Employee Share Schemes: Overview of Tax Concessions and Considerations

Employee Share Schemes (ESS) involve an employer giving employees a benefit through the provision of shares in the company that the employee is working for.

This can include giving employees the ability to purchase shares at a discounted price and giving employees options to buy shares in the future. 

While employees are often eligible for tax concessions on the benefit they are given, it is important to be aware of the potential tax consequences that can occur. This is particularly true in situations where a taxpayer can be assessed for taxes on hundreds of thousands of dollars of assessable income, without the cash income being available to them to pay for those taxes.

In essence, unless the ‘start-up’ concessions apply, you are required to include the ‘discount’ on the shares you acquire, with the discount determined by comparing the price you pay for the shares to the market value.

This discount is a benefit that is included as assessable income in your tax return. The terms of when the market value is measured, and whether tax concessions may apply, vary depending on the exact nature of the ESS.

Basic example:

Employer company issues you shares that are worth $100,000
You only pay $80,000 for the shares.
This means you received a discount of $20,000.

You are required to include that $20,000 benefit as assessable taxable income in your income tax return.

Tax Concessions

For concessional tax treatment both the general condition and specific conditions of the particular ESS must be met.

The general condition is: 

That after acquiring your shares through the ESS, you must not:

  • Hold over 10% ownership of the company
  • Control more than 10% voting rights in the company

(Including ownership/rights held by associates and additional ownership/rights that would be held if any other ESS interests were exercised). 

The specific conditions depend on the type and particulars of the ESS that the employer offers.

Potential tax concessions include:

  • Rollover relief
  • Start-up concession (where the employer is a start-up company)
  • $1,000 discount on taxed-upfront schemes (explained further below)
  • Deferred Taxing point (discussed further below)

Taxed-Upfront Scheme

In a taxed-upfront scheme the employee is taxed on the discount that they receive in comparison to the market value at the time of acquisition. In certain situations a very small benefit of $1,000 is available.

Provided your taxable income is under $180,000 (and you meet the general condition ownership/voting rights test), then shares that are acquired under the taxed-upfront scheme are eligible for a reduction in assessable income by up to $1,000.

For example:

Jack has a total taxable income of $50,000.

His employer provides him with $999 worth of shares in the employer company. After receiving these shares Jack will have less than 1% ownership/voting rights in the company.

The $999 value of the shares is required to be reported as assessable income in Jack’s income tax return. However, as he meets the concessional requirements he is able to apply the discount and will not be taxed on the $999. 

If Jack was provided with $1,999 worth of shares then he would be able to discount $1,000 of those shares and only be assessed on the remaining $999.

Tax-Deferred Scheme

Under a tax-deferred scheme the timing of when the employee is taxed on their discount is deferred to a specific “taxing point” in the future, rather than being the time they initially receive the benefit. 

There are a number of different types of tax deferred schemes and specific conditions must be met for each arrangement. 

When it comes to deferred taxing schemes it is important to follow the specific terms of the actual scheme itself, as this will play a big part in determining when the deferred taxing point occurs. 

In general, the deferred taxing point is the earlier of the following events: 

  1. The time when there is no risk of the ESS interest being forfeited and there are no restrictions on selling the shares.
  2. Where the interests are rights (options), usually the point when the employee exercises those rights and there is no risk that they can forfeit the share and no restriction stopping them from selling that share. 
  3. When the employee ceases employment with the employer who provided the ESS.
  4. 15 years after the acquisition of the ESS interests.

However, if an ESS interest is disposed of within 30 days of the deferred taxing point, then the date of the disposal becomes the taxing point instead.

For example:

Max’s taxing point occurs on 1 March 2020, when he exercises his rights and acquires shares at a $100,000 discount compared to market value. 

On 15 March 2020 Max decided to sell those shares. By this time the market has dropped and he sells his shares for only $80,000 more than he paid for them.

If he was required to include the discount at the point of acquiring the shares he would have to declare the $100,000 discount as  income in his tax return and then declare a capital loss of $20,000 from the sale 15 days later. 

However, because he has sold them within 30 days of the deferred taxing point, he will only need to include the $80,000 discount that applied at the time of sale. 

