Resident Versus Non Resident

Question

Hi there. We are a couple living in Saudi Arabia. I am an Australian Citizen but a non resident for taxation purposes. My wife is also an Australian citizen but a resident for taxation purposes. We are about to invest in some funds as suggested by Whittaker McNaught. These funds are 50% Australian Equities, a property fund and the rest International Equities. Our aim is to obtain the maximum return from these funds net both whilst we are here in Saudi and then when we get back to Australia. At least one of us will go back into the workforce in some capacity at least for a few years on return to Australia. From a taxation point of view and hence overall return, in whose name should we place these investments to obtain the maximum return both here and then on return back to Australia?

Answer

To answer this question specifically I need to know whether you have borrowed for the investments and whether that is likely to be negatively geared. Considering the bargains in the market at the moment and the low interest rates I am going to assume positively geared right from the start. Even if it is negatively geared for the first year or two as this is such a short period of time compared with the overall investment we should still take the line of positively geared.

Because these are public listed investments Australia only has the right to tax them if you are a resident of Australia for tax purposes. So the question of whose name to hold them in initially depends on which country is going to tax you the least. I can’t tell you what the laws are in Saudi Arabia but I would say at best the dividend and capital gain would be tax free but due to this status there will be no offset for franking credits.

You also need to consider, if your wife is a resident of Australia for tax purposes but has no other income, then having the franked dividends taxed in Australia would be even better than tax free in your name in Saudi Arabia because she will get the franking credits back.

If you still own the shares when you return to Australia then for CGT purposes you are deemed to have acquired them on that date for their market value at that date. So CGT only starts to accrue from the time you return to Australia. This would not apply if they were held in your wife’s name because she is already a resident of Australia. If they are held in your name it and it is decided you are the one who will work when you return to Australia. Then when you return you could transfer them to her if there is no CGT in Saudi Arabia because at this point Australia cannot tax the gain on them.

Note if the income you receive, as a non resident, is not fully franked withholding tax may apply to it. The trouble with withholding tax is it ignores any tax deduction you may be entitled to for interest on the borrowings. Again you need to find out how this will be treated in Saudi Arabia.

If they were owned by your wife then Australia would be taxing the dividends right from the start and any capital growth but at least she would be entitled to the franking credit so a lot depends on her marginal tax rate now and in the future. She would have to earn more than $80,000 before her rate of tax would exceed the 30% franking credit. But not all of the investment maybe franked.

You also need to consider when you are likely to sell and realise the capital gain. This may quiet possibly be the largest part of your return so if that is going to happen while you are in Saudi Arabia and they won’t tax it, it maybe better in your name but if this is going to happen while you are both in Australia then it is best in the name of the spouse who is not working. Again you need to re consider your situation when you return to Australia, if the investment is in your name and there is no CGT in Saudia Arabia if you transfer them to you wife.

I don’t know enough about your circumstances to draw a conclusion for you but I hope that applying this information to your circumstances and future plans will give you a clear choice. Our overseas booklet, available under freebees on our web site can give you all the detail you need.

I suggest you show the above to your financial planner so they can incorporate it into your plan depending on their expectations of franked dividends, capital gains and negative gearing.

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