When Is It Not a Good Time For Australian Expats To Be In Control?
There are a lot of financial considerations when becoming an Australian expat and today we run through when is it not a good time for Australian expats to be in control. In recent years we have come across some cases with Australian expats where they have had some complex tax structures in place. These tax structures include;
- family trusts
- unit trusts
- Self-Managed Super Funds (SMSF) and
- SMSF’s with a corporate trustee.
The use of these tax structures has been for income distribution purposes, tax minimisation purposes and limiting liability. Whilst these tax structures can be a useful vehicle for business and investing they can cause some very serious issues when you go abroad and become a non-resident.
The Australian Taxation Office (ATO) has been cracking down on non-compliant tax structures and recent cases have set some precedents going forward into the future. A company will be considered a resident of Australia if it was incorporated in Australia as well as its central management and control are in Australia or its voting power controlled by shareholders are normal tax residents of Australia.
Trusts, other than unit trusts, will be Australian residents in each income year if either a trustee was a resident any time during the income year or the central management and control of the trust was in Australia at any time during the income year. Furthermore, for both a company and a trust at least 50% of the beneficial interests in the income and property should be held by an Australian resident.
Australian expats who head overseas need to be aware of the pecuniary tax they will have to pay if their entities are found to be non-compliant. If you are deemed a non-resident and own more than 50% of the beneficial interests, you could be caught out by the ATO and the entity will be considered non-compliant. There are ways to reduce the risk by having a power of attorney, but you have to be able to prove that you aren’t involved in any decision making.
We can see how this can correlate to an SMSF as the central management and control will be looking after the investment strategy and overseeing and coordinating those appointed to conduct the day-to-day business either as an individual trustee of the SMSF or as a director of the corporate trustee of the SMSF. It’s not the day-to-day business functions but the overall investment strategy and executive decision making in the fund. An SMSF which is deemed non-compliant will be taxed at a rate of 45 – 47% which applies to the income of the fund and the SMSF could also lose almost half of its assets in tax.
A further issue for US-based Australian expats is that having such tax structures can have you incurring pecuniary tax from the IRS side as well. This is due to such tax structures would be classified as a ‘Passive Foreign Investment Company’. Without going into it into too much detail, a PFIC on the surface is a non-US company or trust that has 75% or more of its income from passive sources or at least 50% of its assets produce passive income.
It’s important you make sure you aren’t running any non-compliant tax structures so you don’t get hit with large pecuniary tax bills both by the ATO and the IRS for US-based Australian expats. We recommend reviewing your circumstances with a qualified tax accountant and a qualified financial planner to make sure you are ticking all the boxes for compliance and making sure that you don’t fall into this trap and learn when is it not a good time for Australian expats to be in control.
Disclaimer – the above commentary is general in nature and should not be construed as tax or financial advice.