However, if Max hangs on beyond the 30 day window and the share price drops he will get a capital loss but will be stuck paying income tax on the higher value.

Capital Gains Tax

Deferred Taxing Schemes

An ESS interest that is acquired under a deferred taxing scheme is taken to have been “re-acquired” immediately after the deferred taxing point.

For example:

Wilma is issued with options to acquire shares in her employer’s company on 1 January 2018. 

On 1 May 2020 Wilma exercised those options and acquired shares with a market value of $500,000. She only paid $300,000 for the shares, which means she included $200,000 of assessable income in her 2020 tax return for the discount realised at her deferred taxing point. 

On 1 December 2020 Wilma sells those shares for $600,000.

The $500,000 market value is her cost base, which means she has realised a $100,000 capital gain. 

Since 1 May 2020 is the acquisition date, she has not held the shares for over 12 months and is unable to apply the 50% CGT discount to that $100,000 gain. This means she will need to declare $100,000 in capital gains in her 2020 tax return. 

Forfeiture or Loss of ESS Interests

If an ESS interest is forfeited or lost then there are provisions to ensure that a person is not stuck with a tax bill, however the rules are highly technical and if you are in this position you should seek further tax advice. but they do not necessarily operate as some people may expect.

Being Prepared with ESS Interests

Managing your tax in relation to ESS interests can become complex and can result in cash flow difficulties.

Understanding and accessing any eligible tax concessions can also help reduce the tax burden. 

Because ESS discounts are a tax assessable benefit that is provided in the form of discounts on acquiring shares in the employer company, there is no cash income seen by the employee at the time the income becomes assessable to them. 

Since ESS discounts can see individual taxpayers with hundreds of thousands of dollars in assessable income, it is important that the taxing points are adequately prepared and planned for. 

In the event of termination of employment, this can be a double edged sword. 

Since employment termination is one of the triggers for determining the deferred taxing point, and loss of employment can also mean loss of income, some taxpayers can find themselves being assessed for high levels of tax, with low levels of cash to cover their tax requirements.

It is important to talk to your tax and finance specialists when receiving ESS interests, so you can be aware of contingencies and make necessary plans for tax and cashflow considerations. 

Residency in a Global Pandemic: Advising the Returning Australian

Our principal, Matthew Marcarian, was recently published in Australia’s leading tax journal, Taxation in Australia (run by the Tax Institute), with his article titled “Residency in a global pandemic: advising the returning Australian“.

In his article Matthew breaks down the intricacies of the rules regarding tax residency for expats who have returned to Australia during this global pandemic.

If you are an expat who has returned to Australia due to the pandemic you may have to seek advice on your tax position.

Matthew has over 20 years of international tax experience advising clients on cross border tax matters. His depth of knowledge in this area will give you the clarity you need to understand your tax obligations as a result of returning to Australia.

Contact us today to discuss your residency status.

Moving to Singapore: Understanding the Tax Differences

As an Australian moving to Singapore there are a number of differences that you should be aware of in relation to taxation.

Having an idea of what to expect will help you to organise your move and understand your tax position so that you are more financially prepared.

Taxation Basics

The most fundamental difference between Australia and Singapore is that in Singapore there is no CGT in Singapore and they do not generally tax investment income. Singapore also has a much lower rate of tax in their highest tax tier, which is one of the appeals for Australians considering a move to Singapore on a permanent basis.

Other key differences between Australia and Singapore’s taxation system include: 

  • Financial year
  • Terminology used
  • What constitutes allowable deductions
  • Which income is taxed
  • How tax is paid. 

For instance, while you are taxed on your worldwide income as an Australian resident, Singapore only taxes residents on income that is actually sourced in Singapore. Read on to see some of the basic differences in taxation from an employment perspective.


AUSTRALIASINGAPORE
Financial Year1 July to 30 June1 January to 31 December
Taxation BodyAustralian Taxation Office: ATOInland Revenue Authority of Singapore: IRAS
Individual Tax RateProgessive rate from 0% to 45% for incomes exceeding AUD$180,000.Non residents are taxed a minimum of 15% and up to 45%.Progressive rate from 0% to 22% for incomes exceeding SGD$320,000. Non residents are taxed between 15% and 22%.
Taxed onTaxable Income that is calculated by taking in your worldwide income less allowable tax deductions.“Chargeable” Income that is sourced in Singapore. 

