Article published in Issue 15, 2009-10 of The Taxpayer, dated 15 Feb 2010
In a nutshell...
Going overseas? Coming home? The tax implications
So many Australians leave to take up long-term or even permanent residence in another country, or
return home after an extended period, that it is little wonder there is often confusion over the tax
implications that can arise from both these circumstances.
From the outset, the first question that needs to be settled is: Are you a resident for tax purposes? For the
local tax system, there are three status classes – resident, temporary resident or non-resident.
The tax implications vary depending on the classification, and there are a number of tests that can help
determine status.
A ‘resident’ will:
•
Pay tax on Australian and worldwide income
•
Pay capital gains tax on assets, including foreign CGT assets
•
May be entitles to a foreign tax offset, should tax have been paid on foreign-sourced income.
However, a deemed non-resident will:
•
Pay tax on Australian-sourced income only
•
Pay CGT on assets that are ‘taxable Australian property’
•
Be subject to withholding tax provisions for locally-sourced unfranked dividends, royalties and
interest.
For an Australian resident who chooses to leave the country permanently, the main tax considerations are
the capital gains treatment of assets once they are no longer a resident, and the treatment of Australiansource income from dividends and the disposal of taxable property (that is, real property that is located in
Australia).
Capital gains or losses are determined as the difference between the market value of an asset at the time
the taxpayer becomes a non-resident and that asset’s cost base.
Note however that the ‘absence rule’ may be applied to treat the taxpayer’s former domicile as their main
residence for up to six years from the time they vacate the property and have no other main residence
overseas. Beyond that, a partial exemption may be available.
The capital gains tax trigger concerned here is called ‘CGT event i1’, which brings a potential problem for
some taxpayers in that they may be subject to a tax on an unrealised gain, and not necessarily have the
funds to pay it.
Individuals can therefore make a choice to defer the gain or loss that would otherwise arise. Once a
choice is made however, it will apply to all CGT assets held at the time of becoming a non-resident (that is,
you can’t ‘cherry-pick’ the assets to get the best tax deal).
There can be good reasons not to defer, such as having a surfeit of carry-forward losses that any gains can
be offset against, and if the CGT event i1 results in a net loss position on all CGT assets so that it would be
better to crystallise that loss now as the foreign tax regime has no such capital gains tax provisions.
A taxpayer returning to Australia and becoming a tax resident will from that moment on be taxed on all
income from local and worldwide sources. CGT assets will be deemed to have been acquired on the date
of becoming a resident, unless the choice had been made to defer gains or losses. In these cases, the
relevant asset will retain its original cost base. Note that where the date is when the taxpayer becomes a
resident, the availability of the 50% discount for individuals is measured from then, not when the asset
was acquired.
...the full article follows
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The Taxpayer
15 February 2010 www.taxpayer.com.au
Issue 15 • 2009/2010
Going overseas? Coming home? Tax
implications?
By Andy Nguyen
When the late Peter Allen sang his rendition of I still call Australia Home, the tax implications
of returning to Australia after many years overseas was probably the last thing on his mind!
With so many Australians leaving for overseas permanently or returning after an extended
period – there is often confusion as to the Australian tax implications which may arise. This article
examines a range of issues which may have to be considered upon becoming a non-resident or
resident for Australian income tax purposes.
Back to basics: resident or non-resident?
In determining the tax implications if one decides
to leave Australia or return to Australia, the threshold
question that needs to be asked is whether the taxpayer,
either upon leaving or returning, is an Australian resident
for income tax purposes.
For Australian income tax purposes, a taxpayer can be
classified as either:
• a resident
• temporary resident (eg. those on a 457 Visa), or
• non-resident (ie. not satisfying the relevant
conditions to be either an Australian resident or
temporary resident for income tax purposes).
On that premise, the tax implications will vary
depending on the classification. There are a number
of tests and indicia in determining whether a taxpayer
is a ‘resident’ under s6(1) of Income Tax Assessment Act
1936 (ITAA36). This article does not analyse those tests,
however, Taxation Ruling TR 97/18: Income Tax: residency
status of individuals entering Australia and IT 2650: Income
Tax: Residence – Permanent place of abode outside of
Australia provide detailed consideration of the relevant
factors in determining tax residency for inbound and
outbound individuals.
