Prior to COVID-19, there was a trend for Australian professionals to move overseas for work at some stage in their life. This trend is likely to continue after COVID-19 restrictions are eased.
The tax issues raised when someone stops being a resident of Australia for tax purposes can be complicated. There are additional complications if the person moving overseas also controls assets held in discretionary trusts.
This case study explores some of these issues.
Bessie and her family are Australian tax residents. Bessie is an engineer and she accepts a permanent position based in the United States.
Bessie moves to the US with her family. At this time, she stops being a tax resident of Australia.
Many years ago, Bessie had established a discretionary trust in Australia. Bessie and her husband, Dennis, are directors of the trustee company. The trustee company was incorporated in Australia.
The trust now holds investments in shares listed on the Australian Securities Exchange that have seen significant growth over the years.
When Bessie leaves Australia, she appoints an accountant as a third director of the trustee company. This is to ensure that the trustee company has one resident director and complies with Australian corporate law requirements.
What happens to the trust when Bessie stops being a tax resident of Australia?
If the trust also stops being a resident trust for CGT purposes when Bessie moves to the US, a CGT event I2 will occur.
The consequences are that the trust will have to report a capital gain equal to the notional gain that it has made on any assets that are not taxable Australia property (TAP). In this case, this will be the capital gain on all of the listed shares in the trust. The capital gain will equal the market value of the shares on the date that the trust stops being a resident trust for CGT purposes, minus the cost base of the shares.
A similar CGT event (CGT event I1) happens for CGT assets that Bessie holds in her name. However, CGT event I1 allows individuals to make an election.
The individual can elect to not account for capital gains tax on the CGT event I1, but effectively treat their CGT assets as TAP. The practical effect is that the individual will have to report any capital gain or loss when those shares are sold, rather than at the time of becoming a non-resident.
No equivalent election is available for a trust when a CGT event I2 is triggered.
In Bessie's circumstances, this would result in a significant capital gain for the trust if it stops being a resident trust for CGT purposes.
Has the trust ceased to be a resident trust estate for CGT purposes?
Under Australian domestic tax law, a trust is a resident for CGT purposes if:
- the trustee is a resident of Australia; or
- the central management and control of the trust is in Australia.
In this case, as the trustee of the trust is a company incorporated in Australia, it (and therefore the trust) will continue to be a resident of Australia under Australian domestic laws.
However, as there is a double tax agreement (DTA) between the US and Australia, Bessie will also need to consider:
- whether the trust is a resident of the US (under its domestic laws); and
- if so, whether the DTA will deem the trust to be a resident of the US.
The effect of the DTA with the US is generally that a company will be a resident of the country in which it is incorporated. This means that for Bessie, the trust will remain a resident trust for CGT purposes in Australia as the trustee company was incorporated in Australia.
What if Bessie moved to another country?
Many of Australia's DTAs with other countries could produce a different result. It is important to work through each DTA carefully, and then consider whether the Multilateral Instrument (MLI) applies.
For example, if Bessie moves to the UK, assuming the trust is a tax resident of the UK under its domestic laws, the DTA between Australia and the UK operates so that a company is a resident of the country where it has its 'place of effective management': Article 4(4).
Both the UK and Australia have ratified the MLI and have agreed that Article 4(4) of the DTA is replaced so that the residency position of dual resident entities (other than individuals) can only be decided by mutual agreement between the UK and Australia (taking into account its place of effective management and place of incorporation).
If Bessie and her partner relocated permanently to the UK, the risk is that, under the DTA, the trust's 'place of effective management' would be in the UK, which would trigger a CGT event I2 resulting in a significant gain.
However, as the UK and Australia have both ratified the MLI, the trust will remain both a resident of Australia and the UK (and therefore a CGT event I2 will not occur) until the ATO and HMRC agree on the trust's residency position.
According to the MLI, until its residency position is decided, the trust would:
- not be able to take advantage of any exemptions or relief available under the DTA
- be taxed as a resident in both the UK and Australia.
For the ATO and HMRC to consider its residency position, the trust would generally need to apply to the ATO or HMRC requesting a determination of its residency.
What other issues are there for Bessie to consider?
In the recent case of Peter Greensill Family Co Pty Ltd (as trustee) v Federal Commissioner of Taxation  FCA 559, the Court found that an Australian trust distributing the capital gain made on the disposal of assets that were not TAP to non-residents resulted in the trust having to include this gain in its assessable income.
Trustees will need to be aware of this when considering distributions for the 2020 income year. Please see our alert on this issue here.
The increased global mobility of professionals gives rise to a variety of complex tax issues.
In some cases, there are significant tax risks that can be mitigated through careful planning. That planning generally must be done before moving to another country, or as soon as the issue has been identified
Cooper Grace Ward is a leading Australian law firm based in Brisbane.
This publication is for information only and is not legal advice. You should obtain advice that is specific to your circumstances and not rely on this publication as legal advice. If there are any issues you would like us to advise you on arising from this publication, please contact Cooper Grace Ward Lawyers.