Taxing times for Australian expats overseas

Many Australians dream about living and working overseas. 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 return home.

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. 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 is offered a promotion to head up the APAC marketing team in the group’s Singapore office, starting in September 2018. 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 2018 it is 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 existing rules, they could have used the 6 year absence rule to claim the exemption up until September 2024, with some CGT payable if they sold the house after 6 years.

However under the proposed new rules, the main residence exemption would not be 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 2027 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 6 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 2018 (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 partway 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 6 year exempt period be ignored, but so will be the 18 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 2024, i.e. within the 6 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 2019 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.