Wealth Solutions & Wealth Planning
Baker McKenzie Tax Consultant Olesnicky on the Taxation Do’s and Don’ts of Alternative Residence
Michael Olesnicky of Baker McKenzie
Jul 12, 2021
Michael Olesnicky is a senior consultant, tax and wealth management, at law firm Baker McKenzie, based in Hong Kong. He joined a lively and informative Hubbis Digital Dialogue discussion on June 24, during which the panel of experts focused their attention on the latest trends, opportunities and challenges facing wealthy private clients in Asia as they seek alternative residence or citizenship options around the world. Michael looked at these issues from the angles of tax and structures, offering his insights into some of the considerations HNWIs and UHNWIs should deliberate as they make their relocation plans. Michael is well known for his forthright and insightful perspectives, and as a former Asia Pacific Chair of the Baker McKenzie Tax Practice, from 2000 to 2014 and during those years a member of the firm’s Global Tax Steering Committee, he has accumulated a wealth of experience in his more than 25 years in Hong Kong and Asia working on regional tax advisory work, tax disputes and litigation, as well as wealth management and estate planning. Hubbis has taken the opportunity to select some of his opinions from the June 24 event.
Looking at residence, citizenship and relocation planning from the perspective of tax, Michael said there is a risk of over-generalising because each country's tax rules are so different. It is easier to think about what types of mistakes clients typically make when arranging their estate planning and organising themselves and their families for a possible change of residence or citizenship.
An obvious error, he said, was not fully appreciating that the days of non-disclosure and hiding assets are over. “There is too much information being transferred around the world. Under the so-called common reporting standard, tax authorities everywhere can easily know what assets in terms of bank accounts, securities accounts and certain types of insurance policies people have in other countries, and I'm pretty sure that CRS will be expanded in due course to cover real estate holdings in other countries. On top of that, more countries are now doing immigration matching, where information about your days in and days out is automatically made available to the local tax authorities who can the check whether you are filing tax returns locally.”
Don’t get caught up in an ever-widening net
Michael cautioned that, in such an environment, people should avoid getting embroiled in a tax audit by the authorities in the country they are moving to, whether that is the US, Australia, the UK, Spain, and other countries. Tax audits are very unpleasant, and the best way to avoid them is to be tax-compliant in the first place.
Another issue that people need to be aware of is that the days are largely over when an individual can claim to be resident nowhere. “The nomad is the person who spends two months here, three months there, but doesn't seem to spend enough time in any one country to be tax resident anywhere. Those days are severely numbered, because it has become so much more difficult for such nomads to comply with most institutions’ KYC and other AML requirements, and to provide CRS residence declarations, when opening or maintaining bank accounts, securities accounts, and so forth,” he reported.
Keep good records; diligence pays off
He also warned that individuals and families, especially the very wealthy with family members and wealth spread across the globe, do not often enough keep good records, even of basic things like travel.
“If a person travels a lot, whether for business, vacation, to stay in their overseas homes, for education, healthcare treatment or to visit relatives, they are very often unaware of the tax rules that might apply. So, when they try to sort out their tax affairs at the end of the year, they often do not have the information available to help sort out their tax liabilities and prepare tax returns.”
Plan ahead and act early
And even for those people who do plan and are organised, they often leave things too late, waiting until they are just about to depart for their new country or, worse, turning their minds to tax planning only after they have settled into their new country. He cited the example of somebody moving to the US or to the UK who, after taking up residence overseas, then sells their house in Hong Kong.
“Suddenly, they have exposed themselves to capital gains tax in the US or UK on all the gains they've made in all the years they have owned that house. What they should have done, if they had planned their affairs in advance, was to have sold up before emigrating. People must consider these matters and plan well in advance, especially for countries such as the US or Australia where you can become a tax resident before you actually arrive to live there. This is because, depending on when you arrive within a tax year, you might have unwittingly triggered tax liabilities from the beginning of the tax year while you were still implementing your tax planning.”
“If only I had a dollar”, Michael mused wistfully, “for every client who came to me and said: 'I'm leaving for Australia next week to live, is there anything I should do before I go?' By then, it's too late to do anything meaningful.”
Don’t put too much trust in trusts today
Another area of concern is trusts, which Michael noted were popular among Hong Kong people but increasingly the subject of adverse tax rules in many countries. “Many countries nowadays don't like trusts, and they have very strict tax rules to hammer people who have established trusts abroad,” he reported. “If you move to Australia, for example, you will be taxed on all of the income of any trust that you've ever set up. The UK has very complicated rules about trusts. America also has rules that attack trusts tax-wise. All of this requires complicated review and planning. So, if you have ever set up a trust, you really have to think carefully about how to plan for that. There are strategies to address those issues in many cases. And remember, the fact that you have ever settled a trust will be reported each year to your new tax authorities under the CRS regime. “
Is your hand still on the tiller?
