Introduction

International estate planning might seem like a tangled web, especially with all those different tax rules around the world. But knowing terms such as domicile, residency, and source rules can really clear things up since they decide how your estate gets taxed. This guide breaks down these tricky ideas in a straightforward way. Plus, it looks at how double tax agreements, capital gains taxes, and rules about superannuation death benefits shake up international estate planning. You’ll find some handy tips to cut down on your tax bills and plan your estate wisely across different countries.

Domicile, Residency, and Source Rules

For effective international estate planning, especially concerning taxation, it’s crucial to grasp the ideas of domicile, residency, and source rules. While these terms might appear similar at first glance, they actually have specific legal definitions and consequences. These distinctions are very important because they can significantly affect how taxes are applied to your estate in different countries.

Concept	Importance
Domicile	This is about the country that is considered your permanent home base. It’s the place you plan to go back to, even if you have lived in other countries for many years. Domicile is decided by your long-term plans, not just where you are living right now. It’s very important for inheritance tax rules because many countries use your domicile at the time of your death to decide how inheritance tax applies. For more information on why domicile matters for international estate planning, you can read our detailed article.
Residency	This generally means the place where you actually live and work day-to-day. Unlike domicile, which is about your future plans, residency is usually determined by where you spend the majority of your time during a year. Residency is important for both income tax and estate tax. Different countries have different rules about how they tax people who live there compared to people who don’t.
Source Rules	These are the rules that decide where your income or assets are seen to come from for tax reasons. These rules are very important for planning taxes internationally, as they decide which country can tax your income or assets. For example, income that comes from assets in a different country might be taxed in that country, even if you live somewhere else.

Double Tax Agreements

Agreements called double tax treaties are made between two countries to prevent people from being taxed twice on the same income or assets. Without these agreements, someone could end up paying taxes in two different countries on the same money, which increases their overall tax bill. These treaties explain which country has the primary right to tax specific types of income, profits, or assets. They often offer a way to reduce taxes by giving a credit or exemption for taxes already paid in one country, which can be used to lower the tax owed in the other country.

Many countries have double tax agreements with each other. These agreements explain how income and assets are taxed when a person has connections to more than one country.

In estate planning, these treaties are very important for several reasons:

1. Lessening Double Taxation: If you have assets in multiple countries, a double tax agreement can help make sure your estate isn’t taxed twice on the same asset. For instance, if you own property in two different countries, the treaty can specify which country has the main right to tax that property. This helps prevent both countries from taxing the same asset.
2. Understanding Your Tax Duties: These treaties help clarify where and how much tax needs to be paid. For example, if you live in one country but have assets in another, the treaty can provide rules on how those assets will be taxed. This makes sure your estate follows the tax rules in both countries. This clarity helps avoid unexpected tax bills and makes sure your estate plan is legally sound.
3. Estate Planning Opportunities: By understanding how double tax treaties work, you might find ways to organize your estate more efficiently for tax purposes. For example, a treaty might allow you to get a credit for taxes paid in one country, which can be used against taxes due in another country. This could lower the total tax your estate has to pay.
4. Preventing Legal Issues: These treaties help stop disagreements between countries about who has the right to tax certain assets or income. By clearly setting out the tax duties in each country, the treaties lower the chance of legal conflicts. This can save your estate from long and expensive legal battles.

Capital Gains Tax (CGT)

Capital Gains Tax (CGT) is an important consideration in international estate planning, especially when dealing with assets inherited from overseas. Generally, you don’t pay CGT when you inherit an asset. However, CGT can become relevant if you decide to sell an asset you’ve inherited. The CGT rules can differ based on the type of asset:

• Non-Property Assets: For most assets that are not real estate, standard CGT rules will apply.
• Real Estate: If the inherited asset is a property, it might be eligible for the main residence exemption from CGT. This could reduce or even eliminate any CGT you might owe.
• Collectibles and Personal Assets: These types of assets are usually subject to CGT, unless they were originally bought for less than certain set value limits.

