Potential Changes To Australia’s Personal Tax Residency Laws

Matthew Marcarian   |   16 Mar 2022   |   4 min read

On 11 May 2021, the Australian Government announced that it is considering replacing Australia’s existing residency rules with a new ‘modernised framework’.

This update is intended to be based on a report by the Board of Taxation from March 2019.

The changes have not been passed into legislation at publication of this article.

Our Principal, Matthew Marcarian, analyses the changes and what it might mean for Australian expats in his – Australia To Change Personal Tax Residency Laws – article.

Below is a summary of the article.

Why might the Rules be Changing?

The Government has indicated that the rules are changing in order to:

  • make them easier to understand and apply in practice
  • deliver greater certainty
  • lower compliance costs for globally mobile individuals

 What is Changing?

Under the current rules an individual is a tax resident if they:

  • reside in Australia
  • have their domicile in Australia
  • live in Australia for at least 183 days of the year, or
  • are a member of certain Commonwealth Government superannuation funds.

Unfortunately, due to the lack of measurable criteria in these tests there is a lot of grey area when it comes to the more complex situation involving travellers and individuals with more ambiguous mobile living situations.

The intended change will update these rules to focus on a framework that centres on three things:

  • Physical presence in Australia
  • Australian connections
  • Objective criteria

While the precise nature of the intended update is not yet known, the Board’s recommendation has indicated specific, measurable tests that an individual should pass to meet the residency test. To this end there are three proposed tests to be considered.

1: The 183 Day Physical Presence Test

It is expected that the new primary test will be as simple as determining that an individual has spent at least 183 days physically present in Australia during the given tax year.

2: Commencing Residency Test

When an individual moves to Australia and is only here for between 45 and 183 days they would also need to satisfy at least 2 of the following factors

1. The right to reside in Australia (citizenship or permanent residency)

2. Australian accommodation

3. Australian family

4. Australian economic connections such as:

     a. Employment in Australia

     b. Actively involved in running a business in Australia

     c. Interests in Australian assets

Ceasing Residency Test

To cease residency an Australian would need to spend less than 45 days in Australia during the year, as well as the preceding two years. However, residency would cease immediately where the individual moves overseas to take up overseas employment and the individual:

1. Was an Australian resident for three previous consecutive income years

2. The overseas employment is for at least two consecutive years

3. Has overseas accommodation for the duration of their overseas employment

4. Is physically outside of Australia for less than 45 days in each year they are living overseas

Summary

The proposed rule changes are intended to simplify and clarify the law around determining residency. However, there is still work to do to develop the tests and factors. Further consultation in drafting the legislation is encouraged.

Australia To Change Personal Tax Residency Laws has been written by our Principal, Matthew Marcarian

When it comes to providing tax advice, Matthew believes it is about more than the simple tax consequences. It is about gaining a deep understanding of the client’s situation to formulate clear, robust tax and business advice that deals with both current and potential tax concerns.

With over 20 years of experience providing international tax advice to a wide range of clients, Matthew is well adept at helping clients manage and plan for the tax outcomes and opportunities, both domestically and abroad.

With extensive qualifications in international taxation and personal experience living as an expat, Matthew is a leader in his field with specialist expertise in relation to trusts, controlled foreign companies, international taxation and advising Australian businesses expanding overseas.

NEED ASSISTANCE FOR YOUR SITUATION?

Contact us today
Contact Us
By providing us your information you agree to our privacy policy

More articles like this

 

The New Requirement for Director IDs


10th Dec 2021
Daniel Wilkie

In June 2020 new legislation was passed that changes how directors are required to identify themselves This change was the first step made in an effort to modernise business registrations It means...

 

COVID-19 Financial Support for Individuals and Businesses – August 2021 Update


23rd Aug 2021
Daniel Wilkie

While the Federal Government’s Jobkeeper and Cash Flow Boost have wrapped up, the ongoing pandemic and resulting lockdowns continue This means that businesses and individuals right across the...

 

Tax Obligations for Australian Residents Working for a Foreign Employer


16th Jul 2021
Daniel Wilkie

There is one fundamental principle that guides what income you are assessed on when you lodge your Australian tax return:  Tax residents of Australia are taxed on their worldwide income,...

 

The New Requirement for Director IDs


10th Dec 2021
Daniel Wilkie

In June 2020 new legislation was passed that changes how directors are required to identify themselves This change was the first step made in an...

 

COVID-19 Financial Support for Individuals and Businesses – August 2021 Update


23rd Aug 2021
Daniel Wilkie

While the Federal Government’s Jobkeeper and Cash Flow Boost have wrapped up, the ongoing pandemic and resulting lockdowns continue This means...

 

Tax Obligations for Australian Residents Working for a Foreign Employer


16th Jul 2021
Daniel Wilkie

There is one fundamental principle that guides what income you are assessed on when you lodge your Australian tax return:  Tax residents of...

Tax Requirements When Expanding Your Australian Company To Singapore

Matthew Marcarian   |   20 May 2021   |   3 min read

Singapore is often chosen as a regional business hub for Australian companies looking to expand into Asia or beyond. This is largely because Singapore is one of the countries where there are limited restrictions on foreign businesses setting up. Accordingly it is possible for a fully Australian owned company to operate a business in Singapore. 

This blog considers the potential tax implications of running a business in Singapore through an Australian resident company.

What is an Australian Resident Company?

A company may be an Australian company due to one of three possibilities: 

  • Incorporation in Australia
  • Central management and control being exercised from Australia, or 
  • Voting power is controlled by shareholders who are Australian residents.

This means that even if the decision is made to incorporate a company in Singapore to oversee the business, the company may still be considered an Australian company if the business is managed in Australia, or if the controlling shareholders are Australian residents.

Singapore Company

A company is considered a Singapore tax resident when the control and management of the company is in Singapore. This means that even if a company is incorporated in Singapore, if it is controlled and managed in Australia, then the company will simply be an Australian resident company. 

However, if the company is incorporated in Australia but controlled and managed in Singapore then both Australia and Singapore will consider the company to be a resident company. When this situation occurs the company will need to consider the double tax agreement between Australia and Singapore.

For the purposes of this blog we are looking at a company that is an Australian resident company operating a business in Singapore through a subsidiary incorporated in Singapore.

Australian Taxes

An Australian resident company is subject to Australian taxes on income from worldwide sources. This means that all business income and any capital gains, will need to be reported in an annual income tax return.

Singapore Taxes

If the company is not a resident company in Singapore but it operates a business in Singapore  then the company is usually only taxed on the Singapore-sourced income that is generated through the business. 

The Singapore company tax rate is a flat 17%, but many concessions can apply to reduce the effective tax rate. 

The company may also be required to register for GST in Singapore. Other local taxes may also be payable. 

Double-Taxation

Under the double-taxation agreement between Australia and Singapore an Australian resident company only has to pay taxes in Australia. However, where the Australian company runs a business in Singapore through a permanent establishment in Singapore then Singapore has taxation rights over the profits generated through this permanent establishment.  

As a business operating in Singapore the company will be required to pay income tax on such business income at a rate of 17%. 

When the income is reported in the Australian tax return the company will be eligible to claim the foreign tax paid as a credit against the Australian tax assessment. This ensures that the company will only be paying taxes at the higher Australian tax rate. 