Employment Taxation

As an Australian employee you would be familiar with the PAYGW system.

Pay As You Go Withholding ensures that your estimated tax is paid directly to the ATO through the year. Then, at the end of the year, you lodge your tax return and are either required to pay any additional tax owed, or are refunded any excess tax that the ATO received through the year.

Singapore is the opposite. All of your wages will be paid to you in full as an individual. Then you are required to pay your income taxes in full at the end of the tax year. This means you need to be careful to track and keep aside money to pay your tax bill. In your second year as a resident of Singapore you can pay your tax for the first year using a monthly instalment system.

You will also be used to working in a system where you can claim work related deductions to help bring your tax obligations down. In Australia any work expenses that your employer does not cover can be paid for yourself, then claimed as a deduction that reduces your taxable income. Singapore does not allow employees to claim tax deductions. This means you will want to be extra sure that your employer is covering your work related costs.

Another system you will be familiar with as an Australian worker is Superannuation. Your Australian employer is required to make superannuation contributions to your superannuation fund in order to fund your eventual retirement. The accrued superannuation balance is only able to release your superannuation to you in limited situations, such as retirement.

Singapore also has a retirement fund, the Central Provident Fund (CPF). However, this fund does not just serve as a retirement cash payout. Instead, it is intended to help save for housing and healthcare in retirement. Unfortunately for Australian expats, the CPF is not typically available. This means you may need to continue to build an Australian superannuation fund to plan for your own retirement.


AUSTRALIASINGAPORE
Tax on WagesManaged through the PAYGW system where tax is withheld by your employer and you typically receive a small refund/have a small payable to adjust the total tax required for your actual income over the year. You are paid your total wage income. When you lodge your tax return you are required to pay your income tax obligations in full at that time. 
Work DeductionsYou can claim deductions as an employee. You cannot claim deductions as an employee to bring your taxable income down. 
Super FundsEmployees have Superannuation Guarantee payments paid into their personal super fund at 9.5% of their wages, with capped limits.

All employees over 18 and earning more than $450 a month are paid superannuation. 

Temporary residents or visitors who depart Australia can have their Australian Superannuation paid out or rolled into an overseas fund. If this isn’t organised within 6 months their superannuation money will be transferred to the ATO as unclaimed super money. 
Singaporeans and permanent residents are covered by a Central Provident Fund (CPF) that helps provide for retirement, including housing and healthcare. While individuals contribute to their own fund, employers contribute 17% of wages paid, loved ones typically contribute, and the government also provides top-ups and incentives. 
 
Only Singaporeans are eligible for the CPF. This means Australian expats may need to maintain a local Australian super fund instead, bearing in mind that contributions could be subject to tax in Singapore. 

Other Taxation Matters

Employment income is not the only source of income. While Australians are taxed on a range of income types, the Singapore tax regime is not the same.

Capital Gains Tax

Australians are required to pay tax on the sale of most capital assets, and in some situations they are even taxed on the deemed realisation of assets. Certain concessions, such as the 50% discount where the asset has been held for more than 12 months, can be applied. Singapore does not have a capital gains tax regime at all.

Goods and Services Tax (GST)

GST is a tax that applies in both Australia and Singapore on the sale of goods and services. GST is 7% in Singapore, whereas it is 10% in Australia. However, this doesn’t necessarily mean you end up paying less GST in Singapore overall. While Australia has a large range of supplies that are exempt from GST, including essential goods and services, Singapore only has a limited number of exempt supplies.

Investment Income

In Australia you are taxed on investment income at your own individual marginal tax rate. However you are also typically able to claim tax credits for any tax that the company has paid on income that is distributed to you.

In Singapore a company pays taxes on its own chargeable income. This is the final tax paid, and investment income that is passed on to shareholders is not taxed in their hands. (If the investor is a non-resident, they would only be liable for non-resident taxes in accordance with their country of residence).

