Returning to Australia - the tax nerd’s view

This article was published in the Sydney Morning Herald, The Age and Brisbane Times on 26 January 2022.

With Australia’s international borders about to open to returning citizens and visa holders, it is worthwhile considering the taxation consequences of coming, or returning, to Australia. Six points stand out as most likely to trip taxpayers up.

First, individuals need to consider their tax residency. Generally, anyone coming to Australia and expecting to live here for at least six months in a permanent location will be considered a tax resident, regardless of their visa status.

However, those on temporary visas (and whose spouse is not an Australian citizen) may be temporary residents. This status comes with certain advantageous tax treatments when compared to Australian resident taxpayers who are not temporary residents. Temporary residents are only taxed in Australia on Australian sourced investment income, and are not subject to the ‘attribution’ taxation regimes – more on that below.

Second, residents of Australia for tax purposes are subject to capital gains tax on all of their worldwide assets (other than those assets which are exempted by the provisions more generally – such as a taxpayer’s main residence).

Where a taxpayer moves from being a non-resident to being a resident, special rules apply in relation to setting the cost base of any assets owned at that time. In essence, a non-resident who becomes a resident is taken to have acquired all of their assets (other than Australian real estate) for market value, at the time that they become a resident.

Third, recent arrivals need to consider the tax residency of overseas entities. Usually, entities formed overseas are not residents of Australia for income tax purposes. However there are certain circumstances where that is not the case.

A foreign company may be a resident of Australia if its central management and control is situated in Australia. A foreign trust will be a resident of Australia where any one of its trustees is a resident of Australia. Just like Australian resident individuals, resident entities are potentially taxable in Australia on their worldwide income, but there is no temporary resident rule for entities. So if a taxpayer arrives in Australia and is in control of a foreign company or trust, they may bring the foreign entity into the Australian tax net.

Fourth, even where the foreign entities do not become Australian residents any cash received from the foreign entity is likely to be assessable to the Australian recipient – even if it is accounted for as a loan in the entity’s accounts. For this reason it is worthwhile considering payment of dividends or distributions before arriving in Australia.

Fifth, Australia operates an attribution system of taxation for certain offshore entities in which Australian resident taxpayers hold an interest. The attribution tax system, if it applies, has the effect of taxing the income earned by the foreign entity in the hands of the Australian resident taxpayer who owns an interest in the foreign entity. The existence of these entities needs to be declared on Australian residents’ income tax returns.

Finally, where an Australian resident taxpayer holds loans or other financial instruments, such as bank accounts, denominated in a foreign currency, any realised currency gain or loss will be treated as assessable income or a deductible loss for Australian income tax purposes, unless the account is held purely for private purposes. A realised gain or loss arises each time an amount is converted from one form into another, even if the amounts are not received in Australian dollars. Therefore, the mere use of funds held in a foreign currency bank account will give rise to a foreign exchange gain or loss.

These rules are terribly complex. Whether an individual is coming home, or coming to Australia for the first time, knowing the tax outcomes in advance is vital.

Mark Molesworth is a tax partner at global accounting and advisory firm, BDO in Australia.

Please reach out to a BDO tax adviser if you would like to discuss the impact of tax residency rules or other taxation matters.