When you decide to expand your business into Singapore it is important to ensure that you get your structuring right, and that you understand the full tax implications of your various options. There are a range of questions that need to be addressed including profit repatriation to Australia, withholding tax, transfer pricing, debt/equity and foreign currency issues. 

Make sure that you speak to an experienced international tax expert before making your move. 

NEED ASSISTANCE FOR YOUR SITUATION?

Contact us today
Contact Us
By providing us your information you agree to our privacy policy

More articles like this

 

Moving to Singapore: Understanding the Tax Differences


6th Jul 2020
Matthew Marcarian

As an Australian moving to Singapore there are a number of differences that you should be aware of in relation to taxation Having an idea of what to expect will help you to organise your move...

 

Non-Residents Can No Longer Claim The CGT Main Residence Exemption


28th Jan 2020
Matthew Marcarian

On December 5th 2019 the contentious law denying non-residents the Capital Gains Tax (CGT) main residence exemption was passed This means that the update we previously provided on this...

 

Update on CGT Main Residence Exemption for expats


12th Nov 2019
Matthew Marcarian

Update: Since publication of this post the Bill has passed and is now law The law passed is the Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures) Bill 2019 ) It was...

 

Moving to Singapore: Understanding the Tax Differences


6th Jul 2020
Matthew Marcarian

As an Australian moving to Singapore there are a number of differences that you should be aware of in relation to taxation Having an idea of...

 

Non-Residents Can No Longer Claim The CGT Main Residence Exemption


28th Jan 2020
Matthew Marcarian

On December 5th 2019 the contentious law denying non-residents the Capital Gains Tax (CGT) main residence exemption was passed This means that...

 

Update on CGT Main Residence Exemption for expats


12th Nov 2019
Matthew Marcarian

Update: Since publication of this post the Bill has passed and is now law The law passed is the Treasury Laws Amendment (Reducing Pressure on...

Federal Budget Update 2021

Matthew Marcarian   |   12 May 2021   |   5 min read

Australian Treasurer Josh Frydenberg presented the Australian Budget on 11th May 2021. 

Our Principal, Matthew Marcarian outlines the key budget announcements that may affect our clients. 

Changes to Australia’s personal tax residency rules

The Government has announced that it will adopt a new framework for personal tax residency which will be based on the recommendations of the Board of Taxation made in March 2019. 

The Budget papers indicate that the objective of the change is to make personal tax residency laws ‘easier to understand and apply in practice, deliver greater certainty and lower compliance costs for globally mobile individuals.’ 

The question is whether the amending legislation will actually achieve that objective.

Essentially the government proposes a ‘bright line’ test of 183 days. However, just how bright that line actually is will depend on the drafting and the overall framework of the laws when they are introduced. 

It also seems to be the case that under the new proposed laws, an Australian expat could be found to be a resident even if they spend less than 183 days in the country, where there are other residency indicators present.

In essence this mirrors the existing common law position, but elevates certain common law tests into tax legislation. 

This may result in the removal of uncertainty in some situations – but if not handled carefully, will risk creating other interpretational problems that the common law can more flexibly deal with.

The Government is also likely to introduce specific tests in relation to ‘commencing residency’ and ‘ceasing residency’ in an attempt to increase certainty in the law. 

CST would like to see that the exposure draft process for the new legislation gives the tax community extensive time to provide feedback given how sensitive this area of tax law is to interpretation, how fundamental tax residency is and how far reaching legislative changes are likely to be.

The changes to residency laws will only be effective from the start of the tax year after which the proposed legislation receives Royal Assent. 

This means that if the amending legislation can receive Royal Assent before 30 June 2022 then it will be effective from 1 July 2022.

CST will stay at the forefront of these legislative developments and will be providing feedback to the government on exposure draft legislation, based on our extensive advisory experience in these areas. 

Patent Box

The Government has announced a limited Patent Box regime which will apply a concessional 17% company tax rate to income derived from Australian medical and biotechnology patents. 

We are not sure why 17% was the chosen rate – but we note that it is identical to Singapore’s general company tax rate.

If we are absolutely committed to encouraging this industry in Australia, we would like to see a bolder policy approach here with a more meaningful reduction in the applicable tax rate to 10%, if not lower. That would be much more competitive on the global stage.

The Government has committed to consulting industry before settling on the detailed design of the Patent Box.

Self Managed Superannuation Fund – relaxing residency requirements

The Government has announced that it will permit people who are temporarily overseas to continue to contribute to a Self Managed Super Fund beyond the current 2 year period and upto 5 years. 

However if someone is overseas for up to 5 years they would normally be considered to be non-resident, which would imply that they are not ‘temporarily overseas’ and would therefore not be eligible to keep contributing to a Self Managed Superannuation Fund. 

The Government needs to re-assess this change. We believe the best approach would be to introduce a direct link to the actual tax residency of the member, rather than rely on the notion of ‘temporary’ absence.

Change to Employee Share Scheme Rules

The government has announced that it will amend the Employee Share Scheme (ESS) rules so that the end of a person’s employment will not be a taxing point for individuals any longer under the ESS regimes. 

For clients who are able to keep unvested ESS interests at the end of their employment, this change is excellent.

In the past the law has been problematic for clients where a taxing point has arisen because of employment ending – even though the shares or options had not actually vested, resulting in unfunded income tax bills and heavy compliance costs.

Moving forward, for a deferred ESS scheme, the taxing point will essentially be earlier of the time when there is no risk of forfeiture and no restrictions on disposal, or 15 years.

Removal of the Work Test for Voluntary Superannuation Contributions

In a welcome change, the Government will allow individuals aged 67 to 74 to make non-concessional contributions subject to the existing caps.

However for concessional contributions (i.e personal deductible contributions) the work test still applies. 

We think that the law should have been simplified further so that irrespective of the type of contribution the work test should not apply – particularly given the caps on concessional contributions are quite low being $27,500.

This change is expected to be implemented in time for application for the 30 June 2022 tax year.

Removal of $450 per month threshold for superannuation eligibility

In an excellent measure the government will remove the current $450 monthly threshold meaning that all Australian resident employees will receive superannuation.

Under the current law someone who earned $300 per month missed out on superannuation and given that technology allows employees to so easily make contributions given the onset of single touch payroll – this change is welcome to enhance fairness in our system.

NEED ASSISTANCE FOR YOUR SITUATION?

Contact us today
Contact Us
By providing us your information you agree to our privacy policy

More articles like this

 

Potential Changes To Australia’s Personal Tax Residency Laws


16th Mar 2022
Matthew Marcarian

On 11 May 2021, the Australian Government announced that it is considering replacing Australia’s existing residency rules with a new ‘modernised framework’ This update is intended to be...

 

The New Requirement for Director IDs


10th Dec 2021
Daniel Wilkie

In June 2020 new legislation was passed that changes how directors are required to identify themselves This change was the first step made in an effort to modernise business registrations It means...

 

COVID-19 Financial Support for Individuals and Businesses – August 2021 Update


23rd Aug 2021
Daniel Wilkie

While the Federal Government’s Jobkeeper and Cash Flow Boost have wrapped up, the ongoing pandemic and resulting lockdowns continue This means that businesses and individuals right across the...

