Reducing your Australian tax bill through a fancy offshore tax haven is appealing. And, the idea that up to half of your wealth will be taxed on income to the Australian government is not appealing to many business-minded families in Perth and across Australia.
In this blog we will consider how income in tax havens is taxed, what people when they have a tax haven, and alternative options to people who are looking at tax havens.
What is a tax haven?
A tax haven is a country with either no or very little tax. Some countries have a higher tax rate, but if you do something, they will lower their headline tax rate to attract you to invest in that country.
Sometimes they offer no tax if you employ a minimum number of people in their country.
What is not a tax haven?
Australia has different tax laws with different countries. However, if you have money and assets invested in the following countries, your Australian tax risk is reduced:
- Germany
- France
- Canada
- Japan
- New Zealand
- United Kingdon
- United States of America.
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.
How do some people hide their income in a tax haven?
They don’t. The ATO is very sophisticated at detecting hidden money, and a range of smart people who have hidden money now look silly—think Project Wickenby.
If you engage a stranger as your front person, you commit a criminal act. Sadly, the world is full of stories where the stranger either steals your money or, when asked by the ATO to reveal who they are acting for, gives them your name.
What is the best tax haven I can consider from Perth?
The best tax haven is your superannuation fund. As a couple, you can have $3.8m invested, and when you are over 60, the entire income generated on your superannuation fund monies is entirely tax-free. The income and capital the superannuation fund pays to you are also tax-free.
Further, any underlying tax companies pay (think franking credits) is also fully returned to you.
So, if your $3.8m superannuation fund generated a franked dividend of 4%, you will enjoy an income stream of $152,000 from your investments. The government will then refund you $65,142 as a refund of your franking credits.
Your tax rate, when appropriately structured, is negative 42.8%. This compares to a personal income tax rate of positive 2.5% in Liechtenstein.
You could also own another $1m personally outside the super fund earning, say 5%, as a couple and not pay tax.
So, you can earn $192k and enjoy a negative tax rate of 42.8%.
What other Australian tax havens exist?
The sale of the family home as your main residence is also tax-free. This tax-free gain you make is not capped, so if you sell the family home with a profit of $10,000 or $10m, you will not pay tax on the profit.
If we compare the generous Australian tax position to the USA, the ability to enjoy tax-free profits on the sale of the family home is capped at USD 500,000 a couple.
Using the family home to shelter wealth from taxes is a significant tax haven that is only sometimes available in other countries.
Comparing countries and tax regimes
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.
How to generate taxable income in a tax haven safely
If you run a business in another country through a permanent establishment, prepare sound business records, and keep the business profits in that country, Australia typically won’t tax them until they are sent to you as a dividend.
So, if you have a coffee shop in Monaco selling coffee to local people, the profits from your coffee shop are legitimate trading profits, and Australia won’t tax them. However, if the Monaco business is somehow connected to Australia, such as buying Australian coffee beans for free, then you will have significant tax problems.
Managing your taxes
The tax rates of countries where it is easier to generate income are generally higher. The infrastructure of countries like the USA, Australia, Germany, and the UK makes it easier to make profits in those countries, and those countries generally have a higher tax rate.
The infrastructure support of, say, the Cayman Islands generally makes it harder (not always) to generate income. Those countries use lower tax rates to attract foreign investment.
When you engage a tax advisory firm, it is important to use a firm with a deep international network like GGI. As an alliance of over 31,000 advisors, you get the benefit of a global view while benefitting from independent advisors in each country.
At Westcourt, we have the best of both worlds regarding tax and financial structuring advice. We are a committed independent team of tax professionals who actively engage and leverage the Australian tax system so business families can structure and manage their financial affairs to enjoy the highest after-tax returns. We are also globally connected to other independent firms that are at the top of their field to help business families who are globally invested. So, if you are seriously considering managing the family and business wealth properly, why not call us?
