Of the six million migrants currently living in Australia, over a million were born in the United Kingdom making those who emigrate to Australia a target for ever increasing legislation designed to make the movement of assets from the UK to Australia more complex than ever before. Australian Financial Planning is more important than ever before.
We offer guidance and support to ensure your assets are protected, your pensions are transferable and your will is compliant in both the UK and Australia to protect your estate from unnecessary inheritance tax and other legal objections.
Being a UK expatriate in Australia means that there is an additional layer of complexity in managing your financial planning, no matter how long since you lived in the UK. We review the key financial planning issues of Tax, Investments, Property, Superannuation & Pensions, Estate Planning and State Benefits. These issues are highly complex, and both the Australian and UK authorities will impose heavy penalties if the rules are incorrectly adhered to.
What Is An Australian Resident For Tax Purposes?
The starting point is to determine where you live!
An individual will be deemed an Australian resident for tax purposes if they “reside” in Australia. The Australian Taxation Office (ATO) also takes into account the following factors:
• Intention or purpose of presence
• Family and business/employment ties
• Maintenance and location of assets
• Social and living arrangements.
If you move to Australia, get a job, open bank accounts and sign a 12 month lease you would be considered an Australian resident for tax purposes as you have made arrangements for a lengthy stay and/or permanent residence. If you do not satisfy the “resides test”, you will still be considered an Australian resident if you satisfy one of three statutory tests:
• Domicile test. A person’s domicile is Australia unless the Commissioner of Taxation is satisfied that the person’s permanent place of abode is outside Australia. Relevant if you move overseas.
• The 183 day test. The person is present in Australia for at least 183 days in an income year, unless the person’s usual place of abode is outside Australia and they do not intend to take up residence in this country.
• Commonwealth superannuation fund test. The person is a contributing member of the fund for Commonwealth government officers. This allows Australian government employees to continue to be regarded as resident when they get posted overseas.
What If I am a Temporary Resident?
A temporary resident visa such as a 457 allows you to live and work in Australia for a defined period of time. Temporary residents are individuals that meet all of the following conditions:
• Hold a temporary visa granted under the Migration Act
• Is not an Australian Resident and has never been an Australian Resident (an Australian citizen, a permanent resident or a holder of a protected special category visa residing in Australia) within the meaning of the Social Security Act 1991
• The spouse is not an Australian Resident. A temporary residence can continue for as long as these conditions are met. Temporary residents are subject to different income and Capital Gains Tax (CGT) rules compared to permanent residents.
How Will My Capital Gains Tax Work?
If you move to Australia with the intention of permanently settling here, the ATO will determine that you are a permanent resident and you are taxable on your worldwide income and gains. It deemed that you have purchased your overseas assets as at the date you arrived in Australia. This will be your cost base in Australia going forward for CGT purposes. It is important to obtain a value of your overseas asset on the date you become resident in Australia to calculate your future CGT tax liabilities. One benefit of this is that your capital gains tax liability is reset to zero. This represents a good opportunity to review your overall investment portfolio. From a UK perspective, you must remain a non-resident for five (5) complete tax years. If this condition is not met, the capital gain will be taxed in the year of return to the UK. In this case, the CGT will be calculated based on the rules and rates in the year of return.
In contrast, if you are considered a temporary resident you are only subject to capital gains tax on assets that are considered taxable Australian property i.e. Australian real property. This provides significant tax advantages as any disposals (excluding Australian real property) are not subject to capital gains tax for your period of temporary residence.
Importantly, if you cease being a temporary resident and become an Australian resident, you are taken to have acquired assets at their market value at the time you ceased being a temporary resident.
Am I Subject To UK Income Tax?
It is common for UK expatriates to receive income from their assets in the UK and/or overseas. If you are a permanent resident you are taxed on your worldwide income but will receive a credit for tax deducted overseas. A temporary resident is exempt from Australian
income tax on all ordinary and statutory income from a foreign source. The exemption does not apply to foreign employment income earned during a period of temporary residency here.
We have identified some of the main income tax issues for investments held by UK expatriates living in Australia.
Investment properties Rental income from UK property is taxable by Her Majesty’s Revenue and Customs Commission (HMRC) but the ATO will permit a credit in your Australian tax return for all UK tax paid. The basic rate of tax (20%) is deducted from rent by the local managing agent; alternatively you may register with the Non Resident Landlord Scheme (form NRL1) and the rent is paid gross.
ISAs are tax free investments for UK resident investors and the tax status of existing ISA investments does not change in the UK when you
move to Australia. Further ISA contributions are usually not permitted. An ISA is not recognised by the ATO and income and gains are taxed in Australia.
UK dividend income will be paid net of a 10% tax credit. The dividend tax credit is not available to a non-UK resident unless it is beneficial for you to claim the UK personal allowance and submit a UK tax return.
Interest on gilts is exempt from UK income tax, where it is paid to individuals who are not ordinarily resident in the UK and have completed a declaration confirming their non-resident status. Any investor can receive the interest on gilts gross.
UK or overseas investment funds
There are a wide range of investment funds available to investors in the UK as well as offshore locations that are structured very differently to the funds available in Australia. Hence, it is important to obtain specialised financial advice to get a clear understanding of the nature of each investment and its treatment by the ATO.
When can I stop filing a UK tax return?
You will have an ongoing requirement to complete a tax return for assets that have a necessary connection with the UK such as real property and business investments.
Can I Claim My UK State Pension?
