Now that overseas travel is starting to become a reality again, even amidst the uncertainty of the Omicrom variant, this article discusses some of the key tips and traps that Australians should keep in mind when planning to live and work overseas.
For years Australians have dreamt about living and working overseas, but for most that dream has been put on hold. With international borders opening amid a surge in vaccination rates and availability of vaccine passports, however, the expat dream is experiencing a resurgence.
However, before packing your bags, we recommend you think about what steps need to be taken to ensure you don’t end up with a big tax bill on your eventual return home.
Tax residency
Number one on your to-do list is answering the question of whether your tax residency status is likely to change for the time that you are away from Australia.
Tax residency considerations are very important and should always 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, moving overseas for longer than three years, 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.
A common example would be going on secondment for a period of around 6 – 12 months to an overseas office of your current employer, or to work for another overseas business that is affiliated with your Australian employer, where there is an intention or reasonable likelihood that you will return to your current position.
It is also worth noting that, even if you cut your ties with Australia, if you intend to move around from country to country then you are more likely to remain an Australian tax resident as you will not have specifically established residency in another country.
So, what are the main practical implications of being a tax resident vs a non-resident?
By remaining an Australian tax resident, it is likely that you won’t have issues with capital gains tax (CGT) relating to the move overseas, although all your foreign salary and investment income will be taxed in Australia, with a credit for any foreign tax paid.
By contrast, becoming a non-resident means that you will not have to disclose any foreign income to the ATO and will not pay Australian tax, although there will be CGT issues to navigate on Australian investment assets and foreign property asset at the time you change residency (these are summarized further below).
Australian investment properties will remain in the CGT system until sold regardless of tax residency status, and special rules apply to the family home as discussed in the next section.
Proposed change to the tax residency definition
Something to watch out for is the proposal in the May 2021 Federal Budget to overhaul the decades-old individual tax residency tests. The changes will not apply until the year after they are legislated, and we have not yet seen draft legislation so they may be a little way off, but it is still worthwhile keeping them in mind.
The most significant change is that a stricter 183-day “primary” test would replace the existing one, which would mean that if someone is in Australia for at least 183 days in a year they would always be treated as a tax resident.
Where the primary test is failed, a secondary test would look at four specific factors, and satisfying any two of these factors would make a person a tax resident. The factors are:
- The right to reside permanently in Australia (i.e. citizenship or permanent resident status under immigration rules)
- The ability to access accommodation in Australia
- The location of family in Australia
- Australian economic connections.
These factors are similar, but not identical, to those that have been considered by the ATO and the courts in applying the existing residency tests and, while they should be easier to apply, they still involve an element of subjectivity and judgement.
It is expected that the proposed new rules will operate slightly differently for incoming and outgoing expats, and we are awaiting the detailed legislation to gain a better understanding of their full impact. It is, however, generally expected that the new definition will tend to make it more likely that some individuals will be treated as tax residents than under the current rules, and that seems to be the policy intent of the proposal.
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 2020 change to CGT and the main residence exemption for foreign residents.
The change means 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 now 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.
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.
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 any 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. Tax will be payable at the higher non-resident rates, i.e. without the tax-free threshold.
Other investments – CGT treatment
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. Careful planning can help anticipate and overcome any negative consequences that may arise.
Case Study – Sally & Jim go to Singapore
Sally is a 38 year old marketing executive with a global consulting business and lives in Sydney with her 40 year old husband Jim, a software engineer, and their three children aged 3, 5 and 8.
Sally was offered a promotion to head up the APAC marketing team in the group’s Singapore office, starting in September 2021. Jim has no problem finding a new position with a fast-growing software company based in Singapore, so they jump at the opportunity.
They plan to stay in Singapore for up to eight years, at which time their eldest daughter Michelle would be due to start year 11.
Sally and Jim bought their family home in northern Sydney for $600,000 in 2000, and in August 2021 it was valued at $2 million.
They have a jointly owned investment portfolio valued at $400,000, with unrealized capital growth of $100,000, and their current super balances are $350,000 for Sally and $250,000 for Jim.
Tax considerations
The first key consideration is tax residency, and while this depends on many factors, in this case the length of their intended absence should be sufficient for them to become non-residents, so the Singapore salaries of Sally and Jim should not be taxed in Australia.
The next thing to consider is the CGT main residence exemption. Under the old rules, they could have used the six-year absence rule to claim the exemption up until September 2027, with some CGT payable if they sold the house after 6 years.
However under the current rules, the main residence exemption is no longer available at all to non-residents. The recommendation for Sally and Jim is that they should aim at all costs to take up Australian tax residency again before selling, although they do not necessarily need to move back into the house.
Assume, for example, that the family relocates back to Australia in January 2030 but immediately decide to sell the house for $3.5 million and buy a larger one closer to the CBD for $4.5 million.
A total of 8.67 years has passed since they moved out, and under the six-year absence rule the taxable portion of the gain is 2.67 / 8.67 = 30.8%. The total gain is the increase in value since September 2021 (when the market value was $2 million), i.e. a capital gain of $1.5 million, a taxable portion of $462,000 and total CGT of up to $217,140, but most likely less since the family will move back part-way through the tax year and part of the gain would be taxed at a lower rate.
Contrast this with selling the property while still overseas, however. Not only will the six-year exempt period be ignored, but so will be the 21 years that the family lived in the home before moving overseas. The total gain will be calculated as $3.5 million – $600,000 = $2.9 million, with tax payable at the top marginal rate of 45% being more than $1.3 million – a terrible outcome.
An even better result in terms of CGT would arise if the family moved back to Australia and into the house no later than September 2027, i.e. within the six-year exemption period. In that case, as long as they continue living in the property, it will be treated as having always been their main residence, and on a later sale any capital gain will be entirely tax-free.
The next consideration is the investment portfolio, which does not include Australian real property. The investments are treated as having been disposed of at their market values on the date that Sally and Jim changed their tax residency, triggering capital gains / losses as appropriate. They could defer the tax until actual disposal, but usually this just increases the taxable capital gain, and also reduces the CGT discount percentage applied to the gain.
There is a net capital gain of $20,000 from investments held less than 12 months, and a net capital gain of $80,000 that is eligible for the 50% CGT discount, i.e. net taxable capital gains of $60,000, split equally between Sally and Jim and declared in their 2022 tax returns.
Any investments still held at the date that they return to Australia will be deemed to be reacquired at market value at that time.
Finally, as discussed in the article above, there are many issues to consider with superannuation. While Sally and Jim do not have a SMSF to worry about, they should still keep an eye on the performance of their super fund while they are overseas and not let it become a case of “out of sight, out of mind”.
Assuming that they come back from Singapore in eight years as suggested above, Sally will be 46 and Jim will be 48, and they will be getting into the critical years for building up a superannuation balance sufficient to sustain their desired lifestyle in retirement.
This is where careful planning before they leave can allow them to start off their Singapore adventure with a strategy to keep their superannuation balance growing during this period, and help provide a springboard for their retirement planning on their return.