Initial Value of the Asset

If the inherited asset isn’t completely free from CGT, you’ll need to work out its original cost to calculate any potential capital gain when you sell it. The original cost is usually based on the asset’s value either:

• When the person who passed away first bought it, or
• On the date of their death.

Qualifying for CGT Discount or Indexation

Individuals, trusts, and superannuation funds may be able to get a CGT discount if they hold an asset for 12 months or more. For inherited assets:

• If the person who passed away bought the asset on or after 20 September 1985, you can consider that you’ve owned it since they bought it. This might mean you qualify for the CGT discount.
• If they bought it before 20 September 1985, you can consider that you’ve owned it since the date they passed away.

If the person passed away before 21 September 1999, you might have the option to adjust the original cost for inflation up to 21 September 1999 instead of using the CGT discount. This inflation adjustment can increase the asset’s original cost to account for inflation, which could lower the capital gain.

Administering the Estate of a Deceased Person

When managing and closing a deceased estate, the executor (the legal representative) might need to sell some or all of the estate’s assets. If this happens, any capital gain or loss made by the executor is subject to the usual CGT rules.

Unused Capital Losses

If the person who passed away had any capital losses that hadn’t been used at the time of their death, these losses cannot be passed on to the beneficiaries or the executor. This means you can’t use these losses to reduce any capital gains you might make.

Documenting Inherited Assets

It’s very important to keep good records when you inherit an asset. These records should include:

• The date the person who passed away bought the asset.
• The asset’s value or original cost.
• Any costs related to the asset that you or the executor incur.

These records will help you accurately calculate CGT if you decide to sell the asset later. For assets bought before 20 September 1985, you’ll need to know the asset’s market value on the date of death. If the asset was bought on or after 20 September 1985, you’ll need records of the original purchase cost.

Distribution of Assets to Foreign Residents

If an asset is passed on to someone who lives in another country, CGT can be triggered in the deceased person’s estate at the time of their death if:

• The deceased person bought the asset on or after 20 September 1985 (when CGT started).
• The deceased person was living in Australia at the time of death.
• The asset is not considered taxable property in Australia for the person living overseas who inherits it.

The capital gain or loss is worked out based on the asset’s market value on the date of death and must be included in the deceased person’s final tax return.

Assets Going to Charities and Super Funds

When a CGT asset is passed to a charity or a complying superannuation fund (which has tax advantages), CGT is also triggered in the deceased’s estate when they die.

Tax-advantaged entities can include charities, religious organizations, and trustees of complying super funds.

The capital gain or loss is calculated in a similar way, using the asset’s market value on the date of death. However, a capital gain or loss from a gift in a will can be disregarded if the gift is made to a deductible gift recipient and would have been tax deductible if it wasn’t a gift in a will.

Understanding CGT and how it works is vital for good international estate planning. When planning your international estate strategy, remember to think about the tax effects of both assets in your home country and assets overseas. Also, make use of any relevant tax treaties to avoid unnecessary taxes. Organizing your assets well and timing when you sell them can significantly affect the overall tax outcomes for those who inherit your estate.

Estate Planning

In the past, taxes on estates, often called death duties, were used in Australia. These were charged by both state and federal governments when assets were transferred after someone passed away. However, these duties were removed by 1984 due to various economic and political reasons. This change has a big effect on international estate planning because it makes it simpler to pass on assets after death, as estate taxes no longer need to be considered.

Currently, Australia does not have inheritance or estate taxes. This means that when assets are passed down after someone dies, there is no specific extra tax just because of the inheritance.

Even though there are no estate or inheritance taxes, there can still be tax responsibilities related to the assets you inherit:

1. Capital Gains Tax (CGT): If you decide to sell or dispose of an asset you inherited from an estate, CGT might be applicable. The amount of CGT depends on things like the type of asset, its original cost, and how long it was owned.
2. Income Tax: Any money earned from inherited assets, such as dividends from shares or rent from a property, is subject to standard income tax. This income must be declared in your tax return and will be taxed at your normal income tax rate.

Super Death Benefit

When someone with superannuation (super) dies, the super fund trustee is responsible for deciding who receives the benefits. The payment from the super fund after death is known as a ‘super death benefit.’

