The COVID-19 (coronavirus) pandemic has had unprecedented, widespread impacts on worldwide economics and human activities. To prevent spreading the virus across the nation, the Australian Government has swiftly responded through implementing a series of strict policies to address the social, cultural and economic impacts of the COVID-19 pandemic.
At this current point in time, 88% of Australians over 16 are fully vaccinated. With the success of the current vaccine rollout, the Government is expected to reopen Australia's international border in December 2021 to further assist in recovering our domestic economy and supporting all businesses.
Australian citizens and permanent residents returning home from overseas will be taxable on worldwide income from when they return to Australia. Furthermore, tax planning becomes crucial in relation to assets purchased overseas during periods of non-residency as they would generally be caught within the Australian tax “net” once the individual returns to Australia. Income generated from those assets will be taxable in Australia and the disposal of those assets may be subject to capital gains tax (CGT) if disposed after the individual becomes a tax resident of Australia.
There could also be some further implications if individuals have ownership in foreign entities and their move to Australia could also impact the residency status of any foreign companies or trusts. For example, discretionary trusts are tax residents of Australia where any trustee is resident in Australia at any time during an income year. Therefore, if an individual trustee is considered resident in Australia, this could lead to implications for the residency status on their discretionary trust overseas.
Choosing to remain in Australia - Is it time to re-assess your residency position?
Since the border closures, the Australian Taxation Office (ATO) released guidance on the impact of the closed borders on an individual's residency status. Broadly, individuals who were in Australia but were generally non-residents of Australia did not become Australian tax residents if they were in Australia temporarily for some weeks or months due to COVID-19 and they usually live overseas permanently and intend to return there as soon as they were able.
With the re-opening of the Australian international borders, individuals who now choose to remain in Australia should reconsider their tax residency position. The situation can change rapidly, but from the ATO's point of view, if an individual has chosen to stay in Australia (when they are now able to leave), this will point them towards being a resident assuming one of the residency tests has been met.
Changing tax residency
Changing your tax residency status could have substantial income tax and CGT implications. Below are some key points to keep in mind:
Becoming a tax resident:
- Normally taxable on worldwide income (exceptions may apply for certain temporary visa holders).
- For CGT purposes, they are deemed to have acquired their assets which are not considered Taxable Australian property (TAP) at market value.
- Non-TAP assets include real property situated overseas, foreign shares etc.
Ceasing to be a tax resident:
- Normally taxable on Australia sourced income only.
- Certain types of Australian income are taxed at concessional rates (e.g. interest earned in Australia is subject to a 10% final withholding tax).
- CGT event may apply, and individuals are deemed to have disposed of non-TAP assets at market value but can elect for the event not to apply. More implications will need to consider.
- Foreign residents are not entitled to the tax-free threshold, 50% CGT discount, and the main residence exemption.
- Tax planning becomes essential for calculating the potential tax effect if electing not to apply.
MOVING TO NEW ZEALAND - OVERVIEW
Migrants and returning New Zealanders will become New Zealand tax residents if one of the following tests is satisfied:
- Lived in New Zealand for more than 183 days in any 12 months (part of a day counts as a whole day), or
- Holds a permanent place of abode in New Zealand
Transitional Residency Test
Generally, all New Zealand tax residents are taxed in New Zealand on their worldwide income. However, there is a 4 year tax exemption period available for individuals who receive offshore passive income, for example, overseas rental income, overseas interest and dividends or pension.
To qualify as a transitional resident, the taxpayer must either be a new migrant or a New Zealander returning to New Zealand who had not been a tax resident in New Zealand for at least 10 years. During the exemption period, the transitional resident will be taxed only on income derived in New Zealand and also taxed on any overseas employment-related income.
The 4 year window allows individuals to plan and or transfer their investments from offshore to New Zealand.
Dual Tax Residency
Both Australia and New Zealand have double tax agreements (DTA) with various countries. DTAs allocate taxing rights between two countries, and they also contain rules for dual tax residents i.e. situations where an individual is considered a resident of two countries under each of their domestic tax rules. The DTA specifies the circumstances for which a country can impose tax on specific income types or the situations that allow for a tax credit to be claimed in a particular country where the taxes have been paid offshore.
This article is issued as general commentary - please contact us about your specific circumstances.