As an aside, a taxpayer may also be a ‘dual resident’ for
tax purposes. In other words, the taxpayer demonstrates
factors which indicate that they satisfy the conditions
to be a tax resident of Australia and also of a foreign
jurisdiction. Generally, there are ‘tie breaker’ tests under
the various tax treaties entered into by Australia to
determine whether Australia or the foreign jurisdiction
has the primary taxing rights.
Implications of being a resident/nonresident
Importantly, an Australian resident for income tax
purposes will:
•
•
•
pay tax on their Australian and worldwide sourced
income
pay tax on post-CGT (ie. post 20 September 1985)
assets, including foreign CGT assets, and
to the extent that any foreign tax is paid on their
foreign sourced income, the taxpayer may be
entitled to a foreign tax offset which is capped
at the Australian tax which would otherwise be
payable on that income.
In contrast, a taxpayer who is considered to be a nonresident for Australian income tax purposes will:
• pay tax on Australian sourced income only
• pay tax on capital gains from CGT events
happening to ‘taxable Australian property’
(eg. real property located in Australia), and
• be subject to the withholding tax provisions from
the receipt of unfranked dividends, royalties and
interest from Australian sources.
NOTE: The term ‘taxable Australian property’ replaces
the ‘necessary connection with Australia’ (applicable
from 12 December 2006).
The tax rules are different again for those classified
as ‘temporary residents’. The impact of the tax rules
affecting temporary residents will not be considered in
this article.
What happens if I choose to leave
Australia permanently?
If an Australian resident chooses to leave Australia
to live overseas permanently, such taxpayers would
typically be classified as non-resident for Australian
income tax purposes.
At the time of leaving, the main Australian tax
implications that need to be considered are as follows:
• CGT event I1 will apply to CGT assets held by the
taxpayer once they are no longer an Australian tax
resident (refer below for detailed discussion), and
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Overseas movements - the tax implications
•
the taxpayer will be assessed thereafter only on
income from Australian sources (eg. dividends
from Australian shares) and from the disposal of
taxable Australian property (eg. Australian real
property).
CGT event I1 – deemed taxing upon
becoming a non-resident
From a CGT perspective, at the time that a taxpayer
becomes a non-resident for Australian income tax
purposes, CGT event I1 is triggered. The taxpayer is
required to work out whether they have made a capital
gain or loss for each CGT asset owned by the taxpayer,
except for certain of the assets which are classified as
‘taxable Australian property’.
NOTE: ‘Taxable Australian property’ generally includes:
•
taxable Australian real property (ie. real property
situated in Australia)
•
an ‘indirect Australian real property interest’ (eg.
shares in a ‘land rich’ company holding Australian
real property)
•
a CGT asset which has been used in carrying on a
business through a permanent establishment in
Australia
•
a right or option to acquire any of the preceding
category of assets, and
•
a CGT asset whereby a choice to defer a capital gain
or loss under CGT event I1 has occurred (refer below
for comment).
The capital gain or loss is determined as the difference
between the market value of the asset at the time that
the taxpayer becomes a non-resident and that asset’s
cost base.
However, any capital gain arising from CGT event I1
may be disregarded to the extent that it is in respect of
a pre-CGT asset (acquired prior to 20 September 1985),
is a personal use asset, or where the main residence
exemption applies.
NOTE: the ‘absence rule’ may be applied to treat the
taxpayer’s former domicile as their main residence for up
to six years from the time that they vacate the property
and have no other main residence overseas. Beyond that
time frame, a partial exemption may be available if the
property is subsequently disposed.
No money to pay the tax?
In practice, the trigger of CGT event I1 means that
taxpayers will be subject to tax on an unrealised gain in
respect of which the taxpayer may not have the funds to
pay the tax.
Therefore, for individual taxpayers, a choice can be
made to disregard the capital gain or loss which would
otherwise arise. It is important to note that once the
choice is made it applies to all CGT assets (except those
assets which are classified as ‘taxable Australian property’,
such as Australian real
estate- refer: s104-60 (3))
held by the taxpayer at
the time they become a
non-resident. Therefore,
a taxpayer cannot ‘cherry
pick’ the eligible CGT
assets for which they wish
to defer a capital gain or
loss.
In addition, if the
taxpayer makes the choice
to defer, each CGT asset
is deemed to be ‘taxable
Australian property’ until
the earlier of:
• a CGT event which
occurs and the
taxpayer no longer owns the asset (ie. the asset is
disposed by the taxpayer), or
• the taxpayer becomes an Australian resident again.
