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Australian Tax-Special Issues

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Australian Tax-Special Issues

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There are a number of special issues in Australian taxation that are different from those in the United Kingdom and many other countries.

If you are a permanent resident or Australian citizen living in Australia, you are liable to Australian tax on your worldwide income and capital gains. This applies whether they are remitted to Australia or not.

There is often the question "is there a tax on funds brought into Australia?". Short - and correct - answer is no. However, some of the tax issues outlined below may impact you and you should be aware of them and how best they can be managed. Your mindset has to be "Australia is different!"

Since the 2006 tax reforms, there is now a significant difference in the tax position of temporary and permanent residents. There are many disadvantages to being temporary, but one of the advantages is that in general, overseas income and capital gains are not subject to the Australian tax regime.


[edit] Point of becoming tax resident

  • This is the date on which you become tax resident in Australia.
  • It is generally the date on which you move to Australia.
  • A visit to Australia to "validate" a permanent migration visa does not in itself (usually) establish tax residence.
  • Those in Australia on temporary visas often gain permanent residence onshore. These persons are already tax resident, so for them the relevant date is the acquisition of permanent resident status. Same applies to the small number of persons who become citizens (such as resumed citizenship or citizenship by descent) immediately from having a temporary visa.
  • Contrary to popular myth, there is no "6 month window" to exempt assets from tax after you become tax resident - except for pensions (see below).

[edit] Foreign currency cash

  • Australia may treat gains and losses on foreign currency as part of your capital gains and losses (you can only offset capital losses against other capital gains, not regular income).
  • There are a number of ways to manage this:
    • Transfer your funds into Australian dollars (whether you physically move the funds to Australia or not is irrelevant) before you become Australia tax resident;
    • If you wait 12 months after becoming tax resident before converting to Australian dollars, your capital gain is reduced by 50%.
    • Investigate (with your tax accountant) whether you can get an exemption if the transaction is of a "private and domestic" nature.
  • Many people want to leave funds in foreign currency "hoping for a better exchange rate". If you are moving to Australia, you may want to consider whether or not you really know more about prospective currency movements than the foreign exchange markets do. It is impossible to predict how future exchange rates will go and holding a substantial balance in cash is not a good way to get a long term return. (if you really want to do this, why not buy gold?)

[edit] Foreign currency exchange tax

  • In 2003, Australia adopted a tax reform to force its corporations to take unrealised gains on their foreign currency assets and liabilities directly into their tax accounts.
  • It's not really a "tax" as it can just as easily be a tax deduction as taxable income.
  • They "forgot" to exempt individual taxpayers. It is not clear to what extent the "average" ATO tax official knows about these rules.
  • They do allow people whose bank accounts in foreign currency add up to less than A$250k to "elect" to opt-out of these provisions. The capital gains tax rules will still apply. Same applies if you have a mortgage or loan in foreign currency - if it's less than A$250k you can opt-out.
  • If you have balances over $250k and want to be excluded from these provisions, you should reduce your foreign currency balances below the threshold and then make the election. Convert them to Australian dollars, or buy gold or silver (which are only subject to capital gains tax, not these rules).
  • These rules are incredibly complicated in detail. Even the majority of Australian accountants will not know much about them, except those working with large corporations. ATO Foreign Exchange Tax

[edit] Emigration Tax

  • This is not a demand for cash at the airport, but instead it is a provision of the capital gains tax rules affecting those who cease to be Australia tax resident.
  • The reason for these rules is to prevent Australians who have substantial capital gains from leaving Australia to live in a tax haven for a few years, selling their assets to realise their capital gains, and then returning to Australia.
  • Many countries, including Canada, have similar rules. The United Kingdom does not have a formal emigration tax but does informally have one, by requiring a longer absence period than usual (five years, usually) in order to escape the capital gains tax net.
  • It is possible to defer the "deemed" capital gains until the asset is sold.
  • The deemed disposition rules do not apply to assets physically located in Australia, such as real estate.
  • There are also exceptions for short term residents, provided that one was tax resident on 6 April 2006

[edit] Foreign Investment Funds (not in effect since 1 July 2010)

  • In the 1990s, Australia passed some stringent anti-avoidance rules to stop Australians using offshore funds to legally shelter income from Australian tax.
  • The rules also extend to certain Foreign Life Policies (FLPs). These may be considered as FIFs if they have an "investment" element (such as endowments), unless they were first issued before 1 July 1992.
  • FIFs include shares in foreign companies and holdings in unit trusts (mutual funds) outside Australia.
  • The key issue with FIF taxation is that you are taxed on the increase in value every year, even if you do not sell it. Also, each FIF is looked at separately and losses on one FIF cannot be offset against another one. For this reason, FIF taxation is highly onerous and you should try to dispose of FIF liable assets where possible.
  • Directly held shares (common stock) in an active business, such as that traded on a stock exchange, are considered FIFs but are exempt from the taxation provisions. The normal income tax and capital gains tax rules are sufficient.
  • Employer sponsored pension funds are also exempt from the FIF taxation provisions.
  • There is an exemption if all of your FIF funds (exempt FIF and non-exempt FIF) are less than A$50k. This limit was set in the 1990s and has not been increased since then.
  • A further exemption is given if non-exempt FIFs (such as a unit trust) are less than 10% of your total FIF holding.
  • How to manage this tax? There is really no alternative other than to dispose of these assets (non-exempt FIFs) and convert to another form of investment.
    • As noted above, directly held shares in traded corporations are normally ok for FIF purposes, as are Australian investments. Gold and silver is also FIF exempt.
    • Private pension funds may be subject to the FIF rules. It may be worth considering a transfer of these to an Australian fund.
    • It's ok to keep non-exempt FIFs to the extent that you are covered by the A$50k or balanced portfolio exemptions.
  • Investigate with your tax accountant whether anything is being introduced to replace the FIF tax system from 2010, which may have a similar effect

[edit] Pension transfers - 6 month exemption

  • If you do wish to transfer your pension to Australia - and whether you should do or not is a highly individual decision - you have a 6 month "window" in which you can do this tax free.
  • If you do not, any increase in the value of the fund since you became tax resident, as calculated in Australian dollars, will be subject to tax at a special rate of 15%.

[edit] Rental property

  • * If you rent out property, you are of course subject to tax on the income minus expenses, whether or not you bring the income into Australia.

[edit] Depreciation allowance

  • In Australia - unlike the United Kingdom - you can claim a depreciation allowance for the loss in value of the buildings element of rental property.
  • Ask your tax accountant.

[edit] Negative gearing

  • In Australia, unlike in most countries, you can offset a "loss" from your rental property against your earned income.
  • Normally, such losses would only be accountable against future profits from rental.
  • Be careful before basing your financial strategy around negative gearing - a loss is still a loss, and profits are usually what you should look for in investment!

[edit] Undeducted purchase price - foreign pensions

  • If you are receiving a foreign pension in payment, you may be able to take a tax deduction for the undeducted purchase price (an amount which reflects that the contributions made were not all tax deductible.
  • Ask your tax accountant!