Coming to Australia

Australia is a popular destination for many looking to emigrate or acquire a second citizenship. The critical, but all too frequently overlooked factors in deciding between the various immigration options, are the Australian taxation implications.

The status of an individual and their family members as 'temporary residents' for Australian tax purposes can have a significant bearing on the way they are taxed. Set out below is a summary of the various visa options and the related Australian tax planning considerations for high-net wealth (HNW) individuals and their families.

Visa Options

Significant Investor Visa

Since its introduction in late 2012, the Significant Investor Visa (SIV) has become very popular. It requires an investment of at least AUS$5m to be made by an individual into one or more complying investment. These are:

• Commonwealth, state or territory government bonds.

• Managed funds regulated by the Australian Securities and Investment Commission (ASIC) with a mandate for investing in Australia.

•  Direct investment into Australian proprietary companies. This can be an existing company with a trading history. 

A key advantage of the SIV is that the holder does not have to be actively involved in the management of their complying investment. They also do not need to spend much time in Australia; an average of 40 days per year over the period of the visa is all that is required.

The spouse and dependents of a SIV holder are entitled to remain in Australia for the validity of the visa. No age limit applies to applicants and it's not necessary to meet the points system which applies under other visa streams. English language skills are also not required.

The visa can be extended twice for a period of two years. Therefore the maximum length of a time that an individual can remain on the SIV is eight years. The holder of an SIV can apply for permanent residency after the initial four year period or choose to renew.

Where a complying investment is made in the form of an Australian proprietary company, this must be held in the name of the visa holder or through only a maximum of one interposed entity.

If a trust is used as the ultimate ownership vehicle, the beneficiaries must be the visa holder and their spouse, or de facto partner. These requirements place an unnatural restriction on the way in which an investment into an Australian company must be made by a SIV holder.

Although the SIV is processed by the Commonwealth Department of Immigration and Border Protection, it is necessary for an applicant to be nominated by the state or territory in which the complying investment will be made. It is expected that an applicant has a genuine intention to reside in the state or territory which has nominated them.

Premium Investor Visa

The commonwealth government announced in October 2014, that it will develop an enhanced version of the SIV for foreign persons wishing to invest at least AUS$15m in complying investments. The Premium Investor Visa (PIV) is designed to target HNWs wishing to make Australia their home.

The holder of a PIV will be able to apply for permanent residency after the expiry of the visa which will be issued for a period of 12 months. This is a reduction of the minimum of four years, which applies under the SIV.

As the details of the PIV are to be developed, it is not yet known whether the investment criteria will be entirely aligned with that applying under the SIV or whether it will be more tightly drawn. Applications are expected to be open by July 2015.

Other Options

Given the popularity of the SIV, it is easy to forget the other visa subcategories and streams which are available for investors. The SIV is actually only one of three iterations of the Business Innovation and Investment (Provisional) visa (subclass 188). There is also a Business Innovation Stream and an Investor Stream too.

Other alternatives include the permanent visas issued under the Business Talent 132 (Permanent) stream. This has two streams for investors. The Significant Business History Stream, and the Venture Capital Entrepreneur Stream.

The latter is potentially available where an entrepreneur secures at least AUS$1m of funding from a fund that is a member of the Australian Venture Capital Association Ltd. This investment must be made into a business that is to be undertaken in the nominating state
or territory.

Australian Tax Considerations

The Australian tax implications of a particular visa option should be considered upfront. There is an interaction in the particular type of visa granted to an individual, and the way in which the Australian tax system may apply to their income.

The tax system applies differently depending on whether a person is a tax resident or not, and determining this can be complicated. There is an extensive body of case law from the ATO which stand behind the statutory definition.

An individual will be a tax resident if they reside in Australia under ordinary concepts. This requires a close analysis of their personal circumstances: the intention or purpose of their presence, social and living arrangements and the location of personal assets.

At a basic level there is a risk that an individual may become a resident if they establish a home in Australia which they periodically use after they are granted a visa. This could be a temporary place to stay while in Australia or be a home used by immediate family members. The travel patterns and circumstances of the individual may be consistent with either residence under ordinary concepts, or could even trigger 'deemed residence' where an individual spends 183 days or more in Australia.

Temporary residents

The Australian government introduced a significant concession applying to temporary residents during 2006. Critically only Australian sourced income of a temporary resident is subject to Australian tax, together with income from employment exercised overseas. The capital gains tax (CGT) rules apply to temporary residents in the same restricted way as they apply to non-residents.

In practice, this means that the holder of a temporary visa can often reside in Australia and not be taxed on income received from offshore assets. This could be dividends from the family business incorporated and operating overseas,
or interest from an offshore bank account. Temporary residents are also excluded from the operation of Australia's attribution rules.

As soon as an individual switches over to a permanent visa, then they naturally lose their status as a temporary resident, which may be a reason to choose to renew their SIV. It might also be a reason why an individual may wish to apply for the SIV instead of the PIV in the first place (particularly if the PIV turns out to be non-renewable).

There are other potential strategies that can be deployed before moving to a permanent visa class, which include recognising foreign sourced income while a temporary resident. An example may be to pay dividends from an offshore privately held company before applying for Australian permanent residency.

Once a tax resident individual ceases to qualify as a temporary resident, then (with limited exceptions) their entire worldwide assets will come within the Australian CGT net.

Other complexities

There are a number of other factors which should be taken into account as part of any pre-immigration tax planning. Among these are the potential application of a double taxation agreement where the individual will remain a tax resident of another country. Consideration should also be given to the timing and amount of any contributions or transfers to complying retirement schemes.

This may include the establishment of a self-managed fund which can be a flexible and tax efficient wealth accumulation strategy.

Conclusion

It is advisable to consider the tax implications associated with the various visa options as part of a comprehensive immigration strategy. Given the dynamic nature of the Australian tax system (and life in general) this strategy should be periodically revisited.

Stephen Banfield and Rita Choudhury are based in Withers' Sydney offices