As business families become increasingly mobile and global, it is common for a deceased estate to have interests and assets beyond Australia. They can be overseas business branches, foreign real estate holdings, offshore shares, or bank accounts. All of these assets and interests will have tax consequences on income generated within the deceased estate has tax consequences on the sale of the assets, and also tax implications on the transfer of assets to the beneficiaries.
Getting sound tax advice from your Perth tax accountant, who has a global network, is important. Managing the tax and business impact of assets, both Australian and offshore, is essential for quickly managing a deceased estate and controlling the potential tax liability from the estate’s closure.
Residency of the executor
The residency of your executor has a significant impact on the tax management of a deceased estate. Understanding whether you are a tax resident for ATO purposes is a cornerstone step to managing a deceased estate.
If the executor of your Australian deceased estate is located offshore, you must consider the estate’s overseas tax impact and residency. While your estate has Australian assets, the deceased estate is now viewed as a foreign trust, so the Australian income might be subject to the country’s tax regime where the executor is resident.
Where an executor family member changes their tax residency while managing a deceased estate, considerable tax issues can also arise.
Domicile of the deceased
In Australia, we don’t have a death tax (however, the death of an SMSF member might trigger death tax issues on the payment of the super funds monies). The absence of an Australian death tax historically has meant that we are not concerned with or aware of the deceased’s tax domicile.
The deceased’s domicile can be overseas even though they live in Australia and are tax residents of Australia.
Suppose the deceased has a domicile in another country. In that case, that country might apply their death taxes on the deceased’s assets, even if the assets are in Australian and purchased with income generated from Australia.
This is effectively a tax avoidance mechanism. A person cannot live in a country for, say, 80 years, move to Australia for 2 years, and pass away without paying the death tax in the original country.
Forced heirship
Australia has a generally neutral position on your decision to bequeath assets. That is, you can bequeath assets to a beneficiary of your choice and are not compelled to allocate assets in a specific ratio. Australia has laws that require the deceased to have made reasonable and adequate provisions for the welfare and maintenance of the beneficiaries, but there is also discretion for beneficiaries.
In some countries, the deceased is compelled to distribute assets to their beneficiaries in a certain percentage. In France, for example, if you have a child, you must give 50% of your estate to that child, and you can choose the balance of your estate. In countries with Sharia law, the allocation of assets is compelled, but then some countries exempt foreigners and non-Muslims.
If you have assets in another country, the best way to deal with them on death is to create a will for them. Getting tax and legal advice for those offshore assets is essential.
A will is limited
A will is a document that governs assets owned by the deceased. If the deceased held assets in a trust, where the trust assets are owned by a range of people, the death of the deceased will not affect the trust. So, the will is, by and large, unrelated to the assets owned by a trust.
Importantly, the concept of a trust is not recognised in some countries. In some countries (say Bali), the trust relationship is informal—a friendly local holds the asset for the deceased and is happy to do whatever is needed at the request of the deceased or their executor.
So, given the tax impact of the different jurisdictions on offshore assets, great care must be taken when using a trust relationship.
Non-resident testamentary trusts as an estate planning tool
It is commonly known by Perth tax accountants how a testamentary trust can be an effective tax planning tool for a wealthy family. However, a non-resident testamentary trust can also help because:
- An Australian testamentary trust might be considered harshly in the local jurisdiction.
- Depending on the family, no Australian might want to act as trustee for the testamentary trust.
- The perpetuity period (when a trust can operate) might differ in another country.
- Some countries have tighter secrecy laws than Australia, and if privacy is important to the Australian family, this can be beneficial.
- If an offshore testamentary trust is used, the Australian will might simply gift the assets to the testamentary trust created in the offshore will. However, advice in offshore countries is critical, given the diversity of laws.
Classically, many other countries consider an Australian discretionary trust a sham.
Distributing assets offshore
If an Australian trust generates income offshore and pays that income to a person offshore, the Australian trust will typically incur a withholding tax obligation from that payment. Sometimes, reviewing the Double Tax Agreement can help, but the overall concern is withholding tax.
Further, non-residents cannot enjoy a range of tax advantages from capital gains made by an Australian trust. For example, capital gains distributed offshore do not enjoy the 50% capital gains tax discount.
Stamp duty surcharge
If you are transferring Australian real estate to a foreign person, the possibility of a foreign purchaser stamp duty surcharge might be relevant. So, an estate plan must consider these provisions together with other state-based laws.
Managing poor tax management of the deceased
It is not unusual for an executor of a deceased estate to have a different tax risk profile than the deceased. The deceased might have had a very high tax risk profile, sometimes bordering on criminal! So, an executor might encounter a range of controlled foreign companies, transferor trusts, and offshore cash reserves that have not been adequately disclosed to the Tax Office or multiple years of returns that have not been lodged.
Getting tax advice about a voluntary disclosure to the ATO is essential. If the disclosure is made in advance, a range of penalties and interest remissions are relevant. Further, voluntary disclosure to the ATO also reduces the risk of criminal prosecution by the ATO.
Depending on the situation, it is also relevant to consider the period when income was derived and whether it is too late to amend earlier returns.
Business interests
If the deceased has an operating business in another country, the same succession issues apply to those of Australia. Knowledge of how to operate the company, pay staff, and manage the owner’s death is essential and goes beyond preparing a will.
Upfront communication is important for transferring knowledge about business operations. This is especially true when the business, even if it is a branch operation, is in another country.
Conclusion Managing a deceased estate for a global family with offshore assets can range from relatively mild (like shares owned by a US stock exchange) to considerable for diverse family interests. Getting tax advice from a firm with a global network committed only to a business family’s independent, successful tax and compliance advice is essential to a great outcome. This is where Westcourt is a clear choice – our award-winning expertise, single market focus, independence, and global network of independent firms gives us a unique edge in helping business families that translates into real-world outcomes.