 

Potential Changes To Australia’s Personal Tax Residency Laws


16th Mar 2022
Matthew Marcarian

On 11 May 2021, the Australian Government announced that it is considering replacing Australia’s existing residency rules with a new ‘modernised...

 

The New Requirement for Director IDs


10th Dec 2021
Daniel Wilkie

In June 2020 new legislation was passed that changes how directors are required to identify themselves This change was the first step made in an...

 

COVID-19 Financial Support for Individuals and Businesses – August 2021 Update


23rd Aug 2021
Daniel Wilkie

While the Federal Government’s Jobkeeper and Cash Flow Boost have wrapped up, the ongoing pandemic and resulting lockdowns continue This means...

Australians moving to the USA: Key Differences in the Australian and US tax system

Matthew Marcarian   |   2 Apr 2021   |   5 min read

Like any overseas move, moving from Australia to the United States will mean that you will encounter a brand new taxation system. 

If you’re used to the Australian tax system, the US system may seem a lot more complicated. For a brief overview of the differences see this comparison table:

AustraliaUnited States
Tax Year1 July to 30 June1 January to 31 December
Tax AuthorityAustralian Taxation Office: ATOInternal Revenue Services: IRS
Income Tax (residents)As an Australian you are taxed at a tiered individual income tax rate that ranges from 0% to 45%.Federal Income Tax is charged at tiered individual rates between 10% and 37%. Unlike Australia there is no initial tax free threshold.

Most States also impose a personal income tax which varies between states. Typically the state tax rates are under 10%. 
Income Tax (non-residents)Australia typically only taxes non-residents on income that is sourced in Australia. The tax free threshold doesn’t apply, and the first $120,000 of Australian income is taxed at the rate of 32.5%. (Up to a maximum of 45% for every dollar over $180,000). There may be some limitations and exclusions depending on the relevant double tax agreement. The US typically only taxes non-residents on income that is sourced in the US. Passive income (for example dividends, rent, royalties) is taxed at a flat 30% (unless a specific tax treaty specifies a lower rate). Effectively connected income (income earned through a business or personal services) is taxed at the same graduated rates as for a US person. 
Social Security Tax RateNot applicableThe US charges additional social security taxes, which is payable by both the individual and their employer. There is a cap on the maximum wage that is subject to this tax each year. 
Medicare Australians are taxed for a medicare levy on all of their income, unless they are under low income rate thresholds. The medicare levy rate is currently 2% of taxable income. High income earners are also charged a medicare levy surcharge, unless they have appropriate private health care coverage. The rate of medicare levy surcharge is between 1 and 1.5% depending on the individual’s taxable income level.  In Australia many medical services and public hospital services are provided free for all Australians under the medicare system. This is what the medicare levy and medicare levy surcharge tax levies pays for.The US also charges a medicare tax on all individual income. The rate is currently 1.45%. Employers are required to withhold an extra 0.9% medicare tax when an individual’s wage exceeds $200,000 in a year.   Unlike Australia, the US does not provide universal health care for its citizens. In the US each individual is responsible for funding their own health care. This means that instead of the medicare taxes going towards a general public funding pool for universal healthcare, they go towards your Medicare Hospital Insurance for when you are a senior. Medicaid is available to help support low income earners. 
Health InsuranceIt is optional for an individual to pay for private health insurance, which covers private health care as well as services that aren’t covered by medicare. High income earners will be exempt from the additional medicare levy surcharge if they take out private health insurance with adequate hospital coverage.In the US an individual is responsible for health insurance (most employers do provide health insurance coverage) in order to get their health care services covered, or partially covered, by their insurance provider. Medicaid is available to assist low income earners to access free or reduced cost health care. 
Sales TaxGST is a federal tax charged at 10% on most goods and services. Basic essentials are exempt. Sales taxes apply on most goods and services, and these are levied by the various state governments. These taxes range from 0 to 13.5%. 
Tax Return Due DatesThe financial year ends on 30 June. Individual tax returns are due for lodgement by the 31 of October (however extensions typically apply until May in the following calendar year where an individual uses a tax agent to lodge their return and they have no outstanding obligations). The financial year aligns with the calendar year in the US, meaning the tax year ends 31 December. Tax lodgements are due by 15 April the following year. Self-employed and small business owners are required to make quarterly reports to pay estimated taxes that are reconciled with the annual filing. 
Income from your Australian Superannuation FundTaxation on superannuation income streams and lump sums is taxed differently depending on whether you have reached the preservation age, and the type of super income stream that is paid. Distributions from an Australian superfund are typically exempt from US tax provided the benefits are appropriately claimed and reported. 
RetirementOnce you reach preservation age (60), your retirement benefit from your superannuation fund is tax free.

Aged pensions form part of your taxable income, however if you have no other income then your pension won’t exceed the tax free threshold. 
Your income stream from any 401(k) plan, social security or pension are taxed depending on your income sources and overall level of income.

As you can see, there are a number of key differences in the way taxes are levied and collected in the US. Much of this is due to the additional authority of the states to impose both income and sales taxes for their own jurisdictions. This means that the exact amount of taxes you will be faced with will, ultimately, depend exactly where in the states you are moving to.

NEED ASSISTANCE FOR YOUR SITUATION?

Contact us today
Contact Us
By providing us your information you agree to our privacy policy

More articles like this

 

Potential Changes To Australia’s Personal Tax Residency Laws


16th Mar 2022
Matthew Marcarian

On 11 May 2021, the Australian Government announced that it is considering replacing Australia’s existing residency rules with a new ‘modernised framework’ This update is intended to be...

 

The New Requirement for Director IDs


10th Dec 2021
Daniel Wilkie

In June 2020 new legislation was passed that changes how directors are required to identify themselves This change was the first step made in an effort to modernise business registrations It means...

 

COVID-19 Financial Support for Individuals and Businesses – August 2021 Update


23rd Aug 2021
Daniel Wilkie

While the Federal Government’s Jobkeeper and Cash Flow Boost have wrapped up, the ongoing pandemic and resulting lockdowns continue This means that businesses and individuals right across the...

 

Potential Changes To Australia’s Personal Tax Residency Laws


16th Mar 2022
Matthew Marcarian

On 11 May 2021, the Australian Government announced that it is considering replacing Australia’s existing residency rules with a new ‘modernised...

 

The New Requirement for Director IDs


10th Dec 2021
Daniel Wilkie

In June 2020 new legislation was passed that changes how directors are required to identify themselves This change was the first step made in an...

 

COVID-19 Financial Support for Individuals and Businesses – August 2021 Update


23rd Aug 2021
Daniel Wilkie

While the Federal Government’s Jobkeeper and Cash Flow Boost have wrapped up, the ongoing pandemic and resulting lockdowns continue This means...

Tax Considerations Every Australian Expat Should Understand Before Moving To The USA From Australia

Matthew Marcarian   |   14 Feb 2021   |   8 min read

If you’re an Australian who is moving to the United States, there are many tax issues to be aware of. Here’s a basic overview of what you need to know before considering the move. 

You can also download our guide: Moving to USA, here.

Tax Residency

When moving to another country, the first consideration should be your tax residency. From an Australian perspective, you will be taxed very differently depending on whether:

 i) you remain an Australian tax resident, 

ii) you remain an Australian tax resident, but also become tax resident of the United States, or 

iii) you become a non-resident of Australia and become tax resident of the United States.

