Repatriation Tax Traps: What the ATO Will Be Looking for When You Return to Australia
Repatriating back to Australia can be an exciting yet emotional time in the Australian expat journey. During this busy time, it can be easy to neglect the tax consequences of such a move. However, it’s crucial to understand to avoid unnecessary and often financially significant pitfalls. This article outlines some common examples.
1. Foreign Income
As non-tax residents, Australian expats are accustomed to only having Australian income (if any) being taxed in Australia. However, upon repatriation, Australian tax residents must also include all foreign income, regardless of whether it has been taxed overseas. This includes overseas wages, foreign pension payments (with some exceptions), rental income, dividends, and capital gains for investments built whilst abroad. The ATO requires detailed reporting, and failure to comply can result in penalties and interest charges.
Australia has Double Taxation Agreements (DTAs) with many countries to prevent expats from being taxed twice on the same income. Understanding these agreements is essential to claim foreign tax credits and reduce overall tax liability.
2. Deemed Acquisition
Australian expats may hold ‘non-taxable Australian property’ whilst living abroad. This can include shares, managed funds, ETF’s and other listed assets, which are capital gains tax-free in Australia whilst being a non-tax resident.
When repatriating back to Australia, an event called ‘deemed acquisition’ occurs. This essentially means the value on the date of return is considered the new cost base for these investments. Any gain/loss from this point onwards can generate Capital Gains Tax to the ATO upon sale.
This means that repatriation may be a good time to review these assets, including the ownership structure before any taxable capital gains begin to build again.
3. Foreign Retirement Accounts
Cashing out of foreign retirement accounts upon repatriation can be a complex process, influenced by various international tax treaties, local tax laws, and the specific regulations of the scheme. Therefore, is it crucial to receive professional advice from a specialist in this area before acting.
A foreign pension fund or pension plan might be classified as a ‘Foreign Superannuation Fund’ for Australian tax purposes. This usually only applies to UK pensions and does not apply to most others, including US retirement accounts such as IRA’s and 401k plans.
If classified as a ‘Foreign Superannuation Fund’, some concessional treatment may apply. For example; repatriating Australians who make a lump sum payment can be completely tax free in Australia under certain circumstances, even within 6 months of becoming an Australian tax resident or ceasing foreign employment.
For most foreign retirement accounts not considered a ‘Foreign Superannuation Fund’, it’s likely to be considered ‘Foreign Trust’ where tax may be payable on the earnings component of the fund since it was first established.
4. Cashing Out of Investments & Foreign Exchange Considerations
Before cashing out of any foreign investments, it is essential to understand the tax implications both in the foreign country and upon returning to Australia. Different countries have varying tax treaties with Australia, which can affect how investment gains are taxed.
In addition, currency exchange rates can impact the amount of money received when converting investments back to Australian dollars. Therefore, it’s important to have a strategy for managing FX risk. Additionally, converting foreign currency to AUD after repatriation can trigger tax implications, as the government treats the currency like an investment and taxes any capital gains.
Conclusion: Repatriation tax traps for Australian expats
Repatriating to Australia involves several tax considerations that can significantly impact your financial situation. Understanding and addressing these tax traps can help you plan effectively and avoid unexpected liabilities. By seeking professional advice and staying informed, Australian expats can navigate the complexities of repatriation tax and enjoy a smooth transition back to the lucky country down under.
Contact us to arrange a consultation and build a plan for returning home.
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