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“How the bloody hell are ya??”– quite well if you are a temporary resident!

Tax Telegraph, May 2013

“How the bloody hell are ya??”– quite well if you are a temporary resident!Thanks to Lara Bingle’s short stint in tourism marketing, it seems i’s are being replaced by u’s at an alarming rate as kiwis continue to cross the ditch in droves. It’s not hard to see why when you consider the tax concessions available to New Zealand and other “temporary” residents in Australia.

Statistics New Zealand provides that the total number of New Zealand citizens at 31 December 2012 who have entered Australia and have not left or been granted permanent residency is in excess of 600,000. This is quite impressive when you consider the total population of New Zealand averages 4.4 million. Thanks to the tax concessions available for temporary residents in Australia, kiwis can now test out whether the grass really is greener in Australia and still keep their paddocks back home.

Neighbour love

Tax Determination 2012/18, which was released in July last year confirms that certain New Zealanders living in Australia will continue to be treated as temporary residents for tax purposes regardless of how often they may travel back to their homeland.

So what exactly is a temporary resident?

The classification refers to a certain visa category issued under the Migration Act 1958. Ordinarily, a temporary visa allows an entrant to Australia to stay for a particular period of time. When the visa holder leaves Australia, the temporary visa subsequently lapses. For tax purposes, however, the ATO in TD 2012/18 confirmed that New Zealand citizens will be entitled to ‘temporary resident’ status indefinitely where they meet the criteria due to the ongoing right for New Zealanders to enter Australia on presentation of their New Zealand passport.

For tax purposes, a temporary resident will be taxed as if they were tax resident in Australia albeit with a number of beneficial concessions. Different to Australian tax residents in general who are taxed on their world-wide income, temporary residents are generally alleviated from Australian tax on their foreign-sourced investment income. The concessions apply, for example, to foreign sourced interest, dividends and rental income earned by temporary residents.  Technically, eligible foreign-sourced income will be “non-assessable non-exempt” income in Australia.

No CGT? Yes please!

Capital gains and losses made by temporary residents are treated as if they have been made by a non-resident. This means that capital gains and losses are only taxable if they relate to the disposal of “taxable Australian property”.

Following are the categories of CGT assets that are “taxable Australian property” (TAP) (with the first two being the primary categories):

  1. Taxable Australian real property: includes direct interests in Australian real property and certain mining, quarrying or prospecting rights
  2. Indirect Australian real property interests: includes an interest in Australian real property that is held indirectly through a chain of interposed entities (e.g. shares in a company or units in a trust)
  3. An asset used in carrying on a business through a permanent establishment in Australia: includes a CGT asset that a foreign resident has used at any time in carrying on a business through a “permanent establishment” in Australia
  4. Options and rights to acquire assets: includes an option or right to acquire a CGT asset covered by categories 1, 2, or 3 above
  5. A CGT asset covered by s 104-165(3): relates to choosing to disregard a capital gain or loss on ceasing to be an Australian resident that would otherwise have arisen from CGT event I1 happening. CGT assets covered by CGT event I1 include all assets that are not taxable Australian property and any indirect Australian real property interests. Where a taxpayer makes this election, s 104-165(3) deems those assets that were the subject of the election to be taxable Australian property.

CGT asset means any kind of property or a legal or equitable right that is not property. In addition, certain things are specifically included in the definition, i.e. part of or interests in assets, goodwill, interests in the assets of a partnership, and other partnership interests.

Trust issue?

Any capital gains made by temporary residents through a fixed trust are also exempt from CGT in Australia.

However where a beneficiary is made presently entitled to income through a discretionary trust

  • The capital gain is included in the taxable income of the trust.  This applies irrespective of whether the assets are TAP or non-TAP
  • Generally speaking a distribution of a capital gain to the temporary resident will be subject to tax - the tax is paid by the trustee of the trust on behalf of the temporary resident. The temporary resident includes the amount in their tax return with a credit for the tax paid by the trustee on behalf of the temporary resident. This applies irrespective of whether the assets are TAP or non-TAP.

    However if the gains are foreign source capital gains (that is, where there is disposal of an asset held overseas, for example shares in a foreign company or land overseas), there should be no CGT payable on these in Australia

But wait… it’s not all rosy!

In what is a significant turnaround on the friendly treatment provided to our neighbours, on 8 March 2013, exposure draft legislation and explanatory material were released by the Assistant Treasurer which proposes to remove the 50% CGT discount on discount capital gains accrued after 8 May 2012 for foreign and temporary residents.

The discount is also removed for temporary residents receiving capital gains from trusts (i.e. in situations discussed above).

This will have a significant effect on the way temporary residents, including our neighbours, invest in Australian assets.

A blessing in disguise?

It seems as though our neighbours can come across the border, live here like permanent residents, i.e. purchase property, live with family, maintain a job and social life and can travel back “home” as frequently as they like and never “convert” into Australian tax residents like the rest of the world’s population.  The result is that they never pay CGT on anything except real property.

It would be interesting to see how long this friendly treatment continues. It may be that the first steps towards curbing such hospitality have already begun with the removal of the CGT discount.

Watch this space as more developments occur in this area…

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