As an Australian tax resident you are taxed on your worldwide income, whereas a non-resident is only taxed on Australian sourced income.

For Australian tax purposes, there are a number of tests that determine whether you are treated as a tax resident. Just simply moving to the US does not automatically mean you become a non-resident of Australia. Usually an Australian citizen, or permanent resident, will remain an Australian tax resident unless they move overseas on a permanent basis. While there is no one specific factor that will determine what makes a move permanent, factors that will be considered include the length of time living overseas (minimum 2 years), purchasing or leasing a home overseas, selling Australian assets, and where your personal family ties and business ties lie.

The US, on the other hand, has its own set of rules to determine whether an individual is considered a tax resident in the US. Foreign nationals that are Greencard holders, and those that have been in the USA for over 183 days are generally regarded as ‘resident aliens’ and taxed like US citizens on their worldwide income. Non-resident aliens in the US are only taxed on their US-sourced income.

It is possible that you could be considered a tax resident of Australia under Australia’s rules, and a tax resident of the US under the US rules. In this case, the Double Taxation Agreement (DTA) between Australia and the US will need to be referred to. This tax treaty exists to help avoid double taxation in both countries.

As the rules and tax treaties in both Australia and the US can be quite complex, it is important to talk to a tax advisor who is experienced in cross border residency issues in order to understand your tax residency status, and to be aware of when your residency status may change.

Living In The US Temporarily – Taxation As An Australian Resident For Tax Purposes

If you remain an Australian tax resident after moving to the United States, then you will continue to be required to lodge an Australian tax return each year. As an Australian tax resident, you are required to declare income from worldwide sources in your Australian tax return. 

The Australia – US DTA will need to be referred to,  to see which country has the taxing rights over certain income categories. The DTA also explains circumstances when foreign income tax offsets are available to offset Australian tax. 

US Tax Return

You will also need to lodge a US tax return as a US non-resident, for any US sourced income. The US has the right to tax non-residents on US sourced income. However, thanks to the Australia – US DTA, Australia will generally treat any US income tax paid as foreign tax credits against the Australian tax liability. This means you will only need to pay Australian tax on any difference between the amount of US tax paid and the amount of Australian tax assessed. If the US tax is higher, then you will not be refunded the excess above the Australian assessment.

Living In The US Permanently – Becoming A Non-Resident Of Australia

If you are moving to the US on a permanent basis you will become a non-resident of Australia for tax purposes. You will need to still lodge Australian tax returns on any income generated from sources in Australia.

Capital Gains Tax Payable When You First Move To The US

One of the first taxation issues to understand when moving to the US is that Australia will treat you as having disposed of your capital assets (excluding Australian real property) at the market value prevalent on the date of your departure, unless you elect to defer the deemed disposal (explained further below). A deemed capital gain or loss will need to be calculated and included in your tax return, as if you had actually sold those assets. Once those assets are sold at a later date whilst you are in the US, there will be no further tax payable in Australia (tax will be payable in the US). 

However, you do have the option not to include the deemed capital gain if you instead choose to report it as a capital gain when you eventually sell the assets. However, the DTA will need to be referred to, to see whether the gain would be taxable only in the US.

In summary, your options are:

Option 1- Declare a “deemed” capital gain in your Australian tax return for your foreign investments when you leave the country. As long as you don’t return to Australia you will have no more Australian tax to consider when you eventually sell those foreign assets.

Option 2- Choose not to declare a deemed capital gain, but wait until you actually sell the foreign investment. If you are still living in the US (or another country that has a similar clause that gives them taxation rights over Australia in this situation), then you won’t need to declare the capital gain in an Australian tax return. If you are living in a country that doesn’t have this clause when you sell the foreign investment, then you would have to declare the capital gain in an Australian tax return at that time.

Australian Sourced Income

As a non-resident for Australian tax purposes you would only be required to lodge an Australian tax return to declare any Australian sourced income that was not already fully taxed under the Double Taxation Agreement. For instance, interest income for non-residents is subject to special withholding rates that are considered to be the full and final tax. This means that the tax withheld is the tax paid for this income. You can’t claim deductions against this income to reduce the tax you have to pay on it, and you can’t claim the tax as a credit against other income being reported in an Australian tax return. As long as your bank has been notified that you are a non-resident they should withhold the correct amount of tax.

Fully franked dividends from Australian sourced companies are also considered to be the full and final tax for the Australian sourced income.

Other Australian sourced income is required to be included in your Australian tax return to be assessed for tax at non-resident rates.

Australian Superannuation

While contributions that you make to your Australia superannuation fund may be deductible against your Australian income, they will generally not be deductible against your US income.

Australian superannuation funds are not subject to the same tax deferral rules in the US. Further advice will need to be sought on whether Australian superannuation fund earnings will be taxable in the US.

Talk To Your Tax Advisor Before Making The Move

Moving overseas can create a large number of potentially complex taxation issues to consider. This article contains a brief introduction to some of the tax issues that may be encountered when considering a move to the US and does not consider your personal situation or circumstance. It is important to speak to a qualified and experienced tax advisor, both in Australia and in the USA, about how the various laws and tax treaties apply to your specific situation.

Please note that the general information provided is accurate at the time of publication, however tax laws do change frequently. To ensure you have reliable information it is therefore important that you seek specialist advice at the time of your potential or intended move, to ensure you have up to date, and personally relevant advice on hand.

Planning ahead ensures you have the information necessary to make informed choices, and prevents you from being surprised with unexpected tax costs.

CST Tax Advisors in Sydney can provide you with advice regarding your Australian tax when it comes to moving, or considering a move overseas. Our US office will be able to assist you with tax advice regarding your US tax.

NEED ASSISTANCE FOR YOUR SITUATION?

Contact us today
Contact Us
By providing us your information you agree to our privacy policy

More articles like this

 

Understanding the Differences Between Australian Citizenship, Visa Residency and Tax Residency


18th May 2021
Daniel Wilkie

It can understandably be confusing to determine the difference between being an Australian tax resident for tax purposes compared to visa residency If you’re an Australian citizen who was born...

 

Australians moving to the USA: Key Differences in the Australian and US tax system


2nd Apr 2021
Matthew Marcarian

Like any overseas move, moving from Australia to the United States will mean that you will encounter a brand new taxation system  If you’re used to the Australian tax system, the US system may...

 

Australians Moving to the UK: A Brief Comparison of the Australian and UK Tax System


16th Mar 2021
Daniel Wilkie

The Australian tax system is surprisingly different to the UK tax systemThis makes a simple comparison between the two challenging  Determining, from an individual taxpayer perspective,...

 

Understanding the Differences Between Australian Citizenship, Visa Residency and Tax Residency


18th May 2021
Daniel Wilkie

It can understandably be confusing to determine the difference between being an Australian tax resident for tax purposes compared to visa...

 

Australians moving to the USA: Key Differences in the Australian and US tax system


2nd Apr 2021
Matthew Marcarian

Like any overseas move, moving from Australia to the United States will mean that you will encounter a brand new taxation system  If you’re...

 

Australians Moving to the UK: A Brief Comparison of the Australian and UK Tax System


16th Mar 2021
Daniel Wilkie

The Australian tax system is surprisingly different to the UK tax systemThis makes a simple comparison between the two...

