The Expatriate Financial Guide to

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1 The Expatriate Financial Guide to Australian Tax Facts Australia Introduction Tax Year Assessment Basis Income Tax Taxation in Australia is mostly at a national/federal level with property taxes (council rates and stamp duty) and payroll tax paid by employers being raised by state governments. The national Australian tax system is administered by the Australian Taxation Office (ATO) and all taxpayers are identified by a unique Tax File Number. 1 July to 30 June. Tax returns are due by 31 October following the tax year-end. Australian residents are taxed on their worldwide income (earned and unearned) and on capital gains from all sources including overseas assets. Australia operates a self-assessment regime. Married couples file separate tax returns as there is no joint filing in Australia. Australian residents are subject to income tax on all their taxable income. Individuals benefit from a tax-free allowance and certain deductions ( offsets ) are allowable against taxable income, for example health insurance premiums and superannuation contributions on behalf of a spouse. Income of married couples is not aggregated, with each being taxed on an individual basis. An additional seniors and pensioners tax offset is available to male taxpayers over 65 and female taxpayers over 64½ years. A progressive tax scale is applied to bands of taxable income over the personal tax-free allowance of $18,200 (2014/15). The income tax due on income between $18,201 $37,000 is 19%; on income between $37,001 $80,000 it is 32.5%; on income between $80,001 $180,000 it is 37%; and on income over $180,001 it is 47% (including the Temporary Budget Repair levy of 2%)(2014/15). The above rates do not include the Medicare levy or superannuation payments (see below). Taxation of Investment Income Premium Taxes Tax on Property Rental Income Capital Gains Tax Investment income (such as dividends, interest, and rental income) and capital gains are assessed to tax in the year in which they are derived. They are included in total taxable income. Tax is levied at personal income tax rates. Compared to other countries, taxes on insurance in Australia are relatively high. Insurance taxes are levied at State level with different rates for life insurance applying by State, typically 5% of the first year s premium or 1.5% of all premiums. Rental income is charged to income tax, with tax being applied to the rental income received, less any allowable expenses incurred. The Australian taxation system includes a capital gains tax that applies to certain assets acquired, or deemed to have been acquired, after 19 September 1985 upon their realisation (or deemed realisation). Gains taxed under the capital gains tax provisions are not taxed separately but are included in assessable income and taxed at the individual s marginal income tax rate. Individuals (and small businesses) can generally discount a capital gain by 50% if they have held the asset for more than one year. There are also some capital gains tax exemptions e.g. the sale of the taxpayer s primary residence. In certain circumstances a capital gain on a capital gains tax event can be deferred, or rolled over, until another capital gains tax event happens (capital gains tax events include gifts of assets and distributions from trusts and funds). Capital losses cannot be claimed against income but can be used to reduce a capital gain in the same income year. If capital losses exceed capital gains or if a capital loss is made in an income year where the individual does not have a capital gain, the loss can generally be carried forward and deducted from capital gains in future years.

