Tax Planning for Expats Coming to Australia

Expats travelling to Australia for work purposes generally fall into one of two categories: Australian resident or temporary resident. The category of residency the expat falls into impacts how the expat is taxed in Australia. 

An expat would be an Australian resident if they satisfied the relevant domestic tests to be a resident. These tests are difficult to navigate, but broadly, if an expat is an Australian resident, they are taxed on their worldwide income. 

Further, an Australian resident is also taxed on all capital gains that are derived worldwide. The gain is generally calculated as being proceeds minus cost base. If an expat held a capital asset, e.g. shares in a publicly listed company, it may be expected that their cost base would be their acquisition cost. However, if the expat becomes an Australian resident, their cost base would be adjusted to reflect the market value of the asset at the time they became an Australian resident.

Expats should ensure that they plan ahead and obtain valuations or spot prices of their assets at the time of becoming an Australian resident, in order to calculate their capital gain accurately. 

If an expat is not an Australian resident, they may be a temporary resident. A temporary resident is an individual who has been granted a temporary visa under the Migration Act, and they and their spouse are not Australian residents under the Social Security Act. However, an expat is not a temporary resident if they are an Australian resident under the tax legislation. If an expat is a temporary resident, there are complicated rules on what income is taxed in Australia; the overarching principle is that income from an Australian source is subject to tax. 

Calculating capital gains for temporary residents is complicated. A temporary resident should only be taxed on a gain resulting from the disposal of “taxable Australian property” (“TAP”). Foreign capital gains are not taxable in Australia. 

TAP captures specific types of real property interests in Australia. The definition includes taxable Australian real property, such as land, mining or prospecting rights; indirect interests in Australian real property; assets that are used in carrying on a business through a permanent establishment in Australia; or options or rights to acquire any of the aforementioned assets. 

Temporary residents are not eligible to claim concessional tax treatment for their taxable capital gains. Whilst an Australian resident may be eligible to claim a 50% discount on gains for the period they were an Australian resident, and the asset was held for at least 12 months.

In addition to the general principles outlined above, the application of the rules is still subject to the operation of double taxation treaties that Australia has entered into with many countries. These treaties can impact which jurisdiction has taxing rights and whether any foreign income tax offsets/credits can be claimed for expats that are subject to double taxation.