Addressing your unique needs

The rules relating to Australian tax residency status are complex and critical to the development of a financial plan for an expatriate. Simply living offshore does not automatically qualify an expatriate as a non-resident for Australian tax purposes.

Some of the issues considered in assessing your residency status include:

• the duration of the assignment

• the time spent outside of Australia each year

• the establishment of a home and living style in the foreign country

• whether you are a member of a Commonwealth Superannuation fund

More recently, there have been changes to the residency status of expatriates undertaking rotational or fly in/ fly out assignments making it important for these expatriates to reconfirm their status.

There are a number of other factors to consider and it is important to make the correct determination as it can have a significant impact on the taxation of your income and investments.

Non-residents are granted considerable tax concessions compared to resident investors including a lower rate of tax on Australian investment income, favourable Capital Gains Tax treatment on certain Australian assets, such as shares, and differences in the tax deductibility of debt used to generate investment income.

The compensation packages for many expatriates are managed under their employer’s and it is important to understand how this program impacts on taxation liabilities associated with employment and investment income generated both here and overseas.

We can help you work through the complex issues to confirm your residency status and develop a Wealth Management plan that takes advantage of the significant opportunities available to you as an expatriate.

There are many personal and financial issues to consider before you depart and a number of these have been discussed under the area of the Why Plan section. For example, do you make a deemed disposal of your equity investments? Do you need to appoint a Power of Attorney? We can help you understand the impact of the choices that you will need to make in this and other areas.

Proper foreign country tax planning is essential to ensure that potential taxes on your remuneration package and investment income are minimised. It is important to develop an understanding of the foreign country tax position relating to taxes on both your salary remuneration and investment earnings (both income and capital gains).

Some countries will tax you on investment income earned worldwide, while others may limit their tax liabilities to income earned within the country or remitted to the country. Some countries will apply Capital Gains Tax on growth gains while others will not.

The nature of the terms of your assignment is an important consideration. Some expatriates who contract directly with the foreign company may be taxed directly by the foreign country on their employment income and bonuses. This may be a favourable outcome or an adverse outcome, depending upon the country you are assigned to.  

As previously highlighted, many expatriates elect to take part in their employer’s Tax Equalisation Program program. Under this policy, they may deduct hypothetical tax from your remuneration package and they are accountable for payment of any salary-based income tax in the various foreign countries that you may be assigned to.

At Strategic Wealth, we work with your tax adviser to ensure these issues are carefully considered and managed.

Your expatriate employment compensation package may comprise a number of elements including your usual employment salary, plus a number of foreign compensation benefit components, such as foreign service premiums, cost of living adjustments, home leave and rental assistance.

Tax equalisation packages are offered by many employers to neutralise the impact of foreign country taxes on employment and or investment income. The intention is that expatriates should continue to incur a tax burden equal to that which would have been borne had they remained in Australia. Under this methodology, any tax benefit arising from a transfer to a low-tax jurisdiction goes to the employer. Similarly, the employer bears the cost of any higher tax liability in the overseas jurisdiction.

The policies offered by each employer can vary considerably and may contain a number of options to choose from, making them quite complex and difficult to understand. It is important that you understand these options and choose the most appropriate one for your specific circumstances.

Your options can impact on your decision and strategies in a number of areas, such as your choice to use gearing for specific assets like shares and Australian property. The tax deductibility rules for non-resident expatriates differ for the aforementioned asset classes and your employer’s tax equalisation program may have a further impact. You also need to understand how these programs may impact on any Employee Share and Option benefits received while offshore.

We work with your employer’s tax adviser to understand their policy and manage the issues that arise from these policies.

Employee share plans and other executive bonus components can be an attractive part of your compensation package. Like many other aspects, the taxation rules can change when you undertake an expatriate assignment.

The Australian government has recently changed the tax treatment for these types of benefits granted to investors while working offshore. They also may be impacted by the taxes applicable in the foreign assignment country so it is important to understand the total picture for these investment holdings. 

While offshore, expatriates issued with Employee Share Options may have an opportunity to make an election to have them granted at the time of issue. This can be an important decision and can have a favourable impact on future Australian Capital Gains Tax liabilities when you ultimately return. Additionally, there may be opportunities to favourably realise the benefits while on assignment in certain countries. 

In conjunction with your tax adviser, we help you understand these issues and opportunities in this complex area and design a program that manages both the risk and future tax liabilities.

The Capital Gains Tax rules vary for Australian property and share investments. The treatment for shares can also vary depending upon the type of tax election you make when you leave the country.

Share investments acquired while offshore are usually free of Capital Gains Tax liabilities while you remain offshore. Hence, this can be an attractive investment opportunity for some expatriates. The taxation rules relating to the income received from shares are also different for expatriates and can further enhance the investment attractiveness of this investment class.

When you depart Australia for your assignment, you need to make a Capital Gains Tax election relating to certain assets, such as shares and employee share holdings. The decision in this area will be influenced by the existing Capital Gains Tax liabilities associated with the asset, the duration of your assignment and outlook for the specific investment in question.

Careful planning is required to manage these potential and other Capital Gains Tax liabilities.

Your principal residence is not subject to Capital Gains Tax (CGT) under Australian tax rules. While on assignment as an expatriate, it is possible to elect that your principal residence property maintains its CGT exempt status. Provided the period of absence does not exceed a specified period, the property can be rented without affecting the CGT-exempt status of the property. The exemption may revert to an unlimited period where the dwelling is not used for income producing purposes.

It is important that you monitor this situation with respect to the exemption period.