Running a Company

If you plan to run a company in Singapore there are a wide range of requirements that you need to understand in terms of setting up and running the company. Not the least of these is that, from a taxation perspective, the first three years of operation are tax free for the first $100,000 of chargeable income. After this the company tax rate is only 17%. In Australia the company tax rate is currently 30%.


AUSTRALIASINGAPORE
Capital Gains TaxTaxable Income. Capital Losses are quarantined and can only be offset against other capital gains.

If you cease to be an Australian resident you will be deemed to have disposed of any GST assets that are not Australian real property for Australian tax purposes. 
No Capital Gains tax. 
GST10%
There are an extensive number of exemptions including financial supplies, residential rent, and basic essentials such as raw food and medicine. 
7%
Exemptions include financial services, digital payment tokens, sale & lease or residential property, and important and supply of investment precious metals. 
Investment/Dividend IncomeIndividuals declare the cash and franking credit that they are distributed. The franking credit counts as a tax credit and the ATO will refund any difference between the franking credit (which is at the company tax rate) and the individual’s tax rate, or the individual is required to pay additional tax if their marginal tax rate is higher than the company tax rate. Taxes paid by companies are the final taxes chargeable on income. Shareholders are not taxed on dividends they receive from resident companies. 
Company Tax Rate30%.
Small business entities (under 2 million turnover) are taxed at 28.5%.
17%.
For the first 3 years, newly incorporated companies are given a full tax exemption for the first $100,000 of chargeable income. 

Tax Differences between Australia and Singapore

While there are some commonalities in the foundation from which the Australian and Singapore systems have grown, there are a lot of differences. These differences range from terminology to timing, what income is taxed, at what point it is taxed, and the tax rate.

As outlined above, there is an appeal in being taxed under the Singapore regime. For instance, the tax rates are lower, there is no CGT, and investment income is not typically tax in the hands of the individual it is distributed to. If you are considering making this move, ensure that you fully understand your personal situation and have a good understanding of whether you would be a Singapore tax resident. It is always important to speak to a professional advisor for a more detailed assessment of your specific situation. 

Tax Residency issues amid COVID19 Pandemic

Australian expats who have been forced back to Australia because of the COVID19 pandemic, need to understand what returning to Australia might mean for their tax position.

The latest advice from the ATO on these issues can be accessed here.

Essentially, the ATO’s view is that if you are a non-resident of Australia and you are temporarily in Australia for some weeks or months because of COVID19, then you will not become an Australian resident for tax purposes provided that you usually live overseas and intend to return as soon as possible.

However, the ATO guidance acknowledges that tax residency issues can become more complicated if the non-resident ends up staying in Australia for a lengthy period or does not plan to return to their overseas country of residency. The ATO guidance also acknowledges that there will be unique situations with a range of potential tax outcomes. 

It is an important time to recognise that under Australian tax law a person is considered to be a resident of Australia in accordance with ordinary principles, essentially if they are dwelling permanently or for a considerable time in Australia or if they have their settled or usual abode here. 

We think a helpful summary of the state of the law of residency has been provided by Justice Derrington in Harding v Commissioner of Taxation [2018] FCA 837 in which he said: 

“Necessarily the question of where a person resides is a question of fact (and, perhaps, of degree per Dixon J in Miller at 103), the conclusion of which is reached by a consideration of all of the person’s circumstances.  Those circumstances will be directed to ascertaining whether a person has a physical presence or retains a “presence” in one location whilst at the same time maintaining an intention to reside there.  The consideration also involves identifying the person’s “habits and conduct within the period”, however, that will include a consideration of the events occurring prior to and subsequent to the relevant period as illuminating the relevance of the events in the relevant period.”

183 Day test of limited relevance

It is also important for Australian expats to be aware that the so called 183 Day test is not the main test, but a subsidiary test which is mostly aimed at determining whether a foreigner who might be in Australia for more than 183 days during the income tax year is a resident.

