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Moving overseas back on the agenda but be careful of tax

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MEDIA RELEASE: Following the enforced working from home measures of the past year, many companies are now open to the idea of their employees working remotely, however both businesses and individuals need to be aware of the tax implications of such arrangements, says Peter Bembrick, tax partner at HLB Mann Judd Sydney.

“The COVID-19 restrictions forced companies to implement working from home approaches which – to many people’s surprise – were extremely effective. The upshot of this is that, for the first time, companies may be more willing to allow employees to work from wherever they want, even in other countries.

“However, just because the thinking and perceptions of businesses have changed, it doesn’t mean the thinking of the ATO has changed. There are still a number of considerations to take into account, both for businesses and for individuals,” he says.

Mr Bembrick says it will take careful planning to avoid a big tax bill, and companies and individuals should get specific advice both in Australia and in the country they are moving to.

One consideration for businesses is whether the arrangements mean they will need to comply with payroll rules and reporting obligations in the country their employee has moved to.

“For example, if an employee moves to the UK but continues working for an Australian company, the UK authorities may decide the company should be treated as a UK employer, even if it doesn’t have any customers or an office there, with the resulting registration and reporting obligations in the UK.

“Even in cases where an employee moves interstate rather than overseas, there may be tax implications – for instance, whether a new payroll system needs to be set up to manage the payroll requirements of the different state or territory, and potentially the requirement to register for, and pay, payroll tax in the other state or territory.

“While at some point in the future, the legislation may catch up with the new approaches, at the moment this is not the case,” he says.

He believes another key issue to consider is tax residency, and whether the person moving overseas is going to remain an Australian tax resident.

“People need to think very carefully about whether their tax residency is likely to change as soon as they move overseas. Usually, it is more tax effective to become a tax resident of the country they are moving to, mainly because their salary will be taxed only where they are working while, if they remain as an Australian tax resident, they must report their salary to the ATO and may be up for extra tax as a result.

“However, in this new world, working remotely for an Australian company in another country is still an experiment, and some people may not want to take such a step in case the arrangements don’t work out.

“Even if they decide they don’t wish to be a tax resident of their new home, changing tax residency is not a choice, and will usually depend on a range of factors including how long they plan to live and work in the other country.

“The ATO can determine whether a person’s tax residency status has changed based on their particular circumstances and arrangements, noting the tax legislation in the other country also has a part to play. Where the individual moves to a country with which Australia has a Double Tax Agreement (DTA), there will be “tie-breaker” residency rules that can be used when both countries claim the person as a resident.

“As a rule of thumb anything longer than three years, particularly with no fixed return date and a reasonable prospect of staying in the overseas country longer, makes it more likely that tax residency will change, but time is not the only factor to consider” he says.

Other issues include the possibility of paying capital gains tax (CGT) on the family home. Previously this was rarely an issue unless a resident was absent from the country for at least six years, but this rule changed in 2020 and now, any sales of Australian property by a non-resident will attract CGT, with no allowance for any prior use as the family’s main residence.

There is just one simple remaining solution if it suits the individual’s circumstances – relocate back to Australia within six years and move back into the property before selling it.

Further, becoming a non-resident for tax purposes will have implications for investments such as shares in companies or units in managed funds.

“Such considerations need to be carefully thought through to ensure people don’t end up in a worse financial position than they started in – or even worse, in hot water with the tax office,” Mr Bembrick says.

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