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Thousands of Australian expats waiting to return home amid the coronavirus pandemic have been urged to give thought to their tax affairs to avoid a hefty tax bill on return, a mid-tier firm has warned.
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Returning Australian expats cautioned on tax traps
08 January 2021
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HLB Mann Judd tax partner Peter Bembrick believes thousands of returning Australians will need to give consideration towards a range of tax issues, given there are tax nuances depending on the jurisdiction resided in and the length of time spent overseas.
Around 40,000 Australians are currently registered with the Department of Foreign Affairs and Trade to return home.
“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,” said Mr Bembrick.
“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, said Mr Bembrick, chair of the HLB Mann Judd Australasian tax committee.
“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,” said Mr Bembrick.
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“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 8 May 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.”
Mr Bembrick also noted that the pension system in jurisdictions such as the UK – 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,” he said.
“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.”
Consideration around shares and managed funds will also be required, particularly if someone has become a non-resident during their time overseas, Mr Bembrick stressed.
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,” said Mr Bembrick.
“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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