The 183 Day test only works in one direction. There is a misunderstanding in certain expatriate circles that a person cannot be a resident of Australia unless they have been in Australia for more than 183 Days. That is incorrect. The key test has always been whether the person is residing in Australia in accordance with ordinary concepts and a range of indicators have been considered by the Courts over 150 years to determine whether someone is residing in a country. 

Claiming foreign tax credits on capital gains made from overseas investments

Burton’s case [Burton v Commissioner of Taxation [2019] FCAFC 141] has set an interesting precedent for claiming foreign tax credits on capital gains made from the sale of overseas investments in the United States.

In simple terms, if you own a capital asset in the USA, and you are taxed in the US the capital gain, then you may not be able to claim all the US tax paid as credit in Australia.

The reason for this is because the ATO will only allow you to claim the foreign tax offset that relates to the portion of taxable discounted capital gain being declared in your Australian tax return. The Australia-US Double Taxation Agreement will not assist you in this regard.

Since Burton’s application to appeal the decision was denied on 14 February 2020, the position under the law has been clarified in a situation where an Australian taxpayer makes a capital gains on US real estate (or other assets which are considered effectively connected with the USA).

While some articles claim that this case means the ATO is clawing back the 50% discount on Australian residents with foreign held assets, this isn’t strictly true. It’s actually that not all of the US tax paid would be creditable here.

Example – Comparing the net tax effect on an Australian tax resident selling capital assets owned under different tax regimes. 

To understand the situation let’s consider the example of Jack, an Australian taxpayer who sells a long-term capital asset held in the US, NZ and Australia.

The US taxes capital gains in full, however they tax the capital gain at a different tax rate. NZ does not tax capital gains. Including NZ as a comparison makes it clear that the ruling from Burton does not claw back the discounted 50% capital gain.

For our purposes Jack is an Australian tax resident.

Let’s assume:

  • For ease of calculations Jack makes a capital gain of $1,000,000 on the sale of each of the following assets.
  • Jack’s first $1,000,000 capital gain is on an asset that he held in the US for more than 12 months. While the US taxes capital gains, it applies a concessional tax rate for assets held over 12 months. For ease of calculations we will assume the top concessional rate of 20% applies.
  • The second $1,000,000 gain is on an investment that was held in NZ for more than 12 months. NZ does not tax domestic capital gains.
  • Finally, Jack also sells $1,000,000 investment in Australia, which he has also held for over 12 months. Accordingly, Jack will only be taxed on 50% of the Australian capital gain. For ease of calculations we will assume the flat top marginal rate and Medicare levy applies, 47%.
  • Jack sells all 3 investments in the same financial year for a capital gain of AUD$1,000,000 each.
  • For ease of calculations Jack has no capital losses to apply and he is able to apply the 50% CGT discount in full when preparing his Australian tax return. 
    US owned Asset (AUD$) NZ owned Asset (AUD$) Australian owned Asset (AUD$)
  Capital Gain $1,000,000 $1,000,000 $1,000,000
a. Foreign Taxable gain after applying any discounts for assessing tax on capital gains $1,000,000 0
b. Foreign tax paid
US 20%
NZ NA on capital gains
$200,000 0
c. Australian Capital Gain $1,000,000 $1,000,000 $1,000,000
d. Portion of capital gain eligible for discount in Australian assessment $500,000 $500,000 $500,000
e.Net taxable Australian gain to be taxed (c – d)$500,000$500,000$500,000
f.Australian tax at $47% (including Medicare levy)$235,000$235,000$235,000
g.Net foreign tax paid that is eligible to be claimed as an offset against the Australian taxable portion of the capital gain US: b x 50%
All others: b
$100,0000
h.Australian net tax payable (f – g)$135,000$235,000$235,000
Total foreign & Australian tax (b + h)$335,000$235,000$235,000
Global Tax Paid 33.5%23.5%23.5%

As you can see from this example, Jack ends up paying more tax on the US asset. This is because the US taxes the full gain at a discounted rate. Australia then taxes half of the gain at the Australian tax rate and only allows the 50% portion of the foreign income tax credits to be applied.

Conclusion

The net impact of applying this precedent is that Australian taxpayers will end up paying up to 33.5% income tax on capital gains made on US investments that are held for more than 12 months. This is in contrast to the 23.5% income tax that they will pay on capital gains that are limited to only paying Australian income tax.

