High-Tax Country Resident Planning To Go Offshore: Australia

There are some differences between permanent and temporary non-residence.

Temporary non-residence

If a resident goes abroad to work but his term of employment abroad is less than 2 years and he intends returning to Australia then he will not be taxed as non-resident, although his employment earnings as such will be exempt from Australian tax.

An individual spending a limited period abroad (eg a diplomat or a business executive) will probably be in a favourable income tax situation during non-residence, but the FIF legislation punishes ownership of foreign assets on return to Australia by taxing their accumulated gains, so there is not much point in trying to acquire such assets during a period of non-residence unless a very long absence is in view. After taxation on return home, offshore assets acquired during non-residence will have the same status as those acquired during residence, so there is no extra advantage to be gained from offshore investment due to non-residence as such.

Expatriate Australians can however invest in Australian share assets and will not be subject to Australian capital gains tax on realised gains during non-residence providing that the shares have been held for 5 years and that they do not amount to more than a 10% holding in the company concerned. They can also invest in shares which pay fully franked dividends and not be subject to further Australian tax. Another advantage of investment into Australian shares is that there will be no administrative or fiscal problems on return home.

One of the most interesting investment opportunities open to temporarily expatriate Australians may be an Employer Sponsored Foreign Superannuation Fund. If such a fund complies with certain conditions, it benefits from considerable investment and tax advantages. The key conditions include the following:

• the fund must be established and/or maintained by an employer and must be genuinely for retirement provision;
• it must be established and have residency outside Australia;
• it must not benefit from from concessional tax treatment in Australia;
• it must not invest in Australia

An approved fund may invest funds in offshore capital markets. While the expatriate is non-resident, participation in such a fund will not be subject to tax in Australia under FIF, CGT, FLP, or any other rules. Importantly, when returning to Australia, the expatriate may bring all or any part of their accumulated entitlement into Australia, within 6 months, completely tax free. This can then be rolled over into a complying fund or approved deposit fund in Australia, with the accompanying tax benefits.

Any accrued benefits which are not brought back into Australia within 6 months of the expatriate's return will be subject to tax in Australia, but only on the difference between the benefits the expatriate finally receives and the value of the accrued entitlement on the day that the expatriate returns to Australia. In some cases this could give rise to significant tax benefits.

Permanent non-residence

Due to the FIF and other sets of Australian tax rules, there are relatively few types of offshore investment available to Australian residents which can maintain deferral of tax until after departure.

Once departure has taken place, the situation is different, and if the decision not to return to residence is a firm one, the Australian expatriate is reasonably free to invest wherever he can get the best returns.

Once a definite decision to move offshore has been made, careful thought should also be given to existing Australian capital assets, including pension assets. Will it be possible to move them offshore without incurring capital gains tax? Is it desirable to move them early and pay the tax anyway? These are complex questions, and the answer will depend on individual circumstances, but for many individuals there will be interesting tax planning possibilities.

It is reasonably sure at any rate that the FIF, CGT and FLP rules mean that continued investment into Australian assets by someone planning to move offshore is unlikely to be the most tax-efficient strategy.

www.lowtax.net has full details of the offshore investment, taxation and legal regimes in 35 of the main offshore jurisdictions.

Individuals who have significant 'active' non-Australian business income may be able to make use of offshore corporate tax shelters, and need to give careful thought to how to structure this income once emigration has taken place, to ensure that it will not remain within the grasp of the tax authorities.

www.lowtax.net contains details of the corporate and partnership legal structures available in the 35 most prominent offshore jurisdictions, together with descriptions of the most important business sectors in each jurisdiction, local tax regimes, and the international treaties entered into by each jurisdiction.

NB: The suggestions given above do not constitute investment advice. They are intended only to assist individuals in finding appropriate professional advice, which is essential for anyone planning offshore investment.