Employee Share Schemes: Overview of Tax Concessions and Considerations

Matthew Marcarian   |   29 Jan 2021   |   7 min read

Employee Share Schemes (ESS) involve an employer giving employees a benefit through the provision of shares in the company that the employee is working for.

This can include giving employees the ability to purchase shares at a discounted price and giving employees options to buy shares in the future. 

While employees are often eligible for tax concessions on the benefit they are given, it is important to be aware of the potential tax consequences that can occur. This is particularly true in situations where a taxpayer can be assessed for taxes on hundreds of thousands of dollars of assessable income, without the cash income being available to them to pay for those taxes.

In essence, unless the ‘start-up’ concessions apply, you are required to include the ‘discount’ on the shares you acquire, with the discount determined by comparing the price you pay for the shares to the market value.

This discount is a benefit that is included as assessable income in your tax return. The terms of when the market value is measured, and whether tax concessions may apply, vary depending on the exact nature of the ESS.

Basic example:

Employer company issues you shares that are worth $100,000
You only pay $80,000 for the shares.
This means you received a discount of $20,000.

You are required to include that $20,000 benefit as assessable taxable income in your income tax return.

Tax Concessions

For concessional tax treatment both the general condition and specific conditions of the particular ESS must be met.

The general condition is: 

That after acquiring your shares through the ESS, you must not:

  • Hold over 10% ownership of the company
  • Control more than 10% voting rights in the company

(Including ownership/rights held by associates and additional ownership/rights that would be held if any other ESS interests were exercised). 

The specific conditions depend on the type and particulars of the ESS that the employer offers.

Potential tax concessions include:

  • Rollover relief
  • Start-up concession (where the employer is a start-up company)
  • $1,000 discount on taxed-upfront schemes (explained further below)
  • Deferred Taxing point (discussed further below)

Taxed-Upfront Scheme

In a taxed-upfront scheme the employee is taxed on the discount that they receive in comparison to the market value at the time of acquisition. In certain situations a very small benefit of $1,000 is available.

Provided your taxable income is under $180,000 (and you meet the general condition ownership/voting rights test), then shares that are acquired under the taxed-upfront scheme are eligible for a reduction in assessable income by up to $1,000.

For example:

Jack has a total taxable income of $50,000.

His employer provides him with $999 worth of shares in the employer company. After receiving these shares Jack will have less than 1% ownership/voting rights in the company.

The $999 value of the shares is required to be reported as assessable income in Jack’s income tax return. However, as he meets the concessional requirements he is able to apply the discount and will not be taxed on the $999. 

If Jack was provided with $1,999 worth of shares then he would be able to discount $1,000 of those shares and only be assessed on the remaining $999.

Tax-Deferred Scheme

Under a tax-deferred scheme the timing of when the employee is taxed on their discount is deferred to a specific “taxing point” in the future, rather than being the time they initially receive the benefit. 

There are a number of different types of tax deferred schemes and specific conditions must be met for each arrangement. 

When it comes to deferred taxing schemes it is important to follow the specific terms of the actual scheme itself, as this will play a big part in determining when the deferred taxing point occurs. 

In general, the deferred taxing point is the earlier of the following events: 

  1. The time when there is no risk of the ESS interest being forfeited and there are no restrictions on selling the shares.
  2. Where the interests are rights (options), usually the point when the employee exercises those rights and there is no risk that they can forfeit the share and no restriction stopping them from selling that share. 
  3. When the employee ceases employment with the employer who provided the ESS.
  4. 15 years after the acquisition of the ESS interests.

However, if an ESS interest is disposed of within 30 days of the deferred taxing point, then the date of the disposal becomes the taxing point instead.

For example:

Max’s taxing point occurs on 1 March 2020, when he exercises his rights and acquires shares at a $100,000 discount compared to market value. 

On 15 March 2020 Max decided to sell those shares. By this time the market has dropped and he sells his shares for only $80,000 more than he paid for them.

If he was required to include the discount at the point of acquiring the shares he would have to declare the $100,000 discount as  income in his tax return and then declare a capital loss of $20,000 from the sale 15 days later. 

However, because he has sold them within 30 days of the deferred taxing point, he will only need to include the $80,000 discount that applied at the time of sale. 

However, if Max hangs on beyond the 30 day window and the share price drops he will get a capital loss but will be stuck paying income tax on the higher value.

Capital Gains Tax

Deferred Taxing Schemes

An ESS interest that is acquired under a deferred taxing scheme is taken to have been “re-acquired” immediately after the deferred taxing point.

For example:

Wilma is issued with options to acquire shares in her employer’s company on 1 January 2018. 

On 1 May 2020 Wilma exercised those options and acquired shares with a market value of $500,000. She only paid $300,000 for the shares, which means she included $200,000 of assessable income in her 2020 tax return for the discount realised at her deferred taxing point. 

On 1 December 2020 Wilma sells those shares for $600,000.

The $500,000 market value is her cost base, which means she has realised a $100,000 capital gain. 

Since 1 May 2020 is the acquisition date, she has not held the shares for over 12 months and is unable to apply the 50% CGT discount to that $100,000 gain. This means she will need to declare $100,000 in capital gains in her 2020 tax return. 

Forfeiture or Loss of ESS Interests

If an ESS interest is forfeited or lost then there are provisions to ensure that a person is not stuck with a tax bill, however the rules are highly technical and if you are in this position you should seek further tax advice. but they do not necessarily operate as some people may expect.

Being Prepared with ESS Interests

Managing your tax in relation to ESS interests can become complex and can result in cash flow difficulties.

Understanding and accessing any eligible tax concessions can also help reduce the tax burden. For instance, there can be significant tax incentives for early stage investors.

Because ESS discounts are a tax assessable benefit that is provided in the form of discounts on acquiring shares in the employer company, there is no cash income seen by the employee at the time the income becomes assessable to them. 

Since ESS discounts can see individual taxpayers with hundreds of thousands of dollars in assessable income, it is important that the taxing points are adequately prepared and planned for. 

In the event of termination of employment, this can be a double edged sword. 

Since employment termination is one of the triggers for determining the deferred taxing point, and loss of employment can also mean loss of income, some taxpayers can find themselves being assessed for high levels of tax, with low levels of cash to cover their tax requirements.

It is important to talk to your tax and finance specialists when receiving ESS interests, so you can be aware of contingencies and make necessary plans for tax and cashflow considerations. 

NEED ASSISTANCE FOR YOUR SITUATION?

Contact us today
Contact Us
By providing us your information you agree to our privacy policy

More articles like this

 

Potential Changes To Australia’s Personal Tax Residency Laws


16th Mar 2022
Matthew Marcarian

On 11 May 2021, the Australian Government announced that it is considering replacing Australia’s existing residency rules with a new ‘modernised framework’ This update is intended to be...

 

The New Requirement for Director IDs


10th Dec 2021
Daniel Wilkie

In June 2020 new legislation was passed that changes how directors are required to identify themselves This change was the first step made in an effort to modernise business registrations It means...

 

COVID-19 Financial Support for Individuals and Businesses – August 2021 Update


23rd Aug 2021
Daniel Wilkie

While the Federal Government’s Jobkeeper and Cash Flow Boost have wrapped up, the ongoing pandemic and resulting lockdowns continue This means that businesses and individuals right across the...