2 Inheritance and Gift Tax There is no Inheritance Tax or Gift Tax in Australia. An individual s death and the subsequent passing of their assets to their beneficiaries constitutes a disposal of an asset and is subject to capital gains tax, with some exceptions available with respect to assets owned upon death. These exceptions include their main residence and transfers to a charity, superfund or foreign resident. Where the capital gains tax exemption is available, the result is that the beneficiary who inherits and subsequently sells the assets is subject to capital gains tax on disposal (or the legal personal representative where there is a sale by the legal personal representative). The proceeds of life insurance policies are generally exempt from tax when received by the nominated beneficiary. Regional and Municipal Taxes Property Taxes Stamp Duty/Transfer Tax State taxes principally comprise Payroll Tax, Land Tax and Stamp Duty and rates, deductions and exemptions vary between the eight States for all these taxes. Payroll tax is a state tax on the wages paid by employers when the total wages exemption threshold is exceeded (payroll tax is not the same as PAYG withholding tax collected by the ATO). All landowners, except those in the Northern Territory, may be liable for Land Tax but this tax does not generally apply to principal places of residence. An annual land tax is levied on all real estate properties based on the assessed value of the property and is payable by the owner. Exemptions to land tax are extended in most states to a person s primary place of residence. Land tax rates vary from state to state and are applied on a sliding scale based on the value of property and vary between less than 1% for lower value properties to over 2% for higher value properties. Stamp duty is levied on particular written documents and transactions, including motor vehicle registrations and transfers, insurance policies, leases, mortgages, hire purchase agreements and property transfers (e.g. transfer of businesses, real estate, and particular shares). The stamp duty rate varies according to the type of transaction and its value, and from state to state. Depending on the nature of the transaction, certain concessions and exemptions may be available e.g. to first-time homebuyers. Stamp duty on residential property is applied on a sliding scale based on the value of property and varies between approximately 1.5% and 3.5% for properties valued below $100,000 to between 4% and almost 7% for properties valued at over $500,000. Stamp duty is paid by the purchaser or borrower. In all States there is an exemption from stamp duty (or only nominal duty) on the transfer of assets to the beneficiary of a deceased estate. Sales Tax Social Security Contributions Goods and services tax (GST) of 10% is generally added to the sale price of goods. There are no reduced rates. Some supplies are GST-free (zero rated) e.g. some foodstuffs, childcare, residential property and residential rent. Social security in Australia is non-contributory and is financed from general taxation. There are, however, contributions payable for superannuation (retirement, invalidity and death benefits) and Medicare (health insurance). An employer must pay a minimum of 9.5% (2014/15) superannuation ( super ) for an employee who is aged 18 years or over but under 70 years of age, and who is paid at least AUD450 (before tax) in a calendar month. The employer's contributions must be paid into a complying super fund or retirement saving account, chosen by the employee. Measures announced in the 2011 budget include a gradual rise from 9% to 12%, carried out in two 0.25% rises in 2013 and 2014 followed by 0.5% rises each year until 2019, bringing the minimum to 12%. The age limit was increased from 70 to 75 years on 1 July Individuals may also make voluntary concessional and nonconcessional contributions. Concessional contributions are taxed at the reduced rate of 15% with non-concessional payments taxed at 45%. A cap of up to $25,000 in concessional contributions can be made into a super account each year with this amount rising to $35,000 for anyone aged 50 years or over. Non-concessional contributions (up to a cap of $150,000 each year) can be paid out of after-tax income. A self-employed person is not required by law to contribute to a super fund, but would normally use super as a form of retirement savings and claim tax deductions for the contributions made. Most taxpayers pay a Medicare levy, based on a sliding scale of between 1.0% and 2.0% of their taxable income.

3 Taxation of Expatriates Living in Australia Expatriates living in Australia will be classified as either resident or non-resident. The primary test of tax residency is called the 'resides test'. If you live in Australia in a settled manner, particularly if this is for more than six months, it is likely that you will pass the resides test and be considered tax resident. As part of this test, the ATO will consider factors such as your employment and the location of your family. Even if an individual does not pass the resides test they will be considered tax resident by the ATO if they meet any of three other statutory tests. For expatriates the key statutory test is the 183-day test. If an individual spends more than 183 days in Australia, whether continuously or with breaks, they will be considered tax resident, unless it can be established that their usual place of abode (the abode customarily or commonly used) is outside Australia and they have no intention of taking up residence in Australia. The 183-day test applies to the tax year, not the calendar year. Generally, individuals going to Australia with the intention of living in Australia in a routine manner for six months or more would be treated as tax residents of Australia from the date of their arrival. Individuals can be regarded as temporary residents. A temporary resident is a person who is a resident of Australia (using the definitions noted earlier) and who is the holder of a temporary visa. Persons who are Australian citizens, permanent visa holders, or holders of special protection visas (or the spouse of one of these) cannot be considered temporary residents of Australia. The general rule is that an individual who is a regarded as a resident of Australia is taxed on their worldwide income. Temporary residents and non-residents are generally only assessable on employment income derived while in Australia, plus any Australiansourced income. Australian residents (although not all expatriates) are also subject to the Medicare Levy. Tax returns are required to be filed by resident individuals whose total income derived from sources in and out of Australia is more than the minimum threshold ($18,200 for 2014/15). For temporary residents, non-employment income derived from sources outside of Australia is generally ignored for this