Non-resident tax on Australian-sourced income

1. The following forms of income would not normally need to be disclosed on the client’s Australian tax return if they are derived after the taxpayer ceased being a resident of Australia: 

• Foreign sourced income
• Dividends
• Interest
• Royalties

Dividends, interest and royalties paid to a non-resident are generally subject to non-resident withholding tax. This is a final tax in Australia (although foreign tax could apply). If the dividends are fully franked then they are exempt from withholding tax and any further income tax in the hands of a non-resident.

However, if your client has not informed the bank, company or share registry that they are no longer a resident of Australia then the appropriate withholding tax amounts would not have been deducted. In this case we would normally disclose the amounts to the ATO on an additional attachment to the tax return so that the ATO can issue a withholding tax assessment.

2. When it comes to the sale of the shares, at a very high level non-residents are only subject to CGT in Australia on assets that are classified as ‘taxable Australian property’ (TAP). This means that the sale of shares by a non-resident should not be subject to CGT in Australia unless the shares are classified as TAP. There are 2 ways the shares can be classified as TAP:

a) Shares in a company are automatically classified as TAP if both of the following conditions are met: 

• The shareholder and their associates hold at least 10% of the company; and 
• More than 50% of the market value of the company’s assets is attributable to Australian real property (directly and indirectly).

If the shares are not automatically classified as TAP, whether the shares are classified as TAP in the hands of the client will depend on what happened when the client ceased being a resident of Australia (see below).

b) When an individual ceases being a resident of Australia this triggers CGT event I1. When CGT event I1 is triggered the individual is deemed to have disposed of all their CGT assets for market value on that date (except pre-CGT assets and taxable Australian real property). This means that a capital gain would arise under CGT event I1 if the market value of the shares in the company at the time the client became a non-resident was more than the cost base of the shares.

Other capital gains and losses may also have been triggered in the hands of the individual.

When CGT event I1 is triggered the individual is able to make an election to defer any capital gain or loss that is triggered under CGT event I1. If the election is made, the assets they hold will be treated as TAP until they are subsequently sold. In this case the cost base of the shares is based on the original acquisition cost.

c) Putting this all together, the two main alternatives are as follows: 

• If the client chooses to be taxed upfront on ceasing to be a resident of Australia, the subsequent sale of the shares should only be taxed in Australia if the shares are automatically classified as TAP (point a) above); 
• If the client elects to defer the capital gain or loss that would have be triggered when they ceased to be a resident of Australia, the subsequent sale of the shares should be taxed in Australia.