Death Taxes Catch Australian Expats In Japan
If you are considering taking on an assignment and joining the list of Australian expats in Japan then you better be sure that you keep it short and you stay alive. The Japan government recently made some amendments earlier in the year on how it treats long term foreign residents. It will now levy an inheritance tax of up to 55 percent on their worldwide assets – meaning heirs could be forced to give up their family homes, even if they’ve never set foot in Japan.
Japanese Immigration Control and Refugee Recognition Act
Whilst many working visas such as intra-company transferee and ‘Dependent’ are included in the table below, many foreign people and their family members staying in Japan are likely to satisfy one of the conditions of category A (Heir/Done) or category B (Decedent / Donor) in the following table.
There is relief given to Australian expat residents residing in Japan for 10 years or less out of the last 15 years and who hold a ‘table 1’ visa under the Immigration Act. However, no relief is provided to Australian expats who hold a ‘table 2’ visa who have been residing in Japan for more than 10 years out of the last 15 years (‘Long-term foreigners’); their world-wide assets remain subject to Japanese gift and inheritance tax.
Australian expats who are under a visa in table 2 of the Immigration Act and have maintained a ‘Jusho’(Permanent Place of Residence) in Japan for more than 10 years out of the last 15 years will be considered an unlimited taxpayer. They will be subject to gift and inheritance tax on worldwide assets transferred and as an anti-tax avoidance measure, the proposed reforms also include a ‘look back’ rule for foreign nationals. The transfer of foreign nationals’ worldwide assets will continue to be subject to Japan inheritance and gift tax until they no longer have a Jusho in Japan for 10 out of the past 15 years
To provide some clarity on this, it means that the transfer of assets involving Australian expats who had a main residence in Japan for 10 years or more could be subject to Japan inheritance and gift tax as well as potential transfer tax in another country for up to 5 years after permanently moving out of Japan. Even if the expat no longer holds a Japanese visa, if the assets are located overseas or if the recipient has never resided in Japan before, the transfer of assets involving the expat would be subject to Japan gift or inheritance tax. There is a transition measure in place that exempts foreigners who permanently departed from Japan prior to 1st April 2017 from the 5-year look back rule.
Australian Expats in Japan Potential Tax Obligations
Under the 2017 tax reform, the tax obligations of inheritance/gift tax have been amended as follows:
These changes provide some welcome relief for short-term expats, relieving them of the potential burden of being subject to Japanese gift/inheritance tax on overseas assets. This tax reform should reduce some of the apprehension that some assignees may have had about accepting a position based out of Japan. Overall it should have a positive impact on those considering such a periodical overseas assignment.
Long-term foreigners are the real losers in the tax reform, as the Japanese government seeks to tax them on their worldwide assets up to 5 years after they have permanently departed from Japan. Employers will need to consider possible methods of helping long-term expats manage the potential additional gift/inheritance tax exposure.
Employees on assignments will need to take a moment with their employer to review their current tax equalisation policies to see if any clarification is needed on gift/inheritance tax matters. Furthermore, companies may want to review with their employees what their tax protection policies and the tax ceiling coverage limits are.
This isn’t the first time that we have seen a government introduce a tax to dissuade their long term residents and citizens from moving assets overseas with the intent on reducing or avoiding their tax obligations. In the United States they have what is called the HEART Tax Act which is essentially an exit tax for US citizens and long term residents, like Australian expats, looking to leave the country permanently.
Disclaimer – the above commentary is general in nature and should not be construed as tax or financial advice.