By Darren Beech, Wealth Planner Expat Financial Planning (Globaleye)
Like many Australian expatriates, you may choose to return to Australia to live for a period or even permanently. It is important that your financial plans are flexible enough to meet changes in your lifestyle, such as becoming tax resident in Australia.
There are many things to consider when moving from one country to another. Careful tax planning is important, as this can help you boost your finances by preventing tax eroding your savings and investments unnecessarily.
Tax planning does not need to be complex. If you stay up to date with the latest reliefs and allowances and invest your money in tax-efficient products, you can ensure that you don’t pay any more tax than you need to.
This should be an ongoing process rather than a one-off activity, as taxes change regularly. You can get help with this from your financial adviser and your tax adviser.
Understanding your Australian tax status
The Australian tax system operates on a worldwide basis. This means that if you are a returning Australian expatriate, your income and capital gains are taxable in Australia, regardless of which country they arise in. There are some exceptions, if you are a new resident to Australia – please speak to your tax adviser for more information on this topic.
As an Australian resident, you will pay income tax and you will need a tax file number. If you are working, your employer will withhold tax from your salary and send it to the Australian Taxation Office (ATO) and you will lodge an annual tax return for a final assessment that includes your other income and capital gains. If you have income from overseas, such as pensions and property, these must be included along with your local Australian income.
The extent of your liability to Australian tax will depend on your residence status but as this is assessable on a case-by-case basis, it’s important to consider your personal circumstances.
Residence
The ATO will use criteria established in legislation, taxation rulings and case law and has a number of tests designed to establish residence or non-residence in a tax year. Please note that the terms non-residence and foreign residence mean the same thing.
You might be living away from Australia but continue to be an Australian tax resident. So, if your intention is to cease tax residence, you must make sure you have become sufficiently detached from Australia, otherwise your worldwide income will remain liable to Australian income tax.
The ‘resides test’
If you live in Australia in a settled manner, particularly if it’s for more than six months, then you will quite likely pass the ‘resides’ test and be a tax resident. The ATO will consider factors, including the location of your family and business/employment along with your assets and social arrangements, in assessing whether you pass this test.
Even if you do not pass the ‘resides test’, there are other statutory tests that the ATO will then consider to determine your residence status.
The Australian tax system
Australia has a number of federal, state and local government taxes and the ATO is the federal government authority responsible for administering the tax laws. This guidance only covers the federal taxes on income and capital gains.
As an Australian resident you will pay tax on a progressive basis on your worldwide income and capital gains. Chargeable gains on the disposal of assets are included in your assessable income and taxed at your marginal rate. You will be entitled to the current tax-free threshold of AUD 18,200 (tax year 2018/19) and you will have to pay the Medicare levy, a tax to fund health care in Australia. Please note that as a new arrival part-way through the tax year, your tax free threshold will be pro-rated for the year in question.
If you are a foreign resident, you are generally only taxed in Australia on Australian sourced income but you will not be entitled to the tax-free threshold. However, you will not have to pay the Medicare levy.
As an Australian resident, you will be liable to tax on gains arising from the disposal of your worldwide assets.
Investment Options
So what offshore investment options are available that will shelter your capital/returns from income or capital gains tax in Australia?
Tax efficiency of international life plans when you go to Australia
International life plans taken out while you are an expatriate could maintain their tax efficiency on your return to Australia.
Regular premium and single premium unit-linked life assurance savings plans
- Enjoy the benefits of gross investment returns inside your policy.
- Switch funds inside your policy without paying tax.
- Chargeable gains known as bonuses are assessable income and taxable at your marginal rate (up to year 9).
- Bonuses received after the 10th year eligibility period are not assessable income.
- Premium increments of more than 25% of the previous year’s premium amount extend the eligibility period.
Insurance-based savings plans can therefore provide a number of tax-planning benefits, if you decide to return to Australia.
Capital accumulation – gross roll up
International life insurance products are generally not subject to tax while the investments accumulate in value. This means your savings can grow free of tax, with the exception of certain withholding taxes.
Managing your investments – switching funds
As your investments grow, you may wish to switch funds to realise gains and invest in new opportunities. Buying and selling funds directly usually creates a liability to tax, but by using life assurance products, you should be able to avoid this and make decisions driven by investment strategy rather than tax considerations.
Withdrawing capital to support you in the future
There maybe a time when you need your investment to supplement other income or for capital expenditure, such as buying a property. You will be able to set up a regular ’income’ withdrawal or take ad hoc payments or fully surrender the plan at any time.
As an Australian tax resident, you will be assessed for income tax on the chargeable gains arising from life assurance policies in accordance with the income tax legislation. These gains are known as bonuses and only become taxable when you actually receive them and not while they are accumulating in the policy.
If you hold your policy for more than ten complete policy years since its commencement, you will not be taxed on the bonus because, after this time, it is no longer included as part of your assessable income.
If a bonus payment occurs within the first 8 years, it will be fully assessable for income tax, but in years 9 and 10 only two thirds and one third of the bonus respectively are assessable.
| Examples | AUD |
| Initial investment | 100,000 |
| Current surrender value in year 7 | 150,000 |
| Example 1 | |
| Part Withdrawal in year 7 | 25,000 |
| Bonus amount assessable for income tax | 8,333
(25,000/150,000) x 50,000 |
| Example 2 | |
| Full surrender in year 9 | 150,000 |
| Bonus amount assessable for income tax | 33,333
(150,000–100,000) x 2/3 |
| Example 3 | |
| Current surrender value in year 11 | 180,000 |
| Full surrender in year 11 | 180,000 |
| Bonus amount | 80,000 |
| Bonus amount assessable for income tax | Nil |
You should be aware it is not possible to add significantly large sums to an existing investment and still avoid a possible tax charge after ten years. Rules exist to restart the ten-year period.
In the event the policy terminates on your death, the payment is not assessable income on receipt by a taxpayer. Also, the estate of the deceased will not be subject to tax on the proceeds as they will be received for no consideration resulting in any gain or loss being disregarded.
Succession planning
Life assurance plans can be established as joint accounts or written in trust to ensure capital passes to your preferred beneficiaries, without delay.