purpose. Furthermore, employment income derived from sources outside of Australia, prior to arrival in Australia, is generally ignored for this purpose. The tax-free threshold will be available only on a prorata basis in the year where a taxpayer either becomes an Australian resident for tax purposes or ceases to be an Australian resident for tax purposes. If an international assignee moving to Australia on a temporary visa enters the country before their assignment begins, they may become tax resident in Australia on the date they enter Australia, rather than the date their assignment begins, if earlier. Likewise, if the assignee visits Australia after residency has terminated, this may defer the date that they become a non-resident for tax purposes. Taxation of Temporary/Non-Residents Living in Australia Tax returns are required to be filed by temporary residents and non-residents who derive any Australian-sourced income (other than dividends, interest, managed investment trust income or royalties, and departing Australia superannuation payments which are subject to a final withholding tax). A progressive tax scale is applied to bands of taxable income of temporary residents and non-residents. Temporary residents and non-residents are not entitled to any personal tax-free allowance. A tax rate of 32.5% applies to all relevant income up to $80,000. The income tax due on income between $80,001 $180,000 is $26,000 plus 37% on each $1 over $80,000, and the income tax due on income over $180,001 is $63,000 plus 45% on each $1 over $180,000 (2014/15). These rates do not include the Medicare levy or superannuation payments (temporary residents may be liable to pay the Medicare Levy depending on their level of income and whether there is a reciprocal health agreement between Australia and their country of origin). Employment income is taxable when it is received or when the employee is entitled to receive it, if earlier. Employment income is generally subject to tax to the extent it was earned/derived during a period of Australian residence, or in the case of income earned/derived while non-resident, to the extent it was earned in respect of duties performed in Australia. Temporary residents salary earned from working abroad is taxable in Australia with a credit allowed for foreign taxes paid on that income. Non-residents are not subject to tax on salary earned from working abroad. The 50% discount on capital gains tax for Australian assets held for more than 12 months is not available to temporary residents or non-residents for any disposals after 8 May Temporary residents and non-residents are generally exempt from tax on foreign investment income and gains. Temporary residents can access substantial Living Away From Home benefits if they maintain a home for immediate use and enjoyment in Australia (this requirement is waived if the individual works on a rotational basis). Temporary residents can also benefit from their relocation costs or interest subsidies being exempt from tax, and bonuses received after arrival in Australia will not be subject to Australian tax on that part of the bonus that relates to services performed prior to arrival in Australia. Temporary residents will be required to file a tax return for the year of departure and also any subsequent year in which they have income that is taxable in Australia.

4 Expatriate Financial Planning The approach to an expatriate s financial planning will be determined by whether the individual becomes resident in Australia or is regarded as temporarily resident or non-resident for tax purposes. While the special tax concessions for temporarily resident and non-resident expatriates can be less onerous than for permanent expatriates who become fully tax-resident, there are some clear guiding principles for expatriates in Australia. If you are an expatriate currently living in Australia, you should review your finances with a financial adviser who has an Australian Financial Services Licence to deal in securities or advise on investments issued by the Australian Securities and Investments Commission. If you are planning a move to Australia, you should review your finances with a suitably qualified and experienced financial adviser who is familiar with Australian tax matters before making the move. If you are planning a move to Australia you can arrange Australian bank accounts up to a year in advance through several of the country s larger banking groups. Australia has effective anti-avoidance rules for residents who hold funds abroad, whether in trust, in foreign life assurance policies, in personal pension funds or in other structures. If you are planning a move to Australia you should seek professional investment and tax advice on these issues before moving. Since a change in Australian legislation in July 2010, offshore insurance bonds have become valuable tools for long-term tax planning for Australian taxpayers and for individuals from other countries moving to Australia. Now investments held within such a policy are able to grow free of income tax and capital gains tax charges (small amounts of irrecoverable withholding tax may be payable on certain investment funds), often referred to as the 'gross roll-up' effect. If a policy has been held for ten years or more, any gains (known as bonuses in Australia) made on partial withdrawals, full surrender or maturity may be disregarded if the beneficiary is either the original beneficial owner of the policy or if they acquired the interest in the policy for no consideration. If the policy has been held for less than eight years, the full gain will be taxed at the policyholder s marginal rate. During the ninth year, two-thirds of the gain is included as assessable income and taxed at the policyholder s marginal rate, and during the tenth year one-third of the gain is included as assessable income and taxed at the policyholder s margin rate. The ten year holding period includes when the policyholder was a non-australian resident. If the premium is increased by an amount in excess of 25% of the premium paid in the previous policy year, the holding period is reset to 10 years from the start date of the policy year in which the premium increase takes place. There are also benefits when planning to pass on an inheritance. The amount paid on the death of the life assured (that results in the policy terminating) is not assessable to income tax on receipt by a taxpayer. Additionally, the estate of the deceased will not be subject to capital gains tax on the proceeds, as the proceeds will have been received with no consideration and this results in any gain or loss being disregarded. If an individual owns an offshore life policy and they become tax resident in Australia and then subscribe to a regulated Superannuation Fund, they may be able to transfer their existing offshore life policy into their super fund providing certain requirements are met.