 

Potential Changes To Australia’s Personal Tax Residency Laws


16th Mar 2022
Matthew Marcarian

On 11 May 2021, the Australian Government announced that it is considering replacing Australia’s existing residency rules with a new ‘modernised...

 

The New Requirement for Director IDs


10th Dec 2021
Daniel Wilkie

In June 2020 new legislation was passed that changes how directors are required to identify themselves This change was the first step made in an...

 

COVID-19 Financial Support for Individuals and Businesses – August 2021 Update


23rd Aug 2021
Daniel Wilkie

While the Federal Government’s Jobkeeper and Cash Flow Boost have wrapped up, the ongoing pandemic and resulting lockdowns continue This means...

Residency in a Global Pandemic: Advising the Returning Australian

Matthew Marcarian   |   8 Sep 2020   |   1 min read

Our principal, Matthew Marcarian, was recently published in Australia’s leading tax journal, Taxation in Australia (run by the Tax Institute), with his article titled “Residency in a global pandemic: advising the returning Australian“.

A brief overview of the tax residency issues that have arisen with COVID can be read here.

In his article Matthew breaks down the intricacies of the rules regarding tax residency for expats who have returned to Australia during this global pandemic.

If you are an expat who has returned to Australia due to the pandemic you may have to seek advice on your tax position.

Matthew has over 20 years of international tax experience advising clients on cross border tax matters. His depth of knowledge in this area will give you the clarity you need to understand your tax obligations as a result of returning to Australia.

Contact us today to discuss your residency status.

NEED ASSISTANCE FOR YOUR SITUATION?

Contact us today
Contact Us
By providing us your information you agree to our privacy policy

More articles like this

 

Potential Changes To Australia’s Personal Tax Residency Laws


16th Mar 2022
Matthew Marcarian

On 11 May 2021, the Australian Government announced that it is considering replacing Australia’s existing residency rules with a new ‘modernised framework’ This update is intended to be...

 

The New Requirement for Director IDs


10th Dec 2021
Daniel Wilkie

In June 2020 new legislation was passed that changes how directors are required to identify themselves This change was the first step made in an effort to modernise business registrations It means...

 

COVID-19 Financial Support for Individuals and Businesses – August 2021 Update


23rd Aug 2021
Daniel Wilkie

While the Federal Government’s Jobkeeper and Cash Flow Boost have wrapped up, the ongoing pandemic and resulting lockdowns continue This means that businesses and individuals right across the...

 

Potential Changes To Australia’s Personal Tax Residency Laws


16th Mar 2022
Matthew Marcarian

On 11 May 2021, the Australian Government announced that it is considering replacing Australia’s existing residency rules with a new ‘modernised...

 

The New Requirement for Director IDs


10th Dec 2021
Daniel Wilkie

In June 2020 new legislation was passed that changes how directors are required to identify themselves This change was the first step made in an...

 

COVID-19 Financial Support for Individuals and Businesses – August 2021 Update


23rd Aug 2021
Daniel Wilkie

While the Federal Government’s Jobkeeper and Cash Flow Boost have wrapped up, the ongoing pandemic and resulting lockdowns continue This means...

Moving to Singapore: Understanding the Tax Differences

Matthew Marcarian   |   6 Jul 2020   |   8 min read

As an Australian moving to Singapore there are a number of differences that you should be aware of in relation to taxation.

Having an idea of what to expect will help you to organise your move and understand your tax position so that you are more financially prepared.

You can download our guide: Moving to Singapore, here.

Taxation Basics

The most fundamental difference between Australia and Singapore is that in Singapore there is no CGT in Singapore and they do not generally tax investment income. Singapore also has a much lower rate of tax in their highest tax tier, which is one of the appeals for Australians considering a move to Singapore on a permanent basis.

Other key differences between Australia and Singapore’s taxation system include: 

  • Financial year
  • Terminology used
  • What constitutes allowable deductions
  • Which income is taxed
  • How tax is paid. 

For instance, while you are taxed on your worldwide income as an Australian resident, Singapore only taxes residents on income that is actually sourced in Singapore. Read on to see some of the basic differences in taxation from an employment perspective.


AUSTRALIASINGAPORE
Financial Year1 July to 30 June1 January to 31 December
Taxation BodyAustralian Taxation Office: ATOInland Revenue Authority of Singapore: IRAS
Individual Tax RateProgessive rate from 0% to 45% for incomes exceeding AUD$180,000.Non residents are taxed a minimum of 15% and up to 45%.Progressive rate from 0% to 22% for incomes exceeding SGD$320,000. Non residents are taxed between 15% and 22%.
Taxed onTaxable Income that is calculated by taking in your worldwide income less allowable tax deductions.“Chargeable” Income that is sourced in Singapore. 

Employment Taxation

As an Australian employee you would be familiar with the PAYGW system.

Pay As You Go Withholding ensures that your estimated tax is paid directly to the ATO through the year. Then, at the end of the year, you lodge your tax return and are either required to pay any additional tax owed, or are refunded any excess tax that the ATO received through the year.

Singapore is the opposite. All of your wages will be paid to you in full as an individual. Then you are required to pay your income taxes in full at the end of the tax year. This means you need to be careful to track and keep aside money to pay your tax bill. In your second year as a resident of Singapore you can pay your tax for the first year using a monthly instalment system.

You will also be used to working in a system where you can claim work related deductions to help bring your tax obligations down. In Australia any work expenses that your employer does not cover can be paid for yourself, then claimed as a deduction that reduces your taxable income. Singapore does not allow employees to claim tax deductions. This means you will want to be extra sure that your employer is covering your work related costs.

Another system you will be familiar with as an Australian worker is Superannuation. Your Australian employer is required to make superannuation contributions to your superannuation fund in order to fund your eventual retirement. The accrued superannuation balance is only able to release your superannuation to you in limited situations, such as retirement.

Singapore also has a retirement fund, the Central Provident Fund (CPF). However, this fund does not just serve as a retirement cash payout. Instead, it is intended to help save for housing and healthcare in retirement. Unfortunately for Australian expats, the CPF is not typically available. This means you may need to continue to build an Australian superannuation fund to plan for your own retirement.


AUSTRALIASINGAPORE
Tax on WagesManaged through the PAYGW system where tax is withheld by your employer and you typically receive a small refund/have a small payable to adjust the total tax required for your actual income over the year. You are paid your total wage income. When you lodge your tax return you are required to pay your income tax obligations in full at that time. 
Work DeductionsYou can claim deductions as an employee. You cannot claim deductions as an employee to bring your taxable income down. 
Super FundsEmployees have Superannuation Guarantee payments paid into their personal super fund at 9.5% of their wages, with capped limits.

All employees over 18 and earning more than $450 a month are paid superannuation. 

Temporary residents or visitors who depart Australia can have their Australian Superannuation paid out or rolled into an overseas fund. If this isn’t organised within 6 months their superannuation money will be transferred to the ATO as unclaimed super money. 
Singaporeans and permanent residents are covered by a Central Provident Fund (CPF) that helps provide for retirement, including housing and healthcare. While individuals contribute to their own fund, employers contribute 17% of wages paid, loved ones typically contribute, and the government also provides top-ups and incentives. 
 
