ISA taxed in Australia

[rb1028]

Hello, forum! Hope everyone is doing well :)

I am a permanent resident in Australia and the United Kingdom. I currently work in the UK and have a UK employer who pays UK tax. In the UK we have this thing called an investment ISA (Individual Savings Account), a tax-efficient wrapper in which you can buy, hold and sell investments.

Since I am also a permanent resident in Australia I need to declare this in my AU tax return. 

Question:

Is it even worth setting up an ISA in the UK since I will be taxed anyway?

If yes: Do I get taxed on my capital gain each year?

[rb1028]

Can I claim a foreign income tax offset for my ISA in the UK?

[Wanderer Returns]

1 hour ago, rb1028 said:

Hello, forum! Hope everyone is doing well

I am a permanent resident in Australia and the United Kingdom. I currently work in the UK and have a UK employer who pays UK tax. In the UK we have this thing called an investment ISA (Individual Savings Account), a tax-efficient wrapper in which you can buy, hold and sell investments.

Since I am also a permanent resident in Australia I need to declare this in my AU tax return. 

Question:

Is it even worth setting up an ISA in the UK since I will be taxed anyway?

If yes: Do I get taxed on my capital gain each year?

Hello - you are confusing your rights of residency in the UK/Australia with your tax residency. By the sounds of it, you are currently resident in the UK for tax purposes - not Australia. Your UK income will only be taxed in the UK (unless you have the misfortune of being a US citizen), and it's got nothing to do with Australia. This isn't financial advice, but you should be able to open an ISA, and whilst you remain resident in the UK, you won't pay any tax on the gains because an ISA is a UK tax-free investment. However, if you return to live in Australia you would then need to declare any earnings from your ISA because it isn't a tax-free investment over here.

Edited January 25, 2021 by Wanderer Returns

[Ken]

3 hours ago, Wanderer Returns said:

Hello - you are confusing your rights of residency in the UK/Australia with your tax residency. By the sounds of it, you are currently resident in the UK for tax purposes - not Australia. Your UK income will only be taxed in the UK (unless you have the misfortune of being a US citizen), and it's got nothing to do with Australia. This isn't financial advice, but you should be able to open an ISA, and whilst you remain resident in the UK, you won't pay any tax on the gains because an ISA is a UK tax-free investment. However, if you return to live in Australia you would then need to declare any earnings from your ISA because it isn't a tax-free investment over here.

There's a tiny number of people who despite working in the UK are still considered to be resident in Australia (usually because that's where their wife and children live in the house that is considered to be their home) so it's possible that rb1028 does need to pay tax in both countries - but the more likely scenario is the one you've described where the ISA is the foreign income of a non-resident and therefore escapes Australian tax.

[rb1028]

@Ken @Wanderer Returns Thank you for taking the time to answer my questions!

Background:

I have no family in Australia but I was granted a PR in 2020. My work relocated me to the UK later that year and I intend to come back down under at some point in the next coming years. If it is beneficial to remain a resident in the UK I will. But I don't want to lose my Australian PR status.

And that's the thing.. If I intend to come back I might as well just invest via an Australian bank since I might be taxed on my capital gains anyway once I liquidate my assets in UK and transfer to Australia. We will see how ATO decides. But from my understanding, I will have to declare it in my tax return in AU at least.

".. Australia has a double taxation agreement with the UK that means that you won't pay tax twice, but of course your Isa income won't be taxed in the UK and you will have to declare any returns or interest as part of your income to the Australian authorities. .."

https://www.litrg.org.uk/tax-guides/migrants/residence-and-domicile/what-if-i-am-liable-tax-two-countries-same-income

_______

Work out your residence status
Whether you’re UK resident usually depends on how many days you spend in the UK in the tax year (6 April to 5 April the following year).

You’re automatically resident if either:

you spent 183 or more days in the UK in the tax year
your only home was in the UK - you must have owned, rented or lived in it for at least 91 days in total - and you spent at least 30 days there in the tax year

https://www.gov.uk/tax-foreign-income/residence#:~:text=You're automatically resident if,there in the tax year

[Marisawright]

6 hours ago, rb1028 said:

I have no family in Australia but I was granted a PR in 2020. My work relocated me to the UK later that year and I intend to come back down under at some point in the next coming years. If it is beneficial to remain a resident in the UK I will. But I don't want to lose my Australian PR status.

i'm still not sure you understand. 

