Should Australian Expats Hold Australian Trusts
Many Australian expats often assume that because they’re a non-resident of Australia for tax purposes, any capital gains on shares, ETFs, or managed funds would be exempt from Capital Gains Tax (CGT) in Australia regardless of the ownership structure.
However, as has been demonstrated, this can be a dangerous assumption and could lead to unexpected tax consequences. The ownership structure and domicile of the ownership of assets are key questions for Australian expats, and this week our team at Ally Wealth Management explores the implications for Australian expats holding such assets through a Discretionary Family Trust.
Let’s first explore what a Discretionary Family Trust is
A Family Discretionary trust is a structure whereby assets are held by one or more individuals, or a company, with the intention being that the benefit of the assets held is transferred to the individual/s based on the details outlined in the Trust Deed.
Setting up a trust in Australia is a relatively straightforward process, however, is certainly an area in that appropriate advice should be sought, given that it can have significant tax implications now and in the future.
The key benefits of a Family Trust in Australia are as follows:
Asset Protection
A trust can allow the separation of ownership of assets to provide some degree of the legal protection of assets in the event of lawsuits. You may also wish to ensure that certain assets can not be sold and are to remain part of the estate and Trust for the benefit of future generations.
Tax Effectiveness
A family trust can allow you to have discretion over how capital gains and income are distributed to the beneficiaries of the trust. This means that the trustee could direct greater portions of income and/or capital gains to lower-income beneficiaries to minimise the overall tax impact.
Mobility of Control
With a discretionary family trust, you may decide that you wish to pass control of the trust to other family members, as well as putting in place controls and restrictions over which family members are allowed to be the trustee. This can provide a further degree of asset protection.
Estate Planning
Finally, another key benefit of a Trust is that it allows for probate to be avoided, which can be a costly and tedious process, as anyone who has been through it will attest to. First, the Will must be deemed to be valid before the estate can be distributed, and even after this has been done, it can take months, and in some cases, even years, for an estate to be distributed. For a simple estate, the process is usually three to six months, so this can be quite a drawn-out process without the proper planning in place.
A Trust allows you to bypass the estate, speed up this process, and make everyone’s lives easier when it comes to administering the estate.
Let’s now consider if beneficiaries are non-residents of Australia
In two recent cases in Australia, the Federal Court has held that where a non-fixed trust distributes a capital gain to non-residents of Australia for tax purposes, both the trustee of the trust and the non-resident beneficiary would be liable for tax in Australia, even when the asset being sold is a non-TAP asset.
As a quick refresher, Taxable Australian Property (TAP) refers to those assets that remain taxable in Australia regardless of where you may reside. The Australian Tax Office (ATO) has defined this to include:
- A direct interest in real (physical) property located in Australia
- Mining, quarrying, or prospecting right to minerals, petroleum, or quarry materials that is situated in Australia
- A Capital Gains Tax (CGT) asset that you’ve used at any time to carry on a business through a permanent establishment in Australia
- An indirect interest in real property located in Australia – whereby you and your associates hold 10% or more of an entity (foreign or domestic) and the value of your interest is principally attributed to Australian real property.
The two cases referred to are Peter Greensill Family Co Pty Ltd v Commissioner of Taxation [2020] FCA 559 and N & M Martin Holdings Pty Ltd v Commissioner of Taxation [2020] FCA 1186. In both cases, the issue was based on the sale of shares by a Discretionary Trust in Australia and the capital gains were distributed to beneficiaries who were non-residents of Australia for tax purposes.
Let’s explore other ownership structures were there to consider
In the event of both cases above, had the shares been bought and sold directly by the individual beneficiary in their own name, as a non-resident of Australia for tax purposes, there would have been no CGT payable in Australia. They may have also considered an insurance bond, offshore company or otherwise, and in most cases the CGT issue in Australia could have been avoided.
What does this mean for Australian expats?
This highlights the need for Australian expats to review their investment ownership structures and consider the potential implications. This doesn’t simply mean that if you do have a Discretionary Family Trust you should shut it down and transfer the investments, but it does mean you should conduct a thorough review and explore your options with your Financial Planner.
Ally Wealth Management is the trusted ally in finance for Australians at home and across the globe. As both Australian expats and residents, the founders of Ally have a unique understanding of the common personal financial challenges faced.
Book your complimentary appointment with our team at Ally Wealth Management to discuss how we can help you to achieve your financial goals.
Ally Wealth Management Pty Ltd is a Corporate Authorised Representative of Sentry Advice Pty Ltd ABN 77 103 642 888. Sentry Advice holds an Australian Financial Services Licence (AFSL) No. 227 748.
General Advice Warning: The information contained herein is of a general nature only and does not constitute personal advice. You should not act on any recommendation without considering your personal needs, circumstances, and objectives. We recommend you obtain professional financial advice specific to your circumstances.
