You will be considered an Australian tax resident if your domicile is in Australia. Accordingly, if you are looking to make aliyah, you are saying that you will no longer be domiciled in Australia for taxation purposes. As such, you will become a non resident of Australia, and a range of tax implications will arise in relation to this.
For investments outside of Australia
From an Australian tax perspective, non residents of Australia are only subject to tax on their Australian source income. Accordingly, when you become a non resident, you will be taken to have disposed of assets that no longer have the required connection with Australia. This will generally include assets such as real estate held in overseas countries, and shares you hold in non Australian companies.
For Investments in Australia
Real Estate Investments:
In respect of Australian real estate, you will not be taken to have disposed of this asset. Rather, you will be subject to tax on any rental income derived from that property, and you will also be subject to capital gains tax (“CGT”) when you ultimately sell that property. Tax rates on rental income are listed below – Chart 1.1.
For many people, their principal residence is their main asset. If you sell this whilst you are living in it, the sale will not be subject to CGT. Should you become a non resident of Australia, this exemption can continue for a maximum of 6 years, so long as you do not treat any other premises you own as your principal residence. Accordingly, although the rental income from such a property will be taxable in Australia, any capital gain ultimately made will not be subject to tax, so long as you sell the property within 6 years of leaving. Should you sell the property beyond this time period, a CGT liability may arise. The capital gain will be pro-rated, in line with the total period that it was able to claim principal residence exemption, in order to arrive at the amount that is subject to tax. .
In respect of shares in Australian companies, or interests in managed funds, whether they be listed or unlisted, the tax legislation gives you two alternative treatments. The first involves the deemed disposal of the shares at the time you become a non resident. To the extent that the shares have increased in value, a capital gain will arise and you will have to pay tax on that deemed capital gain. Should you not wish to do this, you are able to elect to defer paying tax until you ultimately sell the shares, at which time you are required to disclose this gain in your tax return (irrespective of whether or not you have other taxable income from Australian sources).
It should also be noted that if there is a deemed disposal of the shares at the time of becoming a non resident, there will be a deemed re-acquisition of those same shares should you return to be a resident of Australia. As such, any increase in the value of the assets whilst you were away would not be subject to tax in Australia. This will not be available should you choose to defer including any amount at the time you became a non resident.
It should also be noted that special rules apply to shares and options acquired under an Employee Share Plan. These rules are too detailed to go into in this article, and professional advice should be sought if you believe you are affected.
We have referred above only to shares/interests in managed funds and real estate, as these are the most common form of investment. If you have other assets, and/or if they do not have a sufficient connection with Australia, there will generally be a deemed disposal of that asset at the time you become a non resident. This can include assets as obscure as personal jewellery, artwork etc. To the extent there has been an increase in value of that asset, a capital gain will arise, and its consequent tax liability.
Investments not held by individuals
It should also be stressed that the above comments only apply to investments held by individuals. Where investments are held by, say, a trust and the departing residents are merely beneficiaries of that trust, there will be no deemed disposal when those beneficiaries become non resident. This is because the residence of the trust for Australian tax purposes is based on the residence of the trustee. As such, if the trustee is an Australian company, the trust will continue to be a resident trust.
If the beneficiaries then receive distributions from that trust, those distributions will be subject to tax. If the distributions are of either interest. dividends or royalites, the withholding tax will be either 10% (interest) or 30% (dividends, unless arising from profits that have already been subject to tax in Australia, as well as royalties). If the distributions consist of other items such as income from a rental property, the tax liability on such distributions will be at rates applicable to non residents (Chart 1.1).
Treatment of Retirement Funds
Generally, funds saved for retirement will be held in either a public retirement fund, or you may control those funds yourself through a Self Managed Superannuation Fund. If you are a member of a public fund, no tax implications arise upon you becoming a non resident. However, you will be unable to access those funds until you have reached a minimum 60 years of age.
If your funds however are in a SMSF, and you are its sole member, that fund will become a non resident fund at the time you make aliyah. This will make the fund “non complying” and will result in a tax liability at 46.5% of the value of the assets, as well as the income in the fund, on an annual basis. These same rules apply to all SMSFs where a majority of its members are non residents. Accordingly, prior to making aliyah, it may be necessary for you to close the SMSF and transfer the funds to a public fund.
For completeness, the rules state that if you are likely to come back within 2 years, the above will not apply to the superannuation fund for that period (although it will require you to come back to Australia at that time). However, if this is not possible, or your absence extends beyond the 2 year period, a tax liability may arise.
If departing residents are the directors of the trustee company, it will be necessary to appoint an Australian resident as director (this is pursuant to Corporations Law). Further, if the trustee has only individual trustees, it will be necessary to appoint replacement trustees. Otherwise, the trust will become a non resident trust, with the issues described above becoming applicable to trusts as well.
The above comments are only intended to be a brief summary, applicable only to investment assets. If disposing of a business prior to becoming a non resident, different rules may apply, and these are beyond the scope of this general commentary. Depending on personal circumstances, the implications of becoming a non resident therefore can vary widely, and professional advice should always be sought where appropriate.
Tax Rates applicable to non-residents for the 2009-09 income year:
|Taxable income||Tax on this income|
|$0 – $34,000||29c for each $1|
|$34,001 – $80,000||$9,860 plus 30c for each $1 over $34,000|
|$80,001 – $180,000||$23,660 plus 40c for each $1 over $80,000|
|$180,001 and over||$63,660 plus 45c for each $1 over $180,000|
Note: there is no tax free threshold available for non-residents. Non-residents are not required to pay the Medicare levy.
Note: Capital gains are included in your assessable income, and taxed at the same rates as above. However, where the asset has been held for at least 12 months, only 50% of the capital gain is subject to tax at the above rates.
Movements of Cash
There is no restriction on the transfers of cash to and from Australia. However, all transfers of $10,000 and above between Australia and another country are required to be reported by banks and other financial institutions under cash transactions reporting legislation, Taxpayers will sometimes be asked by the regulatory authorities for further information on these cash transfers. Any financial institutions that suspect illegal money transfers, such as money laundering, are required to separately report these transfers as well.
Payment of Relocation and Other Expenses
Depending on your employment position, many of your relocation expenses may be capable of being salary packaged as exempt fringe benefits. This will be of particular benefit to those that are largely employed through their own entities prior to the move.
Double Taxation Agreement
Currently, there is no Double Taxation Agreement between Australia and Israel. Australian taxpayers are required to include income derived on a world wide basis, with a credit for tax paid on income derived in foreign jurisdictions. There are jurisdictions however that impose a tax that, in the absence of a double tax agreement, doesn’t qualify as a payment that is eligible for a credit against the Australian tax liability. Similarly, and particularly in relation to Australian trusts, caution needs to be exercised to ensure that all taxes paid in Australia are eligible as a credit in Israel. Given the intricacies involved, it is essential that professional advice be sought prior to any relocation to ensure maximum benefits are obtained.