Non-Residents Can No Longer Claim The CGT Main Residence Exemption

On December 5th 2019 the contentious law denying non-residents the Capital Gains Tax (CGT) main residence exemption was passed.

This means that the update we previously provided on this legislation is still in force. If you are no longer an Australian resident, or are permanently moving overseas, and you still own a property that was your main residence in Australia, then you need to know what this means.

Existing Non-Residents with Main Residence Property In Australia

Did you purchase your Australian main residence before 9 May 2017? If you did then you only have until 30 June 2020 to sell your property if you want to claim the CGT main residence exemption.

After this date non-residents will not be able to claim the exemption. Basically this means you will be assessed on the full capital gain.

On the other hand, if you plan to return to Australia in the future then you may still be able to claim the exemption. If this is the case then you can wait to sell your former main residence once you return to Australia. Once you are a tax resident again then you will be assessed as an Australian tax resident. This means the law will again allow you to claim whatever main residence concession you would ordinarily be entitled to. Given the rise in Australian property prices over the last decade, this change could see an Expat caught unaware, being exposed to capital gains tax of several hundred thousand dollars (if not more), depending on the situation.

For a more detailed look at what the law entails please refer to our “Update on CGT Main Residence Exemption for expats” post.

Seek Tax Advice

The change in law has the potential to significantly impact non-residents. While you can get a general overview from the information provided in our blog, it is important that your specific situation be assessed by a tax specialist. This is important because your individual situation will be dependant on many variables that can’t be adequately covered in a general blog. A personalised assessment will ensure that you understand your options and can make the best decision for your situation.

Update on CGT Main Residence Exemption for expats

Update: Since publication of this post the Bill has passed and is now law. The law passed is the Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures) Bill 2019. ) It was passed with no further amendments. This means non-residents will not be able to claim the CGT main residence exemption from 1 July 2020. The scenarios below currently apply under the new law.

For the past few years Australian expats have been waiting to see if the axe will drop on their ability to claim the capital gains tax (CGT) main residence exemption.

The current main residence exemption allows individuals to claim an exemption on paying CGT when they sell the home that they have been living in. Under the normal CGT rules, an individual may continue to claim their former home as their main residence for up to 6 years of absence. This applies unless and until the homeowner purchases and moves into another house that becomes their main residence in Australia.

The new measure has been in the works since the 2017-2018 budget, with non-residents potentially becoming ineligible to claim the main residence exemption since May 9th 2017.

Main residence exemption removed for non-residents in new Bill

The shortcomings of this bill have been previously highlighted and continue to be of concern. After the Bill lapsed in April 2019, we have waited to see whether it would reappear. The hope was that a new Bill would be rewritten in a way that was fairer to taxpayers.

Unfortunately it was reintroduced on the 23rd of October 2019 in largely the same form. Like the original bill, it applies retroactively and allows no consideration for long term Australian residents who may end up caught out by the changes.

While many concerns with the original bill remain unaddressed, there are a few changes.

These changes have extended the transitional measures and added in some compassionate exceptions. The transitional measures ensures that existing foreign resident home owners have some time to sell their main residence under the existing rules. Previously they had until 30th June 2019. Under the new Bill they now have until 30th June 2020 to sell under the existing CGT rules. The additional exceptions that the revised Bill introduced means that there are now limited situations in which the main residence exemption may still apply for foreign residents. 

So, if you’re an expatriate with a former main residence in Australia you should consider now what strategy you wish to take. It’s time to consider if you need to sell while you can access the existing CGT exemption.

Summarised below is an outline of what these new laws could mean for you and what you can do about it.

What Happens If I Hold Onto My Australian Home When I Move Overseas?

Once you’re a foreign resident then any Australian property home you own is treated as a CGT asset. You are no longer able to apply the main residence exception that is available to Australian taxpayers.

Basically this means you will be liable for full CGT on any profit from the sale of the property. This applies even if you lived in the home for 20 years before becoming a non-resident. Since the main residence exemption can potentially save you tens of thousands of dollars in CGT this is a big change for temporary residents and Australians looking to move overseas.