How a super death benefit is taxed depends on several things:

1. Dependent Status: Whether you are considered a dependent of the person who died, according to tax law, greatly affects the tax you might have to pay.
2. Payment Type: Whether the benefit is paid as a single lump sum or as regular income payments affects how it’s taxed.
3. Super’s Tax Status: Whether the benefit is considered tax-free or taxable, including if the super fund has already paid tax on the taxable portion, will change the amount of tax due.
4. Age Factors: Your age and the age of the person who died are also important, especially for income payments, as they can change the tax rates that apply.

If you are not a dependent of the deceased, you can only receive the super death benefit as a lump sum. The taxable part of this lump sum payment is taxed, but it qualifies for a tax reduction, so the income tax rate applied is as follows:

1. Taxed Portion: The highest tax rate is 15% plus the Medicare levy.
2. Untaxed Portion: The highest tax rate is 30% plus the Medicare levy.

For beneficiaries living in other countries, the taxation of superannuation death benefits can be more complicated. Australian tax rules will still apply, but the person living overseas might also be taxed in their own country. However, tax treaties between Australia and the beneficiary country could provide relief by lowering or removing double taxation. It’s important for estate planning experts to think about the tax effects in both countries to get the best result for beneficiaries who live overseas.

International Estate Planning Strategies to Minimize Your Tax Liability

For people planning their estate across borders, here are some key strategies to reduce tax, especially on capital gains, income tax, and superannuation death benefits:

Strategy	Description
Using Double Tax Agreements	Utilize Tax Credits: International tax agreements can help cut down or get rid of double taxation on your assets. Understanding these agreements means taxes you’ve paid in one country can count towards taxes you owe in another, lowering your overall tax.  Choose the Best Location: When you have assets or investments in different countries, pick countries that have good tax deals in place. This can lower the risk of paying tax twice and give you access to better tax rates.
Timing of Asset Sales	Deferred Selling of Inherited Assets: If you wait to sell assets you inherit for over a year, you might be able to get a discount on capital gains tax, potentially halving the taxable amount. Waiting for good market conditions or currency rates can also reduce capital gains tax.  Main Residence Exemption: The property you inherit might be treated as your main home, which could mean you pay less or no capital gains tax when you sell it.
Superannuation Death Benefits	Strategic Beneficiary Choices: Naming dependents (like your spouse or young children) as beneficiaries for your superannuation can be tax-smart. Payments to them are often tax-free, which reduces the tax impact on your estate and gives more to your loved ones.  Lump Sum or Income Stream: Deciding whether to receive superannuation as a single payment or regular income can change the tax you pay. Choose the most tax-efficient option to lower your overall tax.
Trust Structures	Setting up Testamentary Trusts: Testamentary trusts can be useful and offer tax advantages, especially for children inheriting. Income from these trusts is taxed at adult tax rates, which can be lower than the usual rates for children.  International Trusts: Creating a trust in a country with favorable rules for assets held overseas can provide tax benefits, like protection from double tax and good capital gains tax treatment.
Charitable Donations	Testamentary Gifts: Including donations to charities in your will can lower your estate’s tax bill. These gifts are often exempt from capital gains tax and might also provide income tax benefits.
Record Keeping and Cost Base Adjustment	Keep Good Records: Keeping detailed records of purchase prices and costs related to inherited assets is key to working out the correct original cost. This can reduce capital gains tax when you sell.  Cost Base Indexation: For assets bought before 21 September 1999, you can choose to adjust the original purchase price for inflation. This can reduce the capital gain and the capital gains tax you owe.
Getting Professional Advice	Seek Advice from Tax and Legal Experts: International estate planning is complex, with different tax laws and agreements. It is important to get advice from experts who understand both domestic and international tax rules to plan your estate effectively.

Conclusion

To protect your wealth and ensure your assets are passed on smoothly, it’s really important to understand and manage the tax side of international estate planning. By getting to grips with important tax ideas and using careful planning, you can lower the amount of tax you might owe and safeguard your estate. For advice specifically designed for your individual needs, Samoa Offshore Legal has a team of experienced legal professionals ready to assist you.