggest asset, and one example that highlights the importance of making appropriate arrangements before heading off overseas is the recent proposed changes to capital gains tax (CGT) and the main residence exemption.
If passed, the changes will mean that if you move overseas and rent out your family home, and then decide to sell your home back in Australia while still overseas, you will need to pay CGT on the proceeds of the sale.
Previously, there was a “six year absence” rule, which meant that if the home was sold within six years of moving overseas, it would be exempt from CGT. While these changes haven’t yet been passed into law, they have the support of both parties. The new rules are expected to apply from 1 July 2019.
If you move back to Australia and resume living in the property within six years, the tax-free status is retained. This will, however, happen only if your tax residency also reverts to Australia. This measure stops people returning to Australia for a month, selling the property, and then immediately heading back overseas again.
Tax residency
Tax residency considerations are very important and should be taken into account if you are planning to move overseas for an extended period of time.
The ATO will determine whether a person’s tax residency status has changed based on their particular circumstances and arrangements. As a rule of thumb, anything longer than three years, and particularly with no fixed return date and a reasonable prospect of staying in the overseas country longer, makes it more likely that tax residency will change.
However, if you’re planning to be overseas for less than two years, it is unlikely the ATO will treat the absence as a change in tax residency. Also if you intend to move around from country to country then you are more likely to remain an Australian tax resident.
By remaining an Australian tax resident it is likely that you won’t have issues with CGT, however all of your foreign salary and investment income will be taxed in Australia, with a credit for any foreign tax paid on the income.
Investment properties
While CGT will always apply to the sale of investment properties, the CGT discount is not available for any period after 8 May 2012 during which someone is a non-resident.
For investment properties already owned at the time before moving overseas, there must be an apportionment of the CGT discount for the relevant periods. The same applies for periods between the date you return to Australia and a later property sale.
Note that the rental income and deductions must still be declared in an Australian tax return even while you are a non-resident, with a credit for foreign tax paid.
Other investments
If you become a non-resident then investments such as shares in companies are generally treated as having been sold at their market value, triggering deemed capital gains / losses. There would be no further Australian CGT implications if your assets are actually sold while a non-resident.
If the investments are still owned when Australian tax residency is resumed, they will be deemed to be re-acquired at that time for their current market value, so any future capital gains/losses on sale would relate only to the movement in value for the period of Australian tax residency.
Non-resident withholding tax
Non-resident withholding tax is payable on the receipt of unfranked dividends, interest and managed fund distributions, assuming the institution making the payments has been correctly notified that the taxpayer has become a non-resident.
Superannuation
If you are planning to work overseas for an extended period, you will need to consider what happens to your superannuation contributions and balance. The longer the absence, the harder it will be to build up a super balance sufficient to fund retirement. It can be very challenging to make up for lost time and advice and planning is recommended.
Self-managed superannuation funds (SMSF)
Members and trustees of an SMSF who lose their Australian tax residency status may discover that their Fund has become non-complying meaning it now pays tax at the top marginal rate (currently 45%). Careful planning can help anticipate and overcome any negative consequences that may arise.