5 Expatriate Financial Planning - Offshore Bond Benefits Whilst the specific benefits of offshore life products will depend upon an individual s circumstances, they do offer a number of potential benefits to expatriates in Australia. Tax-efficient Investments! Investments in an offshore life product grow virtually free of tax throughout the time the product is held, suffering only a small amount of irrecoverable withholding tax on investment funds located in certain countries! Expatriates who become tax resident in Australia may wish to consider offshore life investments to help manage their tax liability and/or control when tax charges are made. For instance, benefits can potentially be deferred to a period that may be more advantageous from a tax perspective! If an offshore life policy has been held for ten years or more, any gain made on surrender or maturity is not liable to tax if the beneficiary is either the original beneficial owner of the policy or if they acquired the interest in the policy for no consideration! An offshore bond provides a particularly effective way of housing and switching multiple collective investments in a tax efficient manner without triggering annual tax liabilities! An existing offshore life policy may be able to be transferred into a regulated Superannuation Fund with a beneficial tax treatment in Australia providing certain requirements are met Estate Planning! The amount paid on the death of the life assured (that results in the offshore life policy terminating) is not assessable to income tax on receipt by a taxpayer. Additionally, the estate of the deceased will not be subject to capital gains tax on the proceeds Investment Choice Designed for Expatriates! Offshore bonds generally feature a wide range of offshore funds specifically tailored to fit with expatriate clients preferences and attitude to risk. They also offer access to international and specialist fund managers which may not be available in domestic fund and insurance markets! Most companies offering offshore life products are subsidiaries of global financial services companies specialising in dealing with expatriates on a multi-lingual, multi-currency basis! Offshore products can offer benefits over and above what might be available in the Australian domestic market, particularly in relation to product features and investment choice! An offshore product has the flexibility to adapt to changes in your individual circumstances, including changes in your residency status Your independent financial adviser can help you ensure that you maximise the financial benefits of your expatriate status and help you to assess if offshore life products are right for your individual circumstances. Further information about offshore life products and their use in financial planning can be found on AILO s website at This document has been prepared on behalf of the members of the Association of International Life Offices ( AILO ) and relies on information and technical analysis provided by third party professionally qualified tax advisers. Whilst AILO has used its best endeavours in selecting its advisers to ensure the accuracy of the information contained in this document, AILO cannot be held responsible for any errors and omissions. This document has been prepared for general information purposes only. The information contained in this document is a summary of the law relating to taxation that is generally applicable in Australia and is intended for guidance only. The information contained in this document reflects the law as at March Tax legislation is complex and subject to frequent change. This document cannot be relied upon as a specific analysis of the current law as it applies to each individual. Individuals should seek detailed tax advice from a suitably qualified and regulated professional adviser in their country of origin as well as eventual residence before making any decision in relation to their tax planning. The information contained in this document does not and is not intended to amount to investment advice and anyone reading it should consult their professional adviser before making an investment into any investment product of a type mentioned in this document. March 2015