As mentioned, there are limited situations where non-residents may still access the main residence exemption. This includes the transitional provision that allows you to sell your main residence under the existing CGT exemption if you sell before June 30th 2020. It also includes concessions that equate to compassionate grounds on the event of death, divorce, or terminal illness.

As a Non Resident Can I Use the CGT Main Residence Exemption When I Sell My former Australian home?

Normally when you satisfy the criteria for claiming the main residence exemption for CGT then you can apply this exemption (in part or in full). However, if this bill passes into law, foreign residents will no longer be able to access the main residence exemption. Well, in most situations.

Let’s take a look at when the exemption may still apply:

1- Did you purchase your main residence before or after May 9th 2017?

If you purchased your property after May 9th 2017 then you’re out of luck. You will not be able to claim an exemption for your principal residence if you sell it while you are a non-resident. That’s because you purchased your main residence after these new measures were proposed.

However, if you purchased before May 9th 2017 (and post 20 September 1985) then you are covered by the transitional provisions. This means you have until 30th June 2020 to sell under the current CGT rules and access the main residence exemption. Wait any longer and the exemption is no longer available if you sell your main residence while you’re a non-resident.

The big drawback of selling after 30th June 2020 is that the main resident exemption will not even apply for the period of time that you lived in the property. That means you won’t even get access to a partial exemption.

2- What If a serious life event happens to you within 6 years of becoming a non-resident?

With the new bill being introduced, there are now some situations where a non-resident may continue to access the main residence exemption for CGT. These concessions only apply if you’ve been a non-resident for less than 6 years. As a non-resident you may still be eligible for the main residence exemption if one of the following life events happens:

  • You, your spouse or your child (under 18) get diagnosed with a terminal medical condition.
  • You, your spouse or your child (under 18) pass away.
  • You get divorced or separated.

Basically, if something unexpected happens within several years of becoming a non-resident for Australian tax purposes, then you may still be able to access the same concessions that Australian residents can. While no one can factor these contingencies into a tax strategy it’s good to know that this exists if the worst happens.

3- Will You Become An Australian Resident Again?

If you come back to Australia and become an Australian tax resident, then the main residence exemption is available to you again under the normal rules. This means you will have the opportunity to apply the CGT main residence exemption, either in part (if the property hasn’t exclusively been your main residence) or in full. Keep in mind that this only applies if you sell while you’re an Australian tax resident.  

This means that if you’re planning to return to Australia then it might be worth holding onto the property so that you can reduce your CGT liability. That’s great news if there’s a chance of returning to Australia to live in your home (or elsewhere) again. Of course, this should not be the only factor to consider when deciding whether to hold onto or sell your former home under the main residence exemption.

What If I Die While I’m a Non-Resident?

You might decide to hold onto your property because you’re planning to come back to Australia. But what if that doesn’t happen?

If you die within 6 years of becoming a non-resident then your estate may still be able to access your main residence exemption. However, when you pass away more than 6 years after becoming a foreign resident then your estate will be caught by the changes and the main residence exemption will not be applicable. That means your estate will be stuck with the full CGT liability.

What Do I Do With My Australian Property Now?

The answer to this is very personal. It depends on your ongoing plans, whether you’re concerned about the tax impact of these legislative changes, what the market is like, and what the best decision is for both your immediate and long term needs.

For instance, selling a property now for a $50,000 profit with no CGT to worry about would still net you less than selling it down the road for a $200,000 profit with a $45,000 CGT liability.

Ongoing income or costs also weigh into your decision, as do any plans to return to Australia down the track. Unfortunately, it also depends on unknown factors, including the unpredictable nature of tax law changes that may happen in the future. As always, it’s important to get tailored advice for your unique situation when considering what to do. Individual situations can involve complexities that extend beyond generic information.

As always, it’s important to get tailored advice for your unique situation when considering what to do. Individual situations can involve complexities that extend beyond generic information.


