Asia is home to a great many Australian expatriates who intend to return to (or other nationals who intend to move to) Australia after a period of working elsewhere in the region. In most cases, restructuring business assets and/or personal assets in advance, whilst still an expat, can provide substantial advantages if an individual eventually become tax resident in Australia. Life assurance policies, in particular, offer considerable benefits in respect of holding either business or personal assets.
Australian Tax Residency
Australian tax residents pay income tax on their worldwide assessable income, which includes any capital gains. The Australian Tax Office (ATO) uses a number of tests to establish if an individual is resident for tax purposes in Australia.
The primary test of tax residency is called the ‘resides test’. If you reside in Australia, you are considered an Australian resident for tax purposes and don’t need to apply any of the other residency tests. The ATO may take into account any or all of the following factors in determining where you reside:
- Intention or purpose of presence
- Family and business/employment ties
- Maintenance and location of assets
- Social and living arrangements.
If you move to Australia, settle there and perhaps take up employment, then it is quite possible you will pass the ‘resides test’. Even if you don’t, you may still be considered an Australian resident if you satisfy one of three statutory tests:
- The ‘domicile test’ – if your domicile (broadly, the place that is your permanent home) is in Australia, you will be considered an Australian resident unless the ATO is satisfied that your permanent place of abode is outside Australia;
- The ‘183-day test’ – if you’re actually present in Australia for more than half the income year, whether continuously or with breaks, you may be said to have a constructive residence in Australia, unless it can be established that your usual place of abode is outside Australia and you have no intention of taking up residence in Australia;
- The ‘superannuation test’ – this test applies to Australian government employees working at Australian posts overseas and who are members of the Commonwealth Superannuation (CSS) or Public Sector Superannuation (PSS) schemes. It does not apply to members of the Public Sector Superannuation Accumulation Plan (PSSAP) scheme.
Taxation of life assurance policies
As an Australian tax resident, you will be assessed for income tax on the chargeable gains arising from life assurance policies under section 26AH of the Income Tax Assessment Act 1936. These gains are known as ‘bonuses’ and only become taxable when you actually receive them and not while they are accumulating in the policy.
There may come a time when you want to start using your investment to supplement other sources of income, such as a pension, or for capital expenditure. You will be able to set up a regular ’income’ withdrawal or take ad hoc payments or fully surrender the plan, if it is no longer required.
The ‘bonus’ from an ‘eligible policy’ is included in the assessable income of the taxpayer if it arises during the ‘eligible period’ – on full or partial surrender, for example, but not on death. If you hold your policy for more than 10 complete policy years following its commencement, you will not be taxed on the bonus because, after this time, it is no longer included as part of your assessable income.
Crucially, the holding period includes not only the time when the policyholder was tax resident in Australia but also the time when the policyholder was non-resident in Australia. Therefore, after returning to Australia, a policyholder will be assessed for income tax on chargeable bonuses arising during the eligible period, as follows:
- Within eight years – The full gain will be included as assessable income and taxed at the policyholder’s marginal rate;
- During the ninth year – Two-thirds of the gain will be included as assessable income and taxed at the policyholder’s marginal rate;
- During the tenth year – One-third of the gain will be included as assessable income and taxed at the policyholder’s margin rate;
- After 10 years – The whole gain does not have to be included as assessable income under Section 26AH.
As a result, offshore investment linked insurance bonds for investment and longer-term planning purposes have become a tremendously valuable financial planning tool for Australians and other nationalities moving to, or returning to Australia.
For more information contact Andrew Galway.