Arriving or Returning to Australia?
by Rod McLennan, Senior Financial Planner
Are you leaving Australia for work or an extended stay? Have you recently returned to Australia after time working overseas? Have you recently migrated to Australia? If you answered “yes” to any of these questions, you need to be aware of a couple of taxation issues that could come back to bite you.
If you have worked overseas you will probably be a member of a ‘superannuation’ fund in the country in which you worked. What many people don’t realise is that your fund may be taxed when you transfer it into Australia.
Transferring superannuation into Australia
Under Section 27CAA of the Income Tax Assessment Act 1936, you have six months from the time you become a tax resident of Australia to transfer your offshore superannuation into Australia without any tax implications. Thereafter, you will be taxed on any growth in the balance of your account measured from the date you became a tax resident of Australia to the date of transfer.
This tax can be paid from your receiving superannuation fund in Australia and will be levied at 15 per cent, the tax rate within superannuation. The growth in the balance of your fund will include capital growth and income – no surprise there. But the third potential source of growth occurs when there has been movement in currency exchange rates. If rates have moved in your favour, resulting in a higher balance, the growth caused by this movement will also be taxed.
A typical scenario:
For example, Jenny left Australia in 2004 to work in London for 4 years. She returned to Australia on January 15, 2008. While in the UK, Jenny had accumulated £30,000 in a UK pension scheme, the equivalent of superannuation in Australia. The exchange rate for GBP/AUD on the day Jenny arrived back in Australia was 0.47. If Jenny had transferred her UK pension to Australia within six months, i.e. by July 15, 2008, she would not have been taxed, regardless of any growth in her UK pension balance. Unfortunately for Jenny, she transferred her UK pension on November 15, 2008, 10 months after she had become a tax resident of Australia. At this time, her account balance was £32,000 and the exchange rate had moved to 0.42.
To calculate the amount of tax owing, we first need to calculate the growth in Jenny’s UK pension. On the date of Jenny's arrival into Australia, she had £30,000 and the exchange rate was 0.47. This is the equivalent of $63,830. On the date she transferred the UK pension she had £32,000 and the exchange rate was 0.42, a total of $76,190. You can see that the fluctuation in exchange rates has had a significant effect on Jenny’s account balance. Tax is now payable on the difference between the two totals, being $12,360. At 15 per cent, this results in payable tax of $1,854.
In this case, Jenny wasn’t too upset because she had benefitted from the exchange rate movements. But remember, exchange rates can move the other way as well, resulting in significant losses to capital value.
What if I hold Foreign Investment Funds?
The other thing for recent arrivals to Australia to consider is the taxation imposed on Foreign Investment Funds (FIF). A FIF is either a foreign company or a foreign trust. If you have holdings in any foreign investment that can be classified as a company or a trust and you are a tax resident of Australia, you will have to pay tax each year on the annual growth and income derived from your investment. The growth and income is added to your other Australian income each year and taxed at your marginal tax rate. Even if you have not physically received any payment from your investment, aside from growth in the account balance, you still have to pay tax on that growth. This can be quite a burden when you have not actually received any payment from your investment. The tax will need to be paid from your savings or other sources.
Unless you are able to fund this tax liability, it may be worth considering selling your foreign investments once you have become a tax resident of Australia.
Seek the right advice for you
There are many things to consider when becoming a tax resident of Australia, whether it be for the first time after migrating from overseas or as a recently returned citizen of Australia. The tax issues discussed here are just two potential pitfalls to consider. There are many more, depending on your individual circumstances. If you have recently become a tax resident of Australia, I urge you to seek the advice of a licensed financial planner to ensure you become aware of the many potential issues you may face.
For more information, or to arrange an appointment with a John Hopkins Financial Adviser, please contact our Client Liaison Officer on 1300 726 082 or click here.