The purpose of deeming CGT assets to be ‘taxable
Australian property’ is to ensure that those assets
can be taxed in Australia upon subsequent disposal,
notwithstanding that the taxpayer is no longer a resident
for tax purposes.
Why not make the choice?
As noted, the lack of funds to pay tax arising from a CGT
event I1 would often be the reason that a taxpayer opts
to defer the gain. However, there may be compelling
reasons to not elect to defer, which include:
• where the taxpayer has significant carry forward
tax losses which they can recoup against a capital
gain arising from CGT event I1
• alternatively, if CGT event I1 gives rise to a net
capital loss position on all eligible CGT assets, it
may be advantageous to crystallise that loss (as
no tax would be paid in any case and the foreign
jurisdiction in which the taxpayer intends to reside
may not have a regime to tax any future capital
gains), and
• if the taxpayer believes that there may be a
significant capital gain in the future from a
particular CGT asset, it may be in the taxpayer’s
best interests to pay the tax upfront (and thereby
‘exit’ the Australian CGT regime), as the other
foreign jurisdiction may not have comparable CGT
provisions (such as New Zealand) or impose lower
rates of tax. If the taxpayer subsequently returns to
Australia, a market value step up of the asset’s cost
base would be available if residency is resumed
(refer below for comment).
Similarly, consideration should also be given as to
whether there is a Double Tax Treaty between Australia
and the foreign jurisdiction in which the taxpayer will be
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Overseas movements - the tax implications
residing and, if so, what are the resultant tax implications.
assets as a result of him becoming a non-resident.
Whether a choice is made to defer the capital gain
or loss would need to be made on a case by case basis.
Notwithstanding, that there may be favourable outcomes
in having CGT event I1 being triggered, taxpayers should
also be wary of the tax implications in the foreign country
where they intend to reside and seek foreign tax advice
accordingly.
If he chooses to defer the capital gain, the choice will
apply to all the CGT assets which he owns at that time. Therefore, no capital gains will immediately arise in
respect of Tom’s shares in BHP Billiton as a result of
making that choice. On this basis, the capital loss from
the London apartment is also disregarded. As noted, the
deferral does not apply to Tom’s Melbourne townhouse
as this is ‘taxable Australian property’.
An example of how CGT event I1 applies is illustrated
as follows:
Example 1: ‘Leaving Australia’
Tom Collins, a renowned bar tender, decides to
permanently leave Australia to work the bar scene with
his brother in New York on 1 August 2010.
At that time, Tom has no intention to return to Australia
and prima facie, will not satisfy the definition of a
‘resident’ for income tax purposes. In addition, Tom does
not have any carry forward tax losses from prior years
and has not derived any capital gains for the 2010-11
income year.
At the time that Tom leaves Australia, he owns the
following assets:
•
A townhouse in Melbourne, which he purchased
for $500,000 in March 2003. The townhouse is now
worth $900,000. Tom was living in the property
as his home before he left and was able to find a
tenant to live in the property soon after arriving in
New York. Whilst in New York, Tom intends to live
with his brother.
•
An apartment in London, which he purchased
in July 2007 for $300,000 AUD. He is currently
renting this property to a tenant and is deriving
rental income. Surprisingly, the property now has
a market value of $280,000 AUD.
•
Shares in BHP Billiton, which he acquired in May
2009 for $100,000. The market value at 1 August
2010 is $150,000.
•
A speedboat which he has left in storage in
Australia as he was unable to find a buyer prior to
leaving. The boat was purchased in March 2006
for $11,000. It was subsequently sold on ebay for
$4,000 in September 2010.
What are the tax implications for Tom Collins with
respect to his Australian and foreign-based assets?
CGT event I1 is triggered with respect to the CGT assets
owned by Tom except for his townhouse in Melbourne
(which is taxable Australian property). On that basis,
there would a capital gain on the BHP Billiton shares
of $50,000. A capital loss would arise with respect to
the London apartment of $20,000 and a capital loss on
the speedboat of $7,000 (although the loss on the boat
would be disregarded as it is a ‘personal use asset’).
In this regard, on 1 August 2010, Tom may choose to
defer the capital gains or losses for all the eligible CGT
To the extent that the choice is made, all CGT assets
are deemed to be taxable Australian property. This
means that any subsequent disposal of the London
apartment or shares in BHP Billiton would be subject to
the Australian CGT provisions notwithstanding that Tom
is a non-resident.
