Shock tax bills could catch out Aussie expats coming home
With thousands of Australian expats still hoping to get back home following the global coronavirus pandemic, many will need to consider the tax implications of investments held overseas.
Expats having recently returned to Australia or those contemplating a move back should seek professional financial advice, given there are tax nuances depending on the jurisdiction resided in and the length of time spent overseas.
Even if someone has been living and working abroad for a relatively short period of time, it can still result in a hefty tax bill on their return to Australia.
The nature of COVID-19 also means some expats will have been laid off, so the circumstances dictating their return could be quite stressful. If they've got a sound financial strategy in place throughout their stint overseas, it could go a long way in alleviating a lot of the pressure.
In addition to income tax, expats will need to account for any shareholdings, employee share schemes - particularly in the event of a redundancy, cash in offshore banks accounts, and pension funds.
Property is another key consideration. Some countries charge non-residents a higher rate of transaction tax or tax capital gains on profits from property investments and, in Australia, if you've retained property while abroad, you may be better to move back first before selling. This applies particularly to the former family home, as non-residents selling property are now excluded from the CGT main residence exemption and the related "six-year absence" rule.
The CGT discount on the sale of investment properties is not available for any period after May 8, 2012, during which someone is a non-resident. For investment properties already owned at the time they left to move overseas, there will need to be an apportionment of the CGT discount for the relevant periods. A similar apportionment applies for periods between the date they return to Australia and a later property sale.
The pension system in jurisdictions such as the United Kingdom - where an estimated 40,000 Australians reside at any given time - can also create adverse tax consequences.
People who have been living and working in London for example, often on a high income, need to pay close attention to their pension savings and how to transfer the funds back into the Australian superannuation system.
Another common situation is when people have changed tax residency and paid tax in another country - they may be able to claim a credit for the foreign tax paid upon their return but only if they have the proper records and structures in place.
Shares and managed funds will also need to be carefully assessed, particularly if someone has become a non-resident during their time overseas. These types of investments are generally treated under the CGT rules as having been sold at their market value at the time that tax residency changed, triggering deemed capital gains or losses.
The good news is there would be no further Australian CGT implications if these assets are actually sold while a non-resident. However, if they are still owned when Australian tax residency is resumed, they - along with any new investments - will be deemed to be re-acquired at that time for their current market value, so any future capital gains or losses on sale would relate only to the movement in value during the second period of Australian tax residency.
There's evidently a lot that needs to be factored into a possible return home but, most importantly, a strategy needs to be in place while an expat is still residing abroad. Waiting until such time that they're scheduled to return will only result in added stress and potential tax exposure that could otherwise have been avoided.
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