Only Singaporeans are eligible for the CPF. This means Australian expats may need to maintain a local Australian super fund instead, bearing in mind that contributions could be subject to tax in Singapore. 

Other Taxation Matters

Employment income is not the only source of income. While Australians are taxed on a range of income types, the Singapore tax regime is not the same.

Capital Gains Tax

Australians are required to pay tax on the sale of most capital assets, and in some situations they are even taxed on the deemed realisation of assets. Certain concessions, such as the 50% discount where the asset has been held for more than 12 months, can be applied. Singapore does not have a capital gains tax regime at all.

Goods and Services Tax (GST)

GST is a tax that applies in both Australia and Singapore on the sale of goods and services. GST is 7% in Singapore, whereas it is 10% in Australia. However, this doesn’t necessarily mean you end up paying less GST in Singapore overall. While Australia has a large range of supplies that are exempt from GST, including essential goods and services, Singapore only has a limited number of exempt supplies.

Investment Income

In Australia you are taxed on investment income at your own individual marginal tax rate. However you are also typically able to claim tax credits for any tax that the company has paid on income that is distributed to you.

In Singapore a company pays taxes on its own chargeable income. This is the final tax paid, and investment income that is passed on to shareholders is not taxed in their hands. (If the investor is a non-resident, they would only be liable for non-resident taxes in accordance with their country of residence).

Running a Company

If you plan to run a company in Singapore there are a wide range of requirements that you need to understand in terms of setting up and running the company. Not the least of these is that, from a taxation perspective, the first three years of operation are tax free for the first $100,000 of chargeable income. After this the company tax rate is only 17%. In Australia the company tax rate is currently 30%.


AUSTRALIASINGAPORE
Capital Gains TaxTaxable Income. Capital Losses are quarantined and can only be offset against other capital gains.

If you cease to be an Australian resident you will be deemed to have disposed of any GST assets that are not Australian real property for Australian tax purposes. 
No Capital Gains tax. 
GST10%
There are an extensive number of exemptions including financial supplies, residential rent, and basic essentials such as raw food and medicine. 
7%
Exemptions include financial services, digital payment tokens, sale & lease or residential property, and important and supply of investment precious metals. 
Investment/Dividend IncomeIndividuals declare the cash and franking credit that they are distributed. The franking credit counts as a tax credit and the ATO will refund any difference between the franking credit (which is at the company tax rate) and the individual’s tax rate, or the individual is required to pay additional tax if their marginal tax rate is higher than the company tax rate. Taxes paid by companies are the final taxes chargeable on income. Shareholders are not taxed on dividends they receive from resident companies. 
Company Tax Rate30%.
Small business entities (under 2 million turnover) are taxed at 28.5%.
17%.
For the first 3 years, newly incorporated companies are given a full tax exemption for the first $100,000 of chargeable income. 

Tax Differences between Australia and Singapore

While there are some commonalities in the foundation from which the Australian and Singapore systems have grown, there are a lot of differences. These differences range from terminology to timing, what income is taxed, at what point it is taxed, and the tax rate.

As outlined above, there is an appeal in being taxed under the Singapore regime. For instance, the tax rates are lower, there is no CGT, and investment income is not typically tax in the hands of the individual it is distributed to. If you are considering making this move, ensure that you fully understand your personal situation and have a good understanding of whether you would be a Singapore tax resident. It is always important to speak to a professional advisor for a more detailed assessment of your specific situation. 

NEED ASSISTANCE FOR YOUR SITUATION?

Contact us today
Contact Us
By providing us your information you agree to our privacy policy

More articles like this

 

Tax Requirements When Expanding Your Australian Company To Singapore


20th May 2021
Matthew Marcarian

Singapore is often chosen as a regional business hub for Australian companies looking to expand into Asia or beyond This is largely because Singapore is one of the countries where there are limited...

 

Understanding the Differences Between Australian Citizenship, Visa Residency and Tax Residency


18th May 2021
Daniel Wilkie

It can understandably be confusing to determine the difference between being an Australian tax resident for tax purposes compared to visa residency If you’re an Australian citizen who was born...

 

Australians moving to the USA: Key Differences in the Australian and US tax system


2nd Apr 2021
Matthew Marcarian

Like any overseas move, moving from Australia to the United States will mean that you will encounter a brand new taxation system  If you’re used to the Australian tax system, the US system may...

 

Tax Requirements When Expanding Your Australian Company To Singapore


20th May 2021
Matthew Marcarian

Singapore is often chosen as a regional business hub for Australian companies looking to expand into Asia or beyond This is largely because...

 

Understanding the Differences Between Australian Citizenship, Visa Residency and Tax Residency


18th May 2021
Daniel Wilkie

It can understandably be confusing to determine the difference between being an Australian tax resident for tax purposes compared to visa...

 

Australians moving to the USA: Key Differences in the Australian and US tax system


2nd Apr 2021
Matthew Marcarian

Like any overseas move, moving from Australia to the United States will mean that you will encounter a brand new taxation system  If you’re...

Tax Residency issues amid COVID19 Pandemic

Matthew Marcarian   |   27 Mar 2020   |   3 min read

Australian expats who have been forced back to Australia because of the COVID19 pandemic, need to understand what returning to Australia might mean for their tax position.

The latest advice from the ATO on these issues can be accessed here.

Essentially, the ATO’s view is that if you are a non-resident of Australia and you are temporarily in Australia for some weeks or months because of COVID19, then you will not become an Australian resident for tax purposes provided that you usually live overseas and intend to return as soon as possible.

However, the ATO guidance acknowledges that tax residency issues can become more complicated if the non-resident ends up staying in Australia for a lengthy period or does not plan to return to their overseas country of residency. The ATO guidance also acknowledges that there will be unique situations with a range of potential tax outcomes. 

It is an important time to recognise that under Australian tax law a person is considered to be a resident of Australia in accordance with ordinary principles, essentially if they are dwelling permanently or for a considerable time in Australia or if they have their settled or usual abode here. 

We think a helpful summary of the state of the law of residency has been provided by Justice Derrington in Harding v Commissioner of Taxation [2018] FCA 837 in which he said: 

“Necessarily the question of where a person resides is a question of fact (and, perhaps, of degree per Dixon J in Miller at 103), the conclusion of which is reached by a consideration of all of the person’s circumstances.  Those circumstances will be directed to ascertaining whether a person has a physical presence or retains a “presence” in one location whilst at the same time maintaining an intention to reside there.  The consideration also involves identifying the person’s “habits and conduct within the period”, however, that will include a consideration of the events occurring prior to and subsequent to the relevant period as illuminating the relevance of the events in the relevant period.”

183 Day test of limited relevance

It is also important for Australian expats to be aware that the so called 183 Day test is not the main test, but a subsidiary test which is mostly aimed at determining whether a foreigner who might be in Australia for more than 183 days during the income tax year is a resident.

The 183 Day test only works in one direction. There is a misunderstanding in certain expatriate circles that a person cannot be a resident of Australia unless they have been in Australia for more than 183 Days. That is incorrect. The key test has always been whether the person is residing in Australia in accordance with ordinary concepts and a range of indicators have been considered by the Courts over 150 years to determine whether someone is residing in a country. 