To the extent that the Melbourne townhouse was Tom’s
main residence prior to him leaving, he can apply the six
year absence rule from the date of him leaving to live
with his brother (ie. he has no other main residence). If
the property is subsequently sold, a partial exemption
may be available if the absence period exceeds six years
or if he has another main residence (eg. he acquires a
property in New York).
If a choice is not made, exemptions aside, Tom would be
assessed on a capital gain of $30,000 (ie. $50,000 gain
from the BHP Billiton shares less $20,000 loss from the
London apartment), upon becoming a non-resident.
What If I decide to return to Australia?
If a taxpayer returns to Australia permanently after
a long absence overseas, the main tax implications to
consider are as follows:
• The taxpayer, provided that the relevant criteria
are satisfied, would become an Australian resident
for income tax purposes. From that point,
income derived by the taxpayer from Australian
and worldwide sources will be taxed in Australia
(subject to the application of any tax treaties).
• CGT assets are deemed to be acquired by the
taxpayer at their market value on the date that the
taxpayer becomes a resident. Therefore, capital
gains arising upon subsequent disposal will be
calculated as the difference between the capital
proceeds received and the market value cost base
at the time that Australian tax residence resumes.
• However, if a choice had previously been made
under CGT event I1 to defer the capital gain or loss
for assets owned when the taxpayer was previously
a resident, then the asset is deemed not to have
been acquired upon the taxpayer becoming a
resident but merely retains its original cost base
(as opposed to a market value cost base). This also
applies similarly to pre-CGT assets.
• Where CGT assets are deemed to be acquired
from the date on which the taxpayer becomes
an Australian tax resident, availability of the CGT
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Overseas movements - the tax implications
50% discount for individual taxpayers would be
measured from the date of becoming a resident
and not when the asset was actually acquired.
• Where the CGT asset is foreign real property
which is the taxpayer’s main residence, the main
residence exemption may apply from the time
at which the asset was purchased until the time
the taxpayer returns to Australia and resides in
another property which they treat as their main
residence. The deemed acquisition date for CGT
purposes does not impact the period in which
the property was owned as the taxpayer’s main
residence (refer to ATO ID 2003/826).
• In addition, as noted, where the taxpayer had
previously resided in Australia and had a property
which was their main residence, the absence rule
may apply to that property such that there is a
full or partial CGT exemption available upon their
resumption of residency.
• If a foreign asset is disposed of after resuming
Australian residency, a foreign tax offset may be
available to the extent that foreign tax has been
paid.
• Where the taxpayer controls a foreign company
whilst living overseas, upon their return to
Australia as an Australian tax resident, any income
that is derived by the company may be attributed
to the taxpayer and taxed in Australia under
the Controlled Foreign Company rules (provided
that certain conditions are met). Similarly, such
attribution may also apply where the taxpayer
holds and interest in a foreign investment fund.
Note: These provisions are presently under review and
therefore changes to the law might occur.
Example 2: Returning to Australia
After spending five years in New York, John Collins (who
is Tom Collins’ brother) decides to return to Australia to
settle down with his fiancé in December 2010.
At the time he left for New York, John had no
intention of returning to Australia and was considered
to be a non-resident for Australian tax purposes at
that time. He had made a choice to defer the capital
gains with respect to CGT assets which he owned at the
time that he departed Australia in order to avoid the
application of CGT event I1.
At the time that John leaves the United States, he owns
the following assets:
•
A house in Sydney which he had purchased prior
to departing. Similar to his brother, he had lived
in the property as his main residence and rented
out the property just prior to leaving for New York.
The property was purchased in February 2001 for
$400,000. The current market value of the property
is $800,000. The tenant has left the property and
John intends to live in the property with his fiancé
upon his return.
•
•
An apartment in New York which he purchased and
lived in upon arriving in New York. He purchased
the apartment for US$750,000 in January 2006.
The apartment is worth A$1,000,000 in December
2010. His brother, Tom, who is living in New York
has made an offer for the property, however, John
has mixed feelings about selling.
Shares in Pear Inc which he bought for US$10,000
in February 2008. The market value of those shares
in December 2010 is A$8,000.
•
Shares in BHP Billiton which were purchased for
A$10,000 in May 2009. The market value of those
shares in December 2010 is A$20,000. The shares
were then subsequently sold in March 2011 to fund
the wedding.
