What you need to know when migrating to Australia
This information is designed to provide an overview of some of the issues that should be considered when transferring wealth into Australia or migrating from overseas including; Tax Residency, Withholding Tax, Tax File Number and more.
There are a number of issues that determine tax residence depending upon the type of taxpayer (individual, company etc), whether Australia has a double tax agreement with the country of origin, the taxpayer’s intention, family ties, domicile and permanent place of abode.
If a taxpayer is a tax resident of Australia, they are taxed in Australia on their worldwide income (usually with a credit for any foreign tax paid on that income). Temporary tax residents may exclude foreign sourced income, other than income related to employment or service income, from Australian taxation. A non-resident taxpayer will only be taxed in Australia on Australian sourced income.
Certain passive income – interest, dividends and royalties paid to non-residents is subject to withholding tax which is a final tax. If that is the only income of the non-resident taxpayer, there is no requirement for them to lodge an Australian income tax return.
A non-final withholding tax of 5% is imposed on payments made to non-residents for construction and related activities.
In addition, Australian resident trustees are required to pay tax in respect of trust distributions to a non-resident beneficiary. However, in this case, the withholding tax is not a final tax but rather a credit against the final income tax liability.
TAX FILE NUMBER
If an entity becomes an Australian resident, they will be required to apply for a Tax File Number to lodge a tax return or prevent withholding at 47% from certain payments such as salary and wages, dividends and interest. Individuals will generally be required to lodge an Australian income tax return if they earn more than $18,200 during the tax year or wish to obtain credits or refunds for tax withheld. Non-resident individuals and companies (whether resident or not) are taxed from the first $1 of income earned and will also require a Tax File Number.
THIN CAPITALISATION RULES – LIMITING INTEREST DEDUCTIONS
Australia has rules which may cap any tax deduction for interest on borrowings where the entity is too highly geared. Very broadly, if the entity’s debt to equity ratio exceeds the safe harbour of 1.5:1 (ie $6 of debt for every $4 of equity), then tax deductions may be denied for any interest that relates to debt in excess of this ratio. Higher gearing ratios are potentially available under alternative tests but require more detailed information.
These rules can apply to foreign residents investing into Australia and Australian residents investing overseas. However, the rules do not apply where the total interest deductions are less than $2,000,000 per annum.
For example, assume a foreign investor seeks to purchase a commercial office tower for $80 Million and provides $24 Million (30%) in cash with borrowings of $56 Million from the bank at 6% (ie $3.36M interest pa). As the annual interest expense exceeds $2,000,000 and the debt to equity ratio is more than 1.5:1 the interest expense which exceeds this ratio may not be allowable as a tax deduction against the rental income received.
FOREIGN INVESTMENT REVIEW BOARD (FIRB)
Australia places certain restrictions on the amount and types of investments that non-residents can acquire in Australian assets. The policy behind this is to ensure that foreign ownership benefits Australia. For example, non-residents are generally prohibited from acquiring second hand residential real estate. There are also certain notification requirements when acquiring new real estate. Accordingly, if non-residents are seeking to acquire real estate, they should ensure any contract signed is conditional on FIRB approval. Restrictions and notification is also imposed on non-real estate assets, so investors should seek advice before committing to any acquisition.
AUSTRALIAN INVESTMENT STRUCTURE
There are a variety of ways to invest in Australia. For example, an individual can invest in his / her own name, through a trust, through a company, through a superannuation fund or a combination of these. We would be happy to discuss the best investment structure for your circumstances.
CONTROL OF OVERSEAS ENTITIES
If an Australian resident taxpayer (including a recent migrant) controls an entity (e.g. a company or trust) overseas, there are various rules (including Controlled Foreign Company rules) that can attribute the income of the company or trust to the Australian resident. This means the investor may pay Australian tax on that income even though it is not received.
Example: An Australian resident owns 100% of the shares of a Hong Kong company which owns passive investments. Any income earned by that Hong Kong Company may be assessable to the shareholder in the year it is earned by the company, even if no dividends are paid. Subsequent dividends should then be exempt from tax in Australia.
Different rules apply depending on the type of overseas entity, the ownership percentage and the underlying business / investments of the entity.
Individuals migrating to Australia that wish to move foreign pension or superannuation entitlements into Australia should take action within six months of becoming a resident as they may be able to move the proceeds without paying tax on the accumulated earnings in Australia. Moving superannuation monies outside of the six month ‘window’ may cause the Australian beneficiary or receiving superannuation fund, to have to pay tax on earnings deemed to have accumulated since the migration. Accordingly, it is critical to establish the ‘lump sum value’ of the fund as at the date of migration.
The Australian Government also places limits on amounts that can be contributed to a retirement fund. Transfers from foreign pension funds to Australian complying superannuation funds count towards an individual’s contribution limits, so care should be taken to ensure a liability for excess contributions tax does not arise. Advice should be obtained either prior to, or immediately on arriving in Australia.
Mazars has assisted many clients who have migrated to Australia and those establishing businesses and investments overseas to establish a tax efficient structure and ensure all relevant compliance requirements are taken care of. In addition, Mazars has a worldwide network of connections and can direct clients to accountants and lawyers to obtain relevant advice overseas.
Should you have any queries or would like further information, please contact your usual Mazars advisor, or alternatively:
Brisbane – Jamie Towers
Melbourne – Michael Jones
Sydney – Gaibrielle Cleary
+61 7 3218 3900
+61 3 9252 0800
+61 2 9922 1166
Please note that this publication is intended to provide a general summary and should not be relied upon as a substitute for personal advice. We Recommend that professional up to date advice specific to one’s circumstances be sought before making any decisions in this regard.