If you are not physically resident in Australia right now, you do not submit an Australian tax return at all.  Even though you hold a PR visa, if you don't have your main residence in Australia, you are classed as a foreigner.  The same rule applies even if you're a citizen.

That's how international tax law works. You are liable to pay tax in the country where you live, regardless of your origin/citizenship. America is the only country that makes their citizens pay their tax even if they're living abroad. 

So, if you are currently living in the UK, it's worthwhile investing in an ISA because you'll get the full benefit while you're still residing in the UK.    If, at some point in the future, you return to Australia, you are allowed to keep any ISA's you already have.  Once you are tax-resident in Australia, you'll need to declare the income from the ISA - but frankly, you're not going to find anything as good as an ISA from Australian banks, so there's no point moving it. 

Edited January 25, 2021 by Marisawright

[Wanderer Returns]

8 hours ago, rb1028 said:

But I don't want to lose my Australian PR status.

Marisa has explained it perfectly in the post above. A UK ISA is the way forward for you at the moment. Forget about Australian taxes until you're ready to return here, and at that time seek professional advice from an international tax consultant so you don't get yourself in a mess.

Your Australian PR status has absolutely nothing whatsoever to do with your tax residency. If you want to return here without complications then you will need to make sure your feet are on Australian soil before the travel facility on your PR visa expires, as it appears that you have no substantial ties to Australia.

[rb1028]

Thanks all for the answers. I think I understand better now.

 

Questions:

1. Do I need to let the ATO know I am not currently residing in the country then? Some form I need to send in. Just to be on the safe side.

 

2. From my understanding this will not affect my resident status in Australia then as long as I come into the country before the VISA ends and then extend it. On my VISA it says:

Quote

 

Date of grant: 14 January 2020

Must not arrive after: 14 January 2025

Length of stay: Indefinite from the date of each arrival

 

3. Will my Medicare be affected?

 

4. What will happen to my Superannuation fund?

 

@Wanderer Returns Ok cool! An ISA it is! I will make sure to arrive before 14 January 2025 then.

 

@Marisawright “.. If you are not physically resident in Australia right now, you do not submit an Australian tax return at all.  Even though you hold a PR visa, if you don't have your main residence in Australia, you are classed as a foreigner.  The same rule applies even if you're a citizen ..” Since I left in the middle of the year I should still submit for the time of the tax year I was a resident in the country right?

5. What happens the day I have a home in Australia and the UK then?

Thanks, everyone! Hope you all have a good day!

[Marisawright]

1. Do I need to let the ATO know I am not currently residing in the country then? Some form I need to send in. Just to be on the safe side.

From memory, there is a box to tick on your tax return if it's the last tax return you will be making (I forget the exact wording).  

2. From my understanding this will not affect my resident status in Australia then as long as I come into the country before the VISA ends and then extend it.

Your tax has nothing to do with your visa.  You'll need to return to Australia before 2025 or you are likely to lose your visa, but whether you pay tax or not is totally irrelevant.

3. Will my Medicare be affected?  - by what?

4. What will happen to my Superannuation fund?  Nothing.  Notify them of your British address so you get notifications.  If you are planning to return there's no point doing anything else.

Since I left in the middle of the year I should still submit for the time of the tax year I was a resident in the country right? - Yes, and you'll probably get a tax refund as you were only there part of the year.

5. What happens the day I have a home in Australia and the UK then?  Is that likely?  You must be rich!  

Edited January 26, 2021 by Marisawright

[rb1028]

@Marisawright Thanks s much!

[Ken]

On 26/01/2021 at 20:09, Marisawright said:

Do I need to let the ATO know I am not currently residing in the country then? Some form I need to send in. Just to be on the safe side.

From memory, there is a box to tick on your tax return if it's the last tax return you will be making (I forget the exact wording).  

Since I left in the middle of the year I should still submit for the time of the tax year I was a resident in the country right? - Yes, and you'll probably get a tax refund as you were only there part of the year.

As well as a box to tick on your tax return (so they don't chase you for future tax returns if they're not applicable) there is a date to enter on the form as to when you ceased to be resident (for tax not immigration purposes). Once you take up residence again you will need to fill in a tax return for that year and complete the date on there on when you became tax resident again. The tax free allowance is pro-rated when you are not resident for the whole year but the tax brackets are not - so you still a full year's worth of the 19% tax bracket even if you were only in Australia for a month of the year, hence the reason you'll (probably) be due a tax refund.