Offshore Assets: Beneficiaries, Protection & Tax

Australian investors purchased $4.2billion of commercial property overseas in 2013.

However, ensuring succession (passing on assets to proper beneficiaries) can be problematic when overseas assets are concerned. For example, Australian based beneficiaries may not know what their father had overseas.

High Net wealth investors and small to medium enterprises invest offshore mainly for the following reasons:

• DIfferent countries have different taxation laws concerning property within their jurisdiction
• Expatriates returning home and leaving assets/funds offshore
• Australian resident individuals becoming entitled to an interest in a foreign estate
• Australian resident individuals inherit funds previously sent offshore or cotrol funds derived offshore

The ATO defines a CFC as a “Controlled Foreign Company”, and there is an “active business exemption” with respect to CFC’s.

When investing offshore, the control of the entity is often the main factor of contention. When considering  control it is pertinent to look at:

• Tax perspective
• Family law perspective
• Bankruptcy perspective

Assets held offshore are subject to Australian tax if the person is an Australian resident.

Control of the Offshore Entity(ies) – the “Controlled” Foreign Company (CFC)
“Control” of an overseas entity can play a large part in deciding whether or not returns on that investment are taxable to a resident(in other words, the less control, the greater the chance that it is not liable for Australian onshore tax).

Information Sharing in the Modern World

The OECD in 2014 commenced drafting of an agreement between countries that facilitate reporting and information sharing and automatic reporting. This culminated in the signing in 2016 of 58 member countries. This means that 58 countries are signed up to the OECD standards of reporting will automatically provide information on Australian residents that hold funds overseas.

The Mechanics of Assets passing on Death

The common way that most people deal with this, is to have multiple wills in multiple jurisdictions, however this is not as simple as it seems. Often beneficiaries become aware that there are in fact “accounts throughout Asia or Europe”.

An Australian Will dealing with international jurisdictions is very difficult because you have to in practicality get courts in the foreign jurisdiction to grant probate to get access to those assets.

To try to make this process smoother, the UN has an “International Wills Convention” but it only makes signatories to that convention liable to uphold Wills made in a residents country applicable to another signatory/treaty member.

In general, resident Wills in the country of domicile/home country are not always satisfactory in dealing with assets held in offshore jurisdictions.

Value which is in a Trust does not automatically pass under a will (although what might pass is shares in a trustee company ie. Control passes as far as the ownership of those shares but what about other access checks and balances held by the offshore banks in question?).

Bankruptcy and International Law

The United Nations Commission on International Trade Law also has attempted to allow enforcement of bankruptcy laws in the fellow treaty countries, but although Australia has adopted that, the BVI is the only country on that list that has also adopted it. Also, properly structured Discretionary Trusts will thwart the Trustee in Bankruptcy.

Location of Relevant Participants:

Controller of the Trust – the location of the controller tells you what law applies and what secrecy provisions and whether you can get access to information

Inheritors – insofar as the tax outcomes that spring out of the transaction