Expatriate Executive: Australia

A foreigner becomes resident in Australia for tax purposes if he stays more than 183 days in the jurisdiction within any tax year, or if he has Australian domicile (meaning, behaves generally as if Australia is his permanent base). Australia has double tax treaties with many other countries, which often include 'tie-breaker' clauses to deal with double tax-residency situations.

An Australian tax-resident is subject to Australian tax on his or her world-wide income from the time Australian residence is begun. The taxation year of immigration (ending 30th June) is divided into two parts: the non-resident part in which only Australian-source income is taxed, and the resident part, which is fully taxed. Non-residents are taxed only on Australian-source income.

Non-Australian property acquired since 1985 and owned at the time of immigration is deemed to have a fair market value on the date that Australian residency is begun, and is subject to Australian CGT is disposed of during residency, and, worse, is deemed to be disposed of on cessation of Australian residency.

This rule can be hurtful, although the '5-in-10' concession exempts assets held by anyone who has resided in Australia for less than 5 out of the previous 10 years on their departure. Most short-term expatriate workers in Australia will benefit from the 5-in-10 rule, but anyone who might stay more than 5 years in Australia must be extremely careful about assets acquired prior to taking up residence, or during residence.

The '5-in-10' rule does not apply to assets acquired during Australian residency, but on departure it may be possible to elect that an asset acquired during residency should be treated as 'Australian', so that it is taxed only on final disposal and not on departure - but this is a gamble on future Australian tax rates.

A new regime for temporary residents (deemed as such if they hold a temporary residence visa, are viewed as such under the Social Security Act, and are not married to an Australian resident) was put in place in 2006. The regime provides an exemption for tax purposes on most foreign source income, foreign source capital gains, and interest withholding tax liabilities associated with foreign assets.

Taxable income includes income from personal services (employment or business), bonuses, interest, dividends, rent, royalties, trust distributions and most types of capital gain (on assets acquired after 1985). Foreign-source income which has been taxed usually attracts a tax credit up to the amount of Australian tax that would have been payable. Foreign 'passive' income (ie dividends, interest, royalties etc) is treated as a separate class of income, and tax credits are segregated according to class.

From July 2008, new foreign tax offset rules took the place of the foreign tax credit system. A tax offset will be claimable by both resident and non-resident taxpayers on assessable income on which foreign tax has been paid, up to the amount of Australian tax payable.

Since interests in many types of domestic and offshore trust are subject both to CGT and income tax, it is necessary to take good professional advice on such interests before taking up residence in Australia. It may be possible to bring forward distributions, to postpone them, or to distribute trust assets among family memebrs, all in order to minimise the possibility of incurring (high) Australian taxation during residence.

The same reasoning applies to grants of stock options, which are taxable events in Australia, and should probably be brought forward to occur before immigration takes place.

There is a danger that an offshore entity (trust, company or whatever) if controlled by an individual becoming resident or by his family group will be considered to be Australian, and subject to tax on its world-wide income. The 5-in-10 rule is not available to companies. The ownership structure of offshore (and all foreign) assets must be carefully checked out in advance.

Regarding shareholdings in foreign and offshore companies, Australia has fairly severe CFC (Controlled Foreign Corporation) rules, which apply to closely-held companies (5 or fewer resident shareholders control 50% or more of the shares) and result in taxation of the company's income whether distributed or not.

Australia also has FIF (Foreign Investment Fund) rules which apply income taxes to the increase in value of non-controlling holdings in overseas trusts and companies if their income is mainly passive (ie it catches mutual funds and similar types of investment). There is an equivalent rule applying to Foreign Life Assurance Policies (FLP rules). There are a number of exemptions from FIF and FLP taxation, including one for people holding a residence permit for less than 4 years, which will apply to most short-term expatriates, and one for investments totalling below a designated amount. The calculation basis for the FIF tax is quite complex, and like the US PFIC equivalent, can be onerous for the funds concerned.

Trusts which are not caught by the 'control' or FIF rules may yet be caught by more general provisions under which Australian-resident individuals are also taxed on their non-controlling interests in certain types of trust on an accruals basis - ie on the annual increase in fund value, whether distributed or not.

Income 'franked' under any of these three sets of rules is however exempt from further Australian taxation on the income taxed to the level of the franking.

Currently, there are no death or gift duties in Australia - one thing the incoming resident doesn't have to worry about. But it's nearly the only thing!