Another key issue relates to overseas companies and issues surrounding control, rules for which vary from jurisdiction to jurisdiction.
“We all too often see that, when people move to a new jurisdiction of residence, they keep control of their offshore companies from within those jurisdictions,” Michael warned. “If you do that, you will make those companies tax-resident in the new jurisdiction This is a big concern for many wealthy Mainland Chinese, for example, who control their offshore (say, BVI) companies from within China, but when they move to (for example) Australia or the UK, those companies become subject to tax in those countries on their world-wide income. And even if proper planning is done to ensure that those companies remain non-resident, it's essential to consider the potential application of your new country's controlled foreign corporation rules.”
Get your timing right
Another basic piece of planning involves remembering that, in most countries, income is assessed on a cash basis.
“When you receive income is important, so before you take up residence in a new jurisdiction, think about the income streams you're due to receive and check whether you can accelerate those receipts prior to taking up your new residence. That might include late salary payments, termination payments from employment, stock option gains, capital gains from investments, and so forth.”
Seeking a bigger cut, even from beyond the grave
Michael also highlighted a recent report by the OECD on inheritance taxes and death duties in which the OECD suggested that these could become useful sources of government revenue, especially in these Covid times. The OECD believes governments are not doing enough to tap into this potential source of revenue. He remarked that this is typically the way in which the OECD operates, aiming to sensitize governments on key issues before pushing them more vigorously.
“Ultimately, I suspect we're going to see the OECD doing more work on inheritance taxes and trying to induce more countries to impose this tax,” he observed. “And most certainly, if you do move to another country, death duties are something you need to think about in addition to normal income taxes.”
Broadening the residence rules = broadening the tax take
Michael also pointed to moves in Australia to broaden the tax revenue base by capturing more people in the Australian tax net by expanding that country's residency rules, and even by making it harder to give up Australian residency when leaving Australia. “It is as close as you can get to a citizen test without actually having a citizen test,” he reported. “It has raised a lot of kerfuffle within Asia, particularly in the Australian expatriate community, but it applies to more than just Australian expats.”
He explained that the Australian authorities have presented this as a simplification of the tax rules. The basic idea is that there will be an absolute 183-day test, so anyone who spends more than six months in total in Australia during a tax year will be taxed as fully resident for the full tax year.
The maze – tough to get out
However, this is complemented by a new 45-day rule which will deem many people to be tax-resident in Australia who would not be regarded as resident there in the normal meaning of the word, and who don’t even intend to become resident there. “We'll see how that goes in the final legislation,” he said, “but the 45-day rule is going to trap a lot of people. If you're in Australia for more than 45 days during the tax year, you will be deemed to be an Australian resident for that year if you meet two out of four criteria, which will not be easy for many people to side-step.”
The four criteria, he reported, include: first, if they are an Australian passport holder/citizen, or have permanent residence there; the second is if they have a spouse or child under 18 in Australia; the third is if they have accommodation available in Australia, like a holiday home or a second home; and the fourth factor is if they have economic or business interests in Australia, including property they rent out to tenants or significant bank accounts. The last factor might even cover financial investment assets in Australia, such as a holding of ASX-listed stocks.
So, a tourist who visits Australia and does a two month trip to see the vast country will be deemed to be an Australian resident if they happen to have a child in boarding school in Australia and own a property in Australia for that child's use. “Really tough”, said Michael.
When leaving is not having left…
Michael also reported that anyone leaving Australia would find it increasingly tough to give up residence because they will automatically remain a resident for the next couple of years, with one exception being for departures related to foreign employment.
“All of these changes will come into effect from mid-2022 or mid-2023, depending on how long it takes the government to draft the legislation,” he reported.
He added that for those people who live in jurisdictions which have a double tax treaty with Australia, for example Singapore but not Hong Kong, it is easier to navigate these waters.
“People in tax treaty countries can take advantage of the tiebreaker clause in the relevant tax treaty, but even that is not a complete panacea, because the dominant factor is where do you have your permanent home,” Michael commented. “So if, for example, you have a family home in Sydney, but you just have a short-term rental apartment in Singapore, that might give the Australian authorities ammunition to argue that you should still be treated as an Australian resident rather than a Singapore resident if you fail the 45 days test. It's all a bit alarming, and it illustrates the trend of countries expanding their tax net by expanding the concept of residence, and thereby seeking to capture as much revenue as possible.”
Be wise, don’t try to be too smart, and be prepared
His final word was to advise that people must be transparent with their affairs but also hire experts as early as possible to help them whenever possible, to help them avoid some of the many pitfalls out there, as they plan their alternative residence or citizenship adventures across the globe.
Senior Consultant, Tax & Wealth Management at Baker McKenzie
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