This article forms the second in its series focusing on pre-migration taxation planning published by OLN. For interested readers, the first article can be accessed via the link (https://oln-law.com/tax-emigration-from-hong-kong-the-importance-of-pre-migration-tax-planning), where we address the pre-migration taxation issues arising from emigration from Hong Kong to the United States. This time, the bullseye of deliberation falls squarely on “the land down under”, or more formally termed, Australia. As mentioned in the first article, Australia is one of the most popular emigration destinations amongst Hong Kong people. This perhaps does not come as a surprise due to what this country has to offer: first and foremost, it being an English-speaking country; secondly, its comprehensive healthcare system; thirdly, the freedom and protection constitutionally guaranteed to its residents/citizens by being a democratic society with the common law legal system; and fourthly, its good living environment which is epitomized by the richness of the natural resources and beautiful landscapes, as aptly characterised in the golden words of its national anthem, “we’ve golden soil and wealth for toil, our home is girt by sea…Our land abounds in nature's gifts, of beauty rich and rare”. In the following, we discuss tax issues relating to intended migration to Australia, and in particular, the tax-mitigating tools which should be deployed before migration to this country.
How to obtain Australian citizenship 101
In a nutshell, to apply for Australian citizenship, one has to hold the Australian permanent resident or “PR” status and satisfy the following residency requirements: (1) living in Australia on a valid visa for the past four years; (2) having been a permanent resident for the past one year; and (3) be away from Australia for no more than 12 months in total in the past 4 years, including no more than 90 days in total in the past one year. To obtain the “PR” status, one generally has to first apply for a provisional visa under the available visa categories to temporarily work or live in Australia, such as an investor visa, spousal visa or work visa which may lead to a permanent visa if the respective requirements are satisfied. That being said, there are two common ways in which one can obtain the “PR” status directly: through skilled migration on a point-based system or through the Business Talent (Permanent) Visa (subclass 132). Additionally, one has the option to migrate by making investments in Australia. To illustrate the investment amount required by way of example, the investor stream under the Business Innovation and Investment (Provisional) Visa (subclass 188) requires an investment of at least AUD1.5 million in an Australian State or Territory and maintain business or investment activity in Australia. On the day one obtains a permanent visa, one becomes an Australian permanent resident, who can live and work in the country indefinitely, subject to renewal every 5 years unless citizenship has been obtained, and enjoy certain other rights customarily given to an Australian citizen. For Australian income tax purposes, a new arrival becomes an Australian tax resident after staying in the country for 6 months. Thereafter, this tax residency status can be got rid of by having no actual place of residence in Australia for an extended time, normally 2-3 years.
Absence of Bilateral Double Taxation Treaty between Hong Kong and Australia
As is the case with the United States, Hong Kong currently does not have a comprehensive treaty for double taxation with Australia. This essentially means that, in the absence of bilateral tax concessions, an Australian tax resident whose income has a Hong Kong source, for instance, employment income from Hong Kong entities, interests in Hong Kong entities and rental proceeds from Hong Kong properties will be taxed twice, one time in Hong Kong based on Hong Kong’s territorial source principle of taxation, and another time in Australia based on the worldwide income principle. Nonetheless, a Hong Kong person may be entitled to claim a tax offset if tax on the Hong Kong income has actually been paid to the Hong Kong government and the income has been declared in one’s assessable income for Australian income tax purposes to the Australian government. A Hong Kong person holding a provisional visa as described above may also claim a special exemption on passive income derived in Hong Kong such as rental income.
Pre-emigration Tax Planning
There are a number of taxation tools that can potentially mitigate the Australian tax ramifications. For individuals, before migration, a formal valuation on all investment assets should be carried out to establish the value against which tax on future profits above such valuation will be levied. For instance, assets such as Hong Kong shares can be valued using the last market price (rather than the historical cost if more favourable) on the day of relocation to maximize tax efficiency. With this valuation method, the difference may be significant. This may subsequently have a huge impact on the tax payable on income when the proceeds are realised. However, this might leave the inheritance tax issue unaddressed.
Again, a trust could be an effective tool for tax savings purpose, including inheritance tax. In the case of a foreign trust already in place or to be set up, under Australian tax law, income and gain the foreign trust generates which are later distributed to an Australian tax resident beneficiary are taxable on the part of the beneficiary. In such case, if the beneficiary decides to migrate to Australia, the trustee of the foreign trust should make as much as possible distribution and unpaid retained earnings to the beneficiary before the migration. The trustee appointed or to be appointed should also remain in Hong Kong and have central management of the trust in Hong Kong as the foreign trust may turn into a resident trust if the trustee also migrates to Australia, with the tax consequence that worldwide income of the trust becomes assessable and taxable. The settlor of the trust should therefore appoint a trustee who he thinks will remain in Hong Kong (often a professional instead of a family member) to provide maximum tax benefits to the beneficiaries if the family (comprising the settlor and the beneficiaries) intends to migrate to Australia.
As seen from the above, before migration to Australia, a number of taxation tools should be properly carried out by the Hong Kong person or the relevant Hong Kong entity in order to minimise tax impact post-migration. In this regard, a comprehensive and detailed taxation framework should be implemented to achieve maximum gains from tax reductions.
OLN provides a range of tax advisory services in the migration context. If you have any questions on the above, please contact one of the members of our Tax Advisory Team.
Disclaimer: This article is for reference only. Nothing herein shall be construed as Australian or Hong Kong legal advice or any legal advice for that matter to any person. Oldham, Li & Nie shall not be held liable for any loss and/or damage incurred by any person acting as a result of the materials contained in this article.