•
A rare antique cocktail shaker which was bought
in Australia in May 2002 and which John had taken
with him when he left Australia. The cocktail shaker
was acquired for $1,000 and has a market value of
$1,500 in December 2010.
What are the Australian tax implications for John Collins
with respect to his Australian and foreign based assets
when he resumes Australian residency?
John’s property in Melbourne would retain its original
cost base of $400,000 as the asset was taxable Australian
property and therefore CGT event I1 did not apply when
he left Australia. As this property was previously John’s
main residence prior to him leaving for New York, he
would be entitled to a partial main residence exemption.
Broadly, any capital gain would be apportioned between
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Overseas movements - the tax implications
the times in which
it was John’s main
residence relative
to the total time in
which he owned the
property. The six
year absence rule
would not apply in
this case if John had
chosen another main
residence during that
time (ie. his New York
apartment).
If John’s New York
apartment was his
main residence at the
time of acquisition,
upon his return to
Australia, he would be entitled to the main residence
exemption from the date of acquisition time until
he moves into his Melbourne property (refer ATO ID
2003/826). If he chooses to sell the property to Tom,
then a partial exemption may be available (depending
on the length of time before he disposes of the property
after he moves into his Sydney home).
In calculating the capital gain, the apartment would have
a deemed market value cost base of $1,000,000 (being
the market value at the time residency commenced).
Note that the ‘six month rule’ under s118-140 does not
apply in this instance as the taxpayer is not moving from
an existing main residence to a new dwelling which is to
become his main residence.
The shares in Pear Inc are deemed to have a market value
cost base of $8,000 as at December 2010 (ie. the date
that he becomes an Australian resident). Any dividend
income which is subsequently received by John would
be assessable in Australia as he is an Australian resident.
He may be entitled to foreign tax offsets for any taxes
which have been paid with respect of that dividend in
the United States (such as withholding tax).
The shares in BHP Billiton are deemed to have a market
value cost base of $20,000 as at December 2010. The
cost base would be used in determining the extent of
any capital gain or loss when the shares are disposed
in March 2011. He would be able to benefit from any
franking credits attached to any dividends paid prior to
disposal (subject to the 45 day holding rule). No CGT
discount would be available as the shares have not been
held for at least 12 months from the date of deemed
acquisition.
Application of Double Tax Treaties
Where applicable, consideration should also be given
to the impact of Australia’s Double Tax Treaties, when
a resident is to become a non-resident, in particular the
impact of the treaty on the taxpayer’s CGT assets. For example, under Article 13(6) of the United States
treaty with Australia, where a taxpayer leaves Australia
with CGT assets which are not taxable Australian
property (eg. Australian shares), becomes a United
States resident and a deferral under CGT event I1
has been chosen, any gain on subsequent disposal
would be subject to tax only in the United States.
Consequently, any Australian capital gains (as a
result of the asset being deemed taxable Australian
property) would be disregarded as the terms of the treaty
provide the sole taxing rights to the United States, and the
treaty overrides the domestic provisions which govern the
operation of CGT event I1.
In other jurisdictions, there may not be a similar clause
in the relevant treaty or there may not be a treaty at all.
In such circumstances, any subsequent disposal by the
non-resident taxpayer may be subject to tax in Australia
and the other jurisdiction.
Therefore, before a resident taxpayer moves overseas,
it may be worthwhile comparing the tax payable as a
result of CGT event I1 if no election to defer is made,
with the possible Australian or foreign tax exposure if
the asset is subsequently disposed whilst the taxpayer is
a non-resident.
Comment
Due care should be taken when considering the tax
implications of departing or returning Australian taxpayers
when there is a change in residency status. Therefore,
the threshold question as to whether the taxpayer is a
resident or non-resident should be reviewed to ensure
that the starting point is correct. Only from that point can
the tax implications be identified and properly analysed.
So next time you happen to hear the Boy from Oz’s
rendition or a variation thereof on television, spare a
thought for the application of CGT event 1I or perhaps
the market value cost base rule upon an Aussie’s return.
n
The antique cocktail shaker is a CGT asset. It would have
a cost base of $1,000 as a choice under CGT event I1 had
been made. This cost base would be used to calculate
any future capital gains or losses upon disposal.
The Taxpayer 15 February 2010
© Copyright Taxpayers Australia 2009-10