Stocks and Managed Funds, housekeeping tips
Did you know?
i) You may pay capital gains tax on your share or managed fund portfolio even if you have not sold them.
ii) As a non-resident of Australia, you may lose tax benefits available to tax residents on your Australian share portfolio.
iii) You will lose the 50% capital gains tax free concession on any capital gain while living abroad.
iv) On the other hand, equities acquired as non-resident are CGT-free and if held when commencing Australian residency are deemed acquired at market value.
Shares and Managed Fund
For those with a share or managed fund portfolio you will need to make careful consideration as to how you manage the investment (particularly financing costs) on becoming an Australian non-resident for tax purposes.
You may pay capital gains tax on your share/managed fund portfolio even if you have not sold them.
Australian Capital Gains Tax “CGT” applies to worldwide CGT assets for Australian tax residents. For non-residents it applies only to “taxable Australian property” CGT assets. On departure from Australia (and becoming a non-resident for tax purposes) a “CGT event happens” such that you have to make a choice on whether or not to pay CGT on any overall capital gain at that time on the market value (less cost base), on all foreign CGT assets AND Australian shares or managed funds:
The two choices
a) You can choose to pay tax (on any overall gains) or claim for any overall capital loss; in the tax year of ceasing tax residency of Australia OR
b) You can disregard that CGT event on ceasing to be a resident by choosing to treat your foreign CGT assets AND Australian equities held, just before ceasing residency, as “taxable Australian property”.
This choice is made at the time you lodge your departure year tax return and in hindsight the markets will be clearer. Again this is why you need a trusted Advisor.
The good news is that once you have taken the “deemed disposal” the affected CGT assets are free of CGT thereafter. Any foreign CGT assets AND any Australian equities acquired after ceasing residency are also free of CGT. When you resume residency any such CGT assets are deemed acquired at that time at market value.
As a non-resident of Australia, you may lose tax benefits available as a tax resident on your Australian share portfolio.
As an Australian tax resident, franked dividends are dividends paid out of Australian company profits which have already been subject to Australian Company tax. Franked dividends have a franking credit attached to them which represents the amount of tax the company has already paid and entitles the shareholder to receive a credit for any tax the company has already paid.
However, as a non-resident shareholder who receives franked dividends you are denied the franking credits and are unable to claim a refund in relation to franking credits associated with a franked dividend. That is, franking credits are worthless in the hands of the foreign resident.
A franked dividend paid to a foreign resident will generally be exempt from the non- resident withholding tax and will not be subject to any other Australian income tax.
Non-resident withholding tax will be deducted from certain types of income (ie unfranked dividends and Interest) before it is paid to the non-resident. The Withholding tax is a final tax on that income in Australia. This means the non-resident does not need to declare in an Australian tax return and no more tax is payable on this income. The withholding tax is generally 30% for dividends (reduced to 15% where the shareholder resides in a country which has a Double Tax Treaty with Australia) and 10% for interest income.
If you have an existing share portfolio, as a non-resident of Australia, you will no longer need to include your dividends as assessable income in your Australian tax return and you are no longer able to claim any deductions in relation to deriving this income including interest on investment loans.
You will lose the 50% capital gains tax free concession on any capital gain while living abroad
In 2012, the Australian Federal Government removed the CGT discount for non-residents on capital gains (on taxable Australian property) accruing after 8th May, 2012. Provided you are non-resident on 8 May 2012, capital gains accrued at that date still attracts the capital gains discount (on a proportionate basis) as well as any later period of Australian tax residency.
Note that where you have made the choice to disregard the CGT event on departure from Australia in respect of foreign CGT assets and any Australian equities, these assets are deemed to be taxable Australian Property for the period of non-residency.
On a proportional basis and subject to a greater market value at 8th May, 2012 than purchase price over the ownership period, these assets on disposal will be denied the 50% CGT discount concession. Capital gains on disposal will be taxed but as you are a non-resident the dividends are not subject to income tax. Any borrowing costs will not be deductible but will count towards the cost base for CGT purposes.
This means that if you are a non-resident on 8th May, 2012, you need to undertake a market valuation of your properties on this date (and including any affected CGT assets where you have made the choice to disregard the CGT event happening on becoming a non-resident). When you become an Australian tax resident again, you will also need a market valuation for any foreign CGT assets as well as any Australian equities held on that date which were acquired during your period of non-residency.
Case Study
An expatriate has a stock and managed fund portfolio held in the spouse’s name, with the original investment of $ 500,000 currently valued at date of non-residence at $530,000. Given the modest gains on the portfolio, if the investor is confident the portfolio will continue to grow as a non-resident; the investor should pay any capital gains tax on leaving Australia (ensuing all future capital gains on the portfolio are tax free as a non-resident of Australia).
Critical Question
When you are planning on becoming a non-resident of Australia for tax purposes, what capital gain do I have on my portfolio?
If your capital gains are modest, pay any capital gains tax at time of non-residence (allowing all future capital gains as non-resident to be free of tax). Be aware that depending what Country you move to, there may be a CGT Article in a relevant DTA which modifies the CGT treatment under the Deemed Disposal rules, for example the UK, USA, Japan, France and New Zealand DTAs.
How InterRetire Can Help You
If you’re an Australian expatriate who is considering moving back to Australia, we can help you maximise your assets, minimise your tax obligations and help you transition smoothly.
Disclaimer: This article provides general information on avoiding double taxation in Australia and should not be considered as professional tax advice. It is recommended to consult with a qualified tax advisor or accountant for personalised guidance based on your specific circumstances.