Expatriate investors are treated differently to Australian residents with respect to the ability to claim a tax deduction for a loan relating to an investment. Additionally, share investments are treated differently to property investments. Again, like many aspects, the rules vary according to whether you are considered to be a non-resident or resident expatriate by the Australian Taxation Office. 

It is important to understand how the rules apply to your specific circumstances and to develop strategies that take advantage of the opportunities available to you. For example, what strategy should you adopt in relation to any debt repayment associated with your principal residence? The answer can vary depending upon your circumstances, including whether the property will be rented out or left vacant.

Capital Gains Tax liabilities may also be impacted on your election to participate in your employer’s tax equalisation program. Finally, upon your return to Australia, the rules may change again and a re-entry strategy may be needed to ensure that the strategies adopted remain appropriate.

Your Wealth Management plan will include strategies that consider these important differences.

Superannuation is an important investment structure for the majority of Australians accumulating or funding their retirement due to the favourable tax treatment associated with the structure.

There are constraints on the level and type of contributions that can be made to superannuation including age restrictions. That’s why it can be important to develop a defined contribution plan for your Australian superannuation fund, to ensure that you do not return to Australia and find that you can no longer contribute funds to this structure.

Depending upon your employment arrangements and other circumstances, you may be entitled to make tax deductible contributions to your superannuation fund. Again, like all contributors, you need to be careful that you do not exceed the defined contribution limits or significant tax penalties may apply. 

Special rules apply to Self Managed Superannuation Funds (SMSFs) if the trustees become non-residents. If you have a SMSF or are contemplating establishing one, then you should seek expert advice to ensure that the fund does not become non-compliant and subject to adverse tax penalties.

We help you understand these issues and opportunities and to avoid violating Australian regulations.

If you accumulate funds in an offshore superannuation fund, then you have a limited time to repatriate the funds to Australia without incurring additional tax liabilities. We have a specialised group that can assist with the complex regulations relating to the return of the funds and ensure that your tax liabilities are minimised.

At Strategic Wealth, we have experience in dealing with the many complex issues that can arise in an overseas assignment. It is critical that these issues be considered and addressed prior to your departure, allowing you to focus on your new role and environment with peace of mind. That way, you know with complete confidence that you have a clear plan for maximising the financial benefits and minimising the potential financial risks of the changes you are about to experience.

• UK Pension Funds

• US 401k Pension Funds

As highlighted in the Why Plan – Foreign Pensions section, we can help you understand and transfer these funds to Australia if deemed appropriate.

Expatriate investors have a choice of investing offshore or investing via Australia. There is a strong case for clients to invest back into Australia while on expatriate assignments. These reasons can be considered as follows:

Tax

Tax has been previously discussed and we have highlighted the favourable tax treatment applicable to non-resident investors.

Security

Australia has a well-regulated, efficient and properly supervised investment market, and investors can be secure in the knowledge that their savings, as well as those who provide investment advice, are monitored by expert regulatory authorities.

Currency

Expatriates who expect to return to Australia should consider building their assets in Australia so that they do not subject their investments to unnecessary currency risk.

Cost

Unlike many offshore jurisdictions (other than more mature markets like the UK and US), Australian advisers, and the vehicles they recommend, are subject to full disclosure of all charges, commissions, rebates, early surrender penalties and fees. This has led to lower transaction costs and fee-based advice, both of which ultimately lead to improved returns for the investor.

Choice/Diversification

Australia is a relatively mature market by international standards and offers investors a wide choice of investment vehicles, derivatives and instruments, including ordinary shares, managed funds, property trusts, superannuation, fixed interest, warrants and futures.

Long-term financial planning

Offshore investment structures (e.g. insurance bonds, savings plans, offshore trusts) may not be tax effective for a returning Australian expatriate and are likely to have to be cashed out prior or soon after becoming an Australian resident, often involving significant costs and other charges.  Australian expatriates are advised to accumulate Australian assets for long-term planning reasons so that they are not forced to reorganise their entire investment portfolio when they return to Australia.

Ease of administration

The completion of offshore and onshore tax returns is a complex (and costly) business that can be considerably simplified by investing in a single market that provides reliable and regular information to the investor. Australia's institutions and advisers are geared up to provide accurate and relevant information on capital gains, interest and dividend payments and, in many cases, this can be presented in a single page report.

The above provides a brief overview of the compelling reasons for investing via Australia. Our investment strategies and plans are developed assuming that your investments will be made and managed in Australia.

Australia is a ‘low risk’ country and for those expatriate Australians that live and work offshore, they now carry an increased personal risk while based out of Australia. This additional risk is also taken on by their spouses and family.

Gaining for expatriates is becoming increasingly difficult. Exclusions for ‘War and Terrorism’ and ‘Travel’ restrictions are becoming more prevalent with the result being that, under certain circumstances, a Life Insurance policy may be less than full cover. This could ultimately leave you and your family exposed.

These types of exclusions and restrictions can take place with immediate effect to all ‘new’ policies. It is therefore critical to commence cover prior to these becoming mandatory inclusions on all new policies. It is important to note that insurance companies cannot ‘add’ an exclusion at a later date.

At Strategic Wealth, our aim is to insure this personal risk by way of appropriate personal insurance that would include Life, TPD, Trauma and Income Protection cover. We will always aim to obtain insurance at standard terms but this is not necessarily always available.

Please contact us for an assessment of your position and opportunities to protect yourself in this critical area.

As part of the development of your financial plan, we consider strategies for both your assignment phase and repatriation to Australia. A further comprehensive review is conducted upon your return to ensure that your investments are appropriate for your Australian tax residency status. Further comments on these areas are contained in the Why Plan – Repatriation section.