NEED ASSISTANCE FOR YOUR SITUATION?

Contact us today
Contact Us
By providing us your information you agree to our privacy policy

More articles like this

 

Potential Changes To Australia’s Personal Tax Residency Laws


16th Mar 2022
Matthew Marcarian

On 11 May 2021, the Australian Government announced that it is considering replacing Australia’s existing residency rules with a new ‘modernised framework’ This update is intended to be...

 

The New Requirement for Director IDs


10th Dec 2021
Daniel Wilkie

In June 2020 new legislation was passed that changes how directors are required to identify themselves This change was the first step made in an effort to modernise business registrations It means...

 

COVID-19 Financial Support for Individuals and Businesses – August 2021 Update


23rd Aug 2021
Daniel Wilkie

While the Federal Government’s Jobkeeper and Cash Flow Boost have wrapped up, the ongoing pandemic and resulting lockdowns continue This means that businesses and individuals right across the...

 

Potential Changes To Australia’s Personal Tax Residency Laws


16th Mar 2022
Matthew Marcarian

On 11 May 2021, the Australian Government announced that it is considering replacing Australia’s existing residency rules with a new ‘modernised...

 

The New Requirement for Director IDs


10th Dec 2021
Daniel Wilkie

In June 2020 new legislation was passed that changes how directors are required to identify themselves This change was the first step made in an...

 

COVID-19 Financial Support for Individuals and Businesses – August 2021 Update


23rd Aug 2021
Daniel Wilkie

While the Federal Government’s Jobkeeper and Cash Flow Boost have wrapped up, the ongoing pandemic and resulting lockdowns continue This means...

Claiming foreign tax credits on capital gains made from overseas investments

Matthew Marcarian   |   3 Mar 2020   |   4 min read

Burton’s case [Burton v Commissioner of Taxation [2019] FCAFC 141] has set an interesting precedent for claiming foreign tax credits on capital gains made from the sale of overseas investments in the United States.

In simple terms, if you own a capital asset in the USA, and you are taxed in the US the capital gain, then you may not be able to claim all the US tax paid as credit in Australia.

The reason for this is because the ATO will only allow you to claim the foreign tax offset that relates to the portion of taxable discounted capital gain being declared in your Australian tax return. The Australia-US Double Taxation Agreement will not assist you in this regard.

Since Burton’s application to appeal the decision was denied on 14 February 2020, the position under the law has been clarified in a situation where an Australian taxpayer makes a capital gains on US real estate (or other assets which are considered effectively connected with the USA).

While some articles claim that this case means the ATO is clawing back the 50% discount on Australian residents with foreign held assets, this isn’t strictly true. It’s actually that not all of the US tax paid would be creditable here.

Example – Comparing the net tax effect on an Australian tax resident selling capital assets owned under different tax regimes. 

To understand the situation let’s consider the example of Jack, an Australian taxpayer who sells a long-term capital asset held in the US, NZ and Australia.

The US taxes capital gains in full, however they tax the capital gain at a different tax rate. NZ does not tax capital gains. Including NZ as a comparison makes it clear that the ruling from Burton does not claw back the discounted 50% capital gain.

For our purposes Jack is an Australian tax resident.

Let’s assume:

  • For ease of calculations Jack makes a capital gain of $1,000,000 on the sale of each of the following assets.
  • Jack’s first $1,000,000 capital gain is on an asset that he held in the US for more than 12 months. While the US taxes capital gains, it applies a concessional tax rate for assets held over 12 months. For ease of calculations we will assume the top concessional rate of 20% applies.
  • The second $1,000,000 gain is on an investment that was held in NZ for more than 12 months. NZ does not tax domestic capital gains.
  • Finally, Jack also sells $1,000,000 investment in Australia, which he has also held for over 12 months. Accordingly, Jack will only be taxed on 50% of the Australian capital gain. For ease of calculations we will assume the flat top marginal rate and Medicare levy applies, 47%.
  • Jack sells all 3 investments in the same financial year for a capital gain of AUD$1,000,000 each.
  • For ease of calculations Jack has no capital losses to apply and he is able to apply the 50% CGT discount in full when preparing his Australian tax return. 
    US owned Asset (AUD$) NZ owned Asset (AUD$)Australian owned Asset (AUD$)
 Capital Gain $1,000,000$1,000,000$1,000,000
a.Foreign Taxable gain after applying any discounts for assessing tax on capital gains$1,000,000 0
b.Foreign tax paid
US 20%
NZ NA on capital gains
$200,000 0
c.Australian Capital Gain$1,000,000$1,000,000$1,000,000
d.Portion of capital gain eligible for discount in Australian assessment$500,000$500,000$500,000
e.Net taxable Australian gain to be taxed (c – d)$500,000$500,000$500,000
f.Australian tax at $47% (including Medicare levy)$235,000$235,000$235,000
g.Net foreign tax paid that is eligible to be claimed as an offset against the Australian taxable portion of the capital gain US: b x 50%
All others: b
$100,0000
h.Australian net tax payable (f – g)$135,000$235,000$235,000
Total foreign & Australian tax (b + h)$335,000$235,000$235,000
Global Tax Paid33.5%23.5%23.5%

As you can see from this example, Jack ends up paying more tax on the US asset. This is because the US taxes the full gain at a discounted rate. Australia then taxes half of the gain at the Australian tax rate and only allows the 50% portion of the foreign income tax credits to be applied.

Conclusion

The net impact of applying this precedent is that Australian taxpayers will end up paying up to 33.5% income tax on capital gains made on US investments that are held for more than 12 months. This is in contrast to the 23.5% income tax that they will pay on capital gains that are limited to only paying Australian income tax.

NEED ASSISTANCE FOR YOUR SITUATION?

Contact us today
Contact Us
By providing us your information you agree to our privacy policy

More articles like this

 

Potential Changes To Australia’s Personal Tax Residency Laws


16th Mar 2022
Matthew Marcarian

On 11 May 2021, the Australian Government announced that it is considering replacing Australia’s existing residency rules with a new ‘modernised framework’ This update is intended to be...

 

The New Requirement for Director IDs


10th Dec 2021
Daniel Wilkie

In June 2020 new legislation was passed that changes how directors are required to identify themselves This change was the first step made in an effort to modernise business registrations It means...

 

COVID-19 Financial Support for Individuals and Businesses – August 2021 Update


23rd Aug 2021
Daniel Wilkie

While the Federal Government’s Jobkeeper and Cash Flow Boost have wrapped up, the ongoing pandemic and resulting lockdowns continue This means that businesses and individuals right across the...

 

Potential Changes To Australia’s Personal Tax Residency Laws


16th Mar 2022
Matthew Marcarian

On 11 May 2021, the Australian Government announced that it is considering replacing Australia’s existing residency rules with a new ‘modernised...

 

The New Requirement for Director IDs


10th Dec 2021
Daniel Wilkie

In June 2020 new legislation was passed that changes how directors are required to identify themselves This change was the first step made in an...

 

COVID-19 Financial Support for Individuals and Businesses – August 2021 Update


23rd Aug 2021
Daniel Wilkie

While the Federal Government’s Jobkeeper and Cash Flow Boost have wrapped up, the ongoing pandemic and resulting lockdowns continue This means...