Australian Tax Issues for Expatriates & Immigrants Including Superannuation Murray Howlett, Director Taxation Services

→Residents taxed on income from all sources (including accruals taxation) →Non-residents taxed only on Australian sourced income →Temporary residence since July 2006 Basic principles

Tax rates from 1 July 2007 ResidentNon-resident Income Range %Income Range % 0 - 6, , , , , , , , , , , , , , Maximum rate differential = AU$5,100

→ Four tests →Superannuation test →183 day test →Domicile test →Resides test Determining residency

→Superannuation test →Member of specified government superannuation schemes are automatically residents. →Commonwealth Superannuation Scheme & Public Sector Superannuation Scheme. Determining residency

→183 day test →Individuals in Australia for 183 days or more are residents unless they have a “usual place of abode” overseas and have no intention of taking up residence in Australia. Determining residency

→ Usual Place of Abode →Less stringent test than a permanent place of abode →Test covers people who are holidaying in Australia for an extended period of time. Determining residency

→Domicile test →An individual is a resident if they have an Australian domicile. →To avoid residency under the Domicile test, must have a permanent place of abode outside Australia. →Also, must have a clear intention not to return to Australia in the foreseeable future. Determining residency

→Resides test →Based on “ordinary concepts” →Factual indicia include: →intention or purpose of presence →family and business/employment ties →maintenance and location of assets →social and living arrangements Determining residency

→ A temporary resident is a person: →Holding a temporary visa granted under the Migration Act 1958; →Who is not an Australian Resident within the meaning of the Social Security Act 1991 (SSA); and →Whose spouse is not an Australian Resident under the SSA. Temporary residents

→ An Australian Resident under the SSA is: →A person who resides in Australia; and →Is either of the following: →An Australian Citizen; →A holder of a permanent visa; or →A Special Category Visa holder who is a “protected SCV holder” – broadly, New Zealanders residing in Australia on 26 February 2001 Temporary residents

→ Concessions available: →Foreign sourced income (exept employment income) is treated as non-assessable non-exempt income; →CGT only applies to taxable Australian property; →The CFC, FIF and transferor trust rules do not apply; and →Interest paid to a foreign lender may not be subject to withholding tax. Temporary residents

→ Australian income taxed at resident rates → 457 visa a common trigger Temporary residents

→Residency change has tax ramifications →Can occur on: →Non-resident → resident →Temporary resident → resident →Main impact is on investments and offshore structures →Capital Gains Tax (“CGT”) Becoming a resident

→Important concept: Taxable Australian Property (since December 2006) →Includes Australian real estate and certain business assets →Real estate can be held directly or indirectly →No impact when commencing residency Becoming a resident - CGT

→Foreign investments →Consider whether to transfer to tax-effective structure before commencing residency →Ownership transfer after residency = CGT Becoming a resident - CGT

→CGT implications when commencing residency Becoming a resident - CGT Taxable Australian Property? Effect of commencing residency CGT if sold before recommencing residency? No effect  Deemed acquisition at market value 

→Temporary residents - no tax implications →“Normal” residents face potentially complex, costly rules →Several potential traps: →CFC/FIF/FLP measures →Tranferor trusts →Foreign trusts & s99B →Foreign tax credits Overseas income

→Australia’s attribution measures: →Controlled Foreign Company (“CFC”) →Foreign companies which an Australian taxpayer controls (broadly, > 40% ownership) →Foreign Investment Fund (“FIF”) →Any foreign entity in which an Australian taxpayer holds an interest →Foreign Life Policy (“FLP”) →Potentially includes life assurance, foreign superannuation, and foreign pension funds Overseas income

→Mainly impacts companies with passive investments →Generally, does not apply to: →Active businesses (> 95% of income derived from genuine business activities) →Companies resident in: Canada, France, Germany, Japan, New Zealand, United Kingdom, and United States of America (although certain types of income may still be targeted) CFC attribution

→Where a CFC exists, and attribution applies: →Australian resident interest-holder is taxed on their attributed proportion of the CFC’s profits →Taxed even if profits not actually paid to investors →No double tax if attribution applies and profits later paid e.g. by a cash dividend →Determination of attributable amount is complex and costly CFC attribution

→Targets offshore investment vehicles that are not CFCs but in which an “interest” is held →E.g. foreign trusts controlled by a specialist offshore trustee →Similar outcome to CFC rules FIF attribution

→Technically part of the FIF regime →Different calculation methods →Practically, the FLP measures most often impact retirement funding FLP attribution

→Interests valued < AU$50,000 →Complying superannuation entities →Employer-sponsored superannuation equivalents →Widely-held, listed companies →Lloyd’s members’ Premium Trust Fund income FIF/FLP: some exemptions

→Non-resident trusts to which value has been transferred by way of property and/or services →If transferor were non-resident when the transfer occurred the rules will not apply unless they also retain control of the trust →Broad definition of control, includes de facto control Transferor trusts

→Applies only to trusts →Taxes distributions made at any time during an income year. →Does not apply to distribution of corpus →Goes beyond the FIF de minimus rule The s.99B trap

→Individual resident in Australia from March 07 →Holds Jersey-based investment trust →Transfers ownership to individual names before commencing residency →Ownership transfer is a distribution within s.99B’s ambit →Individual is taxed despite distribution being foreign income received by a non-resident s.99B: practical application

→Consider alternatives: →Take advantage of Temporary Resident concessions? →Defer commencement of residency to the next financial year? s.99B: practical application

→“Normal” residents receiving un-attributed foreign income are taxed in Australia →Income may have already been taxed in country of origin – e.g. withholding taxes →Australia may allow credit for the foreign tax paid “by the taxpayer” →No credit for underlying corporate taxes Foreign tax credits

Superannuation →Attractive tax environment →Substantial re-write of applicable rules effective July 2007

Superannuation →15% tax on earnings and some contributions →10% tax on capital gains if asset held >12 months →0% tax to extent monies are dedicated to paying pensions

Superannuation →Funds in superannuation are for retirement purposes →Cannot access until age 55 or older →After age 60, withdrawals are tax free →Non-citizens can withdraw on departure from Australia with a 30% tax penalty

Superannuation →Therefore, if paying pensions to someone over age 60 – no tax is payable

Superannuation →Limitations: →Stringent regulatory requirements →Cannot borrow to fund investments →Cannot invest in / loan to related entities →Subject to exceptions, cannot acquire assets from members

Superannuation →Contributions: →$50,000 per person p.a. tax deductible contributions →$150,000 per person per annum undeducted contributions →Additional contributions attract excess contributions tax (effectively 46.5%)

Superannuation →Foreign retirement funding: →Individuals with existing overseas retirement funds can transfer their balances into Australian superannuation without penalty if the transfer is done within 6 months of commencing residency.

Superannuation → Types of funds →Estate planning implications must be considered

Australian Tax Issues for Expatriates & Immigrants Including Superannuation Murray Howlett, Director Taxation Services