UK expatriates who have spent some time working in the UK before arriving in Australia are often unaware of their entitlement to a UK state pension. The current state pension is £6,204 pa approx and eligibility is based on years of National Insurance contributions (NICs) made in the UK, with minimum of 10 years N.I contributions to qualify for any state pension. There may be additional payments such as the State Graduated Pension Scheme, State Earnings Related Pension Scheme (SERPS) and the State Second Pension depending on the years you worked in the UK. There is an additional top up if you have a dependent spouse/partner.
If you remain abroad you can top up your National Insurance record by paying voluntary Class 3 or Class 2 contributions depending on your situation. NICs may be backdated up to six years from the year they were due; so unless you have themaximum years NIC contributions required it may be beneficial to maintain contributions to qualify for the full UK state pension.
Unfortunately, if you receive your UK state pension while living in Australia you do not benefit from an inflation indexation. There have been a number of challenges regarding the non-payment of pension increases, both in the UK courts and in the European Court of Human Rights, but none have been successful.
Should I Transfer My UK Pension?
There are two significant advantages of the Australian superannuation system compared to the UK pension:
• No inheritance tax. In the UK there is a 55% pension death tax. Australian superannuation benefits can be left to spouses tax free or to children at a rate of 15% chargeable in Australia is on the growth of the UK fund.
• Tax-free pensions. Australian pension income is tax-free from the age of 60, whereas it is treated as employment income in the UK and is fully assessable. All pension transfers from the UK must be to a Qualifying Recognised Overseas Pension Scheme (QROPS) in Australia.
Failure to do so will result in fines of up to 55% of the entire pension balance. It is essential to seek advice before embarking upon a pension transfer. Any overseas transfer is tested against the value of your lifetime allowance in the UK (currently £1m).
Transfers into the Australian superannuation system within six months of taking residence are tax-free and a lump sum transfer are permitted - this is currently a 3 years roll up rule which allows a transfer of $540,000 for this year and no further transfers for the following 2 tax years. This ‘Non-Concessional Contribution Cap is being reduced from $180,000 per annum (with a 3 year roll up to $540,000) down to $100,000 per annum ~(with a 3 year roll up to $300,000) from 1 July 2017.
If you return to the UK, you will not be able to access your pension until you meet a condition of release in Australia. Hence, if there is any uncertainty about the permanence of your migration, it is better to leave your pension in the UK.
Will My Estate Pay UK Inheritance Tax?
In contrast to Australia, the UK has death taxes. The first £325,000 is exempt; the balance is taxed at 40%. Lifetime gifts may be included in your estate for up to 14 years. If you are domiciled in the UK you are liable for Inheritance Tax (IHT) on all your property whether it is situated in the UK or elsewhere.
Am I domiciled in the UK?
Domicile is a much more permanent concept than residence. Most people retain the same domicile for their whole life even if they live for long periods abroad. It is possible to change domicile by moving to Australia with the intention of living here permanently. This normally requires a near complete break with the UK.
Ultimately, the onus of proof is on the individual to prove their domicile has changed. Individuals from the UK who want to establish
Australia as their new domicile of choice continue to be deemed to be domiciled in the UK for IHT for at least three tax years after leaving the UK. There is a minimum waiting period of three years after departure from the UK before disposals of foreign assets may be made free of IHT. However, the actual period may be much longer as the three-year period only starts when the new domicile is acquired. Importantly, UK IHT is payable by the estate. The executor of the estate in the UK is required to determine the assets and liabilities of the estate and pay any IHT tax liability. Probate will not be awarded until the IHT tax liability is paid to the estate. This can create its own problems in terms of liquidity for the estate on how to fund the liability. A properly structured life policy written in a Trust may be used to
address this problem and does not form part of the estate for IHT calculation.
For UK citizens living in Australia that remain domiciled in the UK, it is important to develop a long-term IHT strategy using all the available reliefs, and implementing common UK inheritance minimisation strategies such as loan trusts, retained interest trust and discounted gift schemes.
What if I am non-domiciled?
Even if you are non-domiciled in the UK, certain assets such as investment properties are subject to UK inheritance tax.
Do I Need A Will?
You may be a potential beneficiary of your parents or other family member’s estate sometime in the future. There are a number of strategies you and your family may put in place to minimise Inheritance Tax, so it is important to have an understanding of UK estate
planning rules and work with a professional that can assist in this area. Two such strategies include the use of lifetime giving and a deed of variation.
The use of potentially exempt transfers (PETs) may provide individuals with valuable tax saving opportunities during their lifetime. There is no tax at the date of the gift and the gift does not have to be reported to HMRC.
Deed of Variation
Even in death there is an opportunity for you and other beneficiaries of the estate to take steps to minimise the tax payable by the estate by using a Deed of Variation to alter the provisions of the Will.
It is important for every Australian to have a Will to ensure their assets are transferred according to their wishes in a tax efficient manner. If you own property in the UK it is important to have a UK Will. It is essential to check with your legal advisers to ensure that there is no conflict between your UK and Australian Wills. We recommend working with our estate planning specialist that understands both jurisdictions.
Are my UK personal insurances still valid?
If you have personal insurances such as Life, TPD, Trauma or Income Protection in place in the UK, they will normally remain in force even if you move to Australia. That said, it is important to review the policy terms to ensure migration has not invalidated your cover. You should advise your insurance company that you are moving overseas as that in itself may be a breach if not disclosed.
The main advantage of replacing your UK policies with new Australian insurances is in the event of a claim. Lodging an insurance claim is far easier, quicker and less stressful on home soil.
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