Are you an Australian expat currently planning to return home from Hong Kong? Perhaps you are considering it, but are unsure where or how to start planning?
It is clear that Australia is currently in the midst of an unprecedented influx of expats returning home from Hong Kong. Driven by a combination of factors such as an increasingly authoritarian rule, China’s harsh zero COVID policy, and tight border rules alongside general geo-political tensions, many Australians are eager to return before Christmas.
However, this rush to repatriate is proving costly when done without the right advice. Whilst repatriation can often be an emotional process, it can also be a complex one when it comes to your finances. Therefore, seeking the right advice can help you avoid losing thousands of dollars in unnecessary tax whilst also help you achieve better wealth outcomes for your new life ahead.
So, what are the five money mistakes you should try to avoid when repatriating to Australia?
The five potential (and costly) mistakes all expats returning to Australia need to be aware of are:
- Tax residency timing;
- Superannuation contributions and structure;
- Currency management;
- Timing the purchase of a new home; and
- Inadequate life insurance.
1. Tax residency timing
An essential component of planning your return to Australia is to understand tax strategies available to you before you fly home. The timing of your return in conjunction with proactive tax planning will determine when you will once again become subject to income tax (which can be up to 45% plus 2% Medicare Levy) as well as capital gains tax (CGT) on your worldwide income and assets.
Importantly, it is critical to know that upon your resumption of tax residency status, you are once again eligible for the CGT discount on assets held for more than one year. Many expats don’t realise that since 8 May 2012, you have to include 100% of a gain on taxable Australian property, and you only get to discount this gain to 50% for the period before 8 May 2012 and after your resumption of tax residency.
2. Superannuation contributions and structure
Much like tax, sorting out your superannuation before you fly home is critical for two primary reasons. Firstly, pre-retirees who are still expats have the potential to reduce their Australian income tax by making tax-deductible contributions to superannuation up to $27,500 p.a. (also add up to $110,000 p.a. as a capital contribution each year up to a balance limit of $1.7m per person which equals $3.4m for a couple). These tax advantages mean it is paramount to address your superannuation contribution strategy so that your capital has the potential to be sheltered in a tax-free fund when you retire after the age of 60.
Second, is the need to determine whether the retirement scheme or provident fund you have as part of your employment overseas is recognised by the ATO as a Foreign Superannuation Fund. The answer to this question has significant tax consequences and affects the strategy options that can be used to bring this capital back to Australia. Here again, timing is critical, therefore it is pivotal to seek the right advice before you make the move home.
3. Currency management
The third potential pitfall you need to avoid is not proactively managing your currency well ahead of repatriation.
It is essential to plan ahead to reduce the risk of unfavourable currency movements. At the time of writing, for example, the AUD has depreciated significantly against the USD and the risk is that this direction may reverse. Risk reduction may be achieved by building a portfolio of AUD assets (e.g. an Australian bank account, Australian property or shares, currency ETFs, or Australian superannuation) over time to reduce currency risk.
Conversely, the other factor to consider is increases in the value of foreign currency: currency gains are taxable upon becoming an Australian tax resident with a limited exception. If you have a strong view on the direction of currency, there is more than just the one way of expressing that view by holding on to foreign currency and paying tax on gains. Currency views can also be proactively expressed through Australian structures where tax can be reduced. As with all finance-centric matters, forward planning before you fly home is key.
4. Timing the purchase of a new home
The fourth potential pitfall you need to proactively manage is timing the purchase of your home. There is no doubt that the home buyer landscape has changed over recent years for non-residents. Nowadays, home buyers need to take into account additional stamp duty and land tax (both of which are applicable in most states), and increasingly tight bank lending rules. Given the scope of changes, and the fact that the timing of when you buy property will determine how much tax you may pay in the future, it is vital to seek tax planning advice before you return home.
5. Inadequate life insurance
After many years outside Australia, you may find that you have too little or too much life insurance and are perhaps paying unnecessary premiums embedded in old superannuation accounts. Reviewing your insurance options and estate planning prior to repatriation will ensure you have access to the most current and suitable products for your circumstances.
Seeking the right advice prior to repatriating is essential to avoid these five costly mistakes that are made all too frequently in the rush to return home. Without astute forward planning, you can lose thousands of dollars in tax and lost opportunities for optimal wealth outcomes to these mistakes, therefore it is imperative to plan ahead to ensure the repatriation experience is as smooth as possible. Please get in touch if you have any questions, or would like to find out more about how to best structure your finances ahead of your return to Australia.
Any advice included in this communication is general and has been prepared without taking into account your objectives, financial situation or needs. As such, you should consider its appropriateness having regard to these factors before acting on it. Any tax information refers to current laws, is not based on your unique circumstances and should not be relied on as tax advice. Before you make any decision about whether to acquire a certain financial product, you should obtain and read the relevant product disclosure statement.