I'm in London Still*
So last month I whisked you away to the beautiful banks of La Dordogne. This month we are travelling on a much less romantic journey - how to tax effectively provide for family members under your estate plan who have left our shores to live or work overseas.
Something as seemingly simple as leaving shares to an adult child who has been living and working in London for a few years, can trigger unexpected CGT consequences for the estate if the tax complexities are not carefully considered.
In the broadest of terms, Australian tax residents pay Australian tax on their worldwide income and gains. Non-residents pay tax in Australia on Australian sourced income and capital gains on Taxable Australian Property (TAP) when it is disposed of.
The starting point is to be aware of the residency status of the beneficiaries and trustees and the location and nature of the assets forming part of the estate.
Determining individual residency is in itself fairly complex and depends on a person’s domicile, whether they spend more than 6 months in or out of the country, and turns on the facts in each situation. It is certainly more than just ‘ticking a box’.
The residency of a company will be informed by its place of incorporation, the location of its central management and control, the residency of directors, and where board meetings are held.
Trust residency will generally be determined by the residency status of the trustees using the individual or company residency tests.
The general position is that where an Australian resident dies, CGT ‘rolls over’ and is not usually triggered until assets are subsequently disposed of to third parties by the executor, a trustee or a beneficiary.
However, if an asset that is not TAP (for example, shares) passes to a non-resident beneficiary, a CGT cost will be triggered earlier (CGT event K3). Hot Tip: From a practical point of view, if the time the asset ‘passes’ to the non-resident is outside the deceased’s income tax return amendment period, then there may not be any material tax consequences.
If TAP (real estate) passes to a non-resident beneficiary, although K3 won’t be triggered, Foreign Resident Capital Gains Withholding tax will be payable and further the CGT discount may not be available.
One recommended solution is to create a testamentary trust under your Will, giving the executor the flexibility to decide what assets go into it, and the ability to make it a non-resident trust if the relevant jurisdiction recognises trusts (and hold cash for example), or a resident trust to hold Australian property (such as shares) for a non-resident beneficiary.
So when your daughter Skypes you from London on a Sunday night for a weekly chat, let that remind you to ensure you have an effective estate plan in place and avoid the unhappiness of unexpected tax outcomes for your beneficiaries. Speak to the team at Partners Legal today to make sure you are covered for every situation.