Residency – Harding’s Appeal Victory

The biggest personal tax residency case in 40 years just got bigger. The taxpayer Mr Glen Harding having lost his case in front of a single judge in the Federal Court has won an emphatic victory in the Full Federal Court in a decision handed down on 22 February 2019.

In Harding v Commissioner of Taxation [2018] FCA 837 in a unanimous decision the Court found that Glen Harding was not a resident of Australia because;

  • he did have a Permanent Place of Abode in Bahrain; and
  • he did not reside in Australia;

As we reported last year in our blog (an Appeal to Common Sense) the taxpayer, Glen Harding, appealed from an initial Federal Court decision against him.

The Facts of Harding’s case were, in essence, that Mr Harding, in his evidence, had abandoned his residence in Australia, with the intention never to return. However, in establishing life in Bahrain, he lived in an apartment building called “Classic Towers”. Initially he took a two bedroom apartment because he believed that his wife and children would visit him from time to time.  He remained in that apartment from 10 June 2009 until 9 June 2011.  When his marriage broke down around 2011 and he realised that his wife would not be moving to Bahrain, he moved in to a one bedroom apartment where he remained until 9 June 2012.

The case was all about whether Mr Harding was a resident in Australia for the income tax year ended 30 June 2011 and the single judge in the first instance found that because of the style of accommodation that Mr Harding chose in Bahrain, being a fully furnished apartment, he had not established a permanent place of abode in Bahrain, despite several other factors which demonstrated that he was living in Bahrain.

Several principles of residency law were analysed in detail by the Court. However, the main focus was on the question of what was meant by the phrase ‘Permanent Place of Abode’. A clear understanding of that phrase is critical because of the definition of tax residency in Section 6(1) of the Income Tax Assessment Act 1936.

That definition says that a person is a resident of Australia if they reside in Australia and includes a person who is Australian domiciled unless the Commissioner would be satisfied that the person has established a Permanent Place of Abode outside Australia.

Most Australian expats who move overseas will remain domiciled in Australia and hence, unless they can show that they have established a permanent place of abode overseas, will remain fully taxable in Australia. It has never been the case that an Australian who is itinerant overseas avoids taxation in Australia.

So the question ‘what is a Permanent Place of Abode?” is critical. In their joint decision,  Davies and Steward JJ with Logan J in agreement, indicated that the word ‘place’ should be read as including a reference to a country or state and they expanded by saying;

In the context of the legislative history, in our view, the phrase “place of abode” is not a reference, as one might have thought, only to a person’s specific house or flat or other dwelling.  If that had been Parliament’s intention it would have used the phrase “permanent abode” rather than “permanent place of abode”.  The word “place” in the context of the phrase “outside Australia” in subpara (i) invites a consideration of the town or country in which a person is physically residing “permanently”.

In taking that approach, the Court referred to the analysis of Sheppard J in Applegate’s case where he indicated that as follows:

“place of abode”’ may mean the house in which a person lives or the country, city or town in which he is for the time being to be found.  I am of the view that the latter is the meaning of the expression used in s. 6(1.) of the Act.  Thus a person might be correctly said to have a permanent place of abode in, say, Vila, notwithstanding that during a given period he lived in a number of different establishments occupying each for only a relatively short period.  His case is no different from one where a person, such as the appellant here, lives, for a substantial period, in the same house.

So here we see, for the first time, a definite focus by the Federal Court on the permanence in a particular jurisdiction as being of paramount importance rather than the particular ‘type’ of accommodation that a tax payer chooses to live in within that jurisdiction.

If this decision stands, it would be a victory for common sense, because if a person is living permanently in a particularly city it should not be critical what type of accommodation the person chooses to live in.

Author: Matthew Marcarian

The Road to Oz

Our Principal, Mathew Marcarian, together with our Managing Director in Singapore, Boon Tan, were recently featured in the STEP Journal* (a publication produced by STEP for its members) discussing the local taxation laws that apply to Trust beneficiaries relocating to Australia.

STEP is an organisation that focuses on improving the public understanding of the issues families face in relation to inheritance and succession planning.

Read the full article.

* Matthew Marcarian and Boon Tan, ‘The road to Oz’, STEP Journal (Vol27 Iss1), pp.41-43