Who deals with tax havens?

Many countries and their tax advisors will strongly suggest that they are not tax havens but lower-tax countries.  Luxemburg has previously been considered a tax haven. Still, they are now part of the European Union – so they cannot act as a tax haven under their membership requirements for the European Union.

So, who deals with a “tax haven” is not restricted to a country or a person. The simple act of dealing with a tax haven, or a country with lower taxes, does not make a person a good taxpayer or a bad taxpayer—they are simply dealing with a country that is not Australia.

If you run a boat charter business in the Cayman Islands, you might simply be leveraging their beautiful coastline and growing tourism business.

What is the best way to deal with a tax haven?

Suppose you want to use a tax haven. In that case, the best way is to leave Australia forever and not be an Australian tax resident – think Novak Djokovic, a tax resident of Monaco, and Sean Connery, a tax resident of Switzerland.

So, the ideal solution is to leave the country, sever your ties to Australia, and make the tax haven your home. This solution works for globally mobile families.

If you have no money in Australia, and no connection to Australia, Australia cannot tax you.

If you leave Australia and become a non-resident of Australia, the Australian tax regime will still tax your Australian assets.  So, if you have an Australian rental property, the income from that property will still be taxed in Australia.  Suppose you have Australian shares on the ASX. In that case, you can pay capital gains tax when you become a non-resident at the market value of the shares, or you can keep those shares within the Australian tax net, so they continue to be taxed within the Australian tax system.

So, to use a tax haven properly, you would also sell all taxable Australian assets, such as real estate and privately held shares, and not generate income from those assets.

What happens if you have income generated from a tax haven?

Suppose you’re an Australian tax resident with investment income generated in a tax haven. In that case, that income will likely be deemed your Australian income – using the tax haven to quarantine taxable income away from Australia will not work.  The income will be attributed to you, through the tax haven, and you will pay tax in Australia.

If, after you have paid Australian tax on the income, the tax haven transfers the taxed income to you, the cash payment of that money transferred will not be taxed again.  Australia won’t tax your income twice.

If the tax haven applied some minor tax rate (say 2%) on the monies sent back to you, you might enjoy a reduction on your Australian tax payable.

Many find the Australian headline tax rate of 47% intimidating. However, it is also worth noting that our tax rate is final. Australia does not have a state income tax system, and we are often quoted the Federal tax rate of other countries but not the differing state income tax rate.

For example, the highest US tax rate is 37%, so it looks like people are getting a better deal. However, California’s highest state tax rate is 13.3%, so the combined tax rate for a person in California is 50.3%.  This rate should be compared to the Australian rate of 47%.

Further, Australia does not have death taxes. In comparison, the UK has a death tax of 40% of the estate value over 500,00 pounds if the estate is left to a child.  Admittedly, we can have a hidden death tax in a superannuation fund, but this can be managed with smart tax advice from your Perth tax accountant.

Australia also does not have a social security tax.  French residents’ social security tax rate is roughly 13% to 40%, depending on their income.  So, comparing the French Federal tax rate is not appropriate.

It is also worth knowing that nothing is for nothing.  Many tax havens apply no taxes at all to attract investment; however, to qualify for a zero-tax outcome, you are committed to spending a minimum amount of money in that country.  So if you have a team of people working for you in another country, you might need to consider the tax impacts before hiring staff internationally.