Many of us living and working outside Australia will ultimately want to return to live in Australia: to work or retire, to help with children’s education or parent’s care, or to be closer to friends and an Aussie beach. There are also many who have accelerated the move back to Australia due to the COVID-19 pandemic. Generally, no one returns to Australia because they want to pay more tax! But tax management and other financial considerations play a critical role in successful repatriation. Below are some questions you should ask before coming back to Australia.
What taxation changes apply on becoming an Australian tax resident?
Very recently, the Australian Taxation Office (ATO) released a tax ruling that does a great deal to clarify what can be a very opaque subject – Australian tax residency. It is essential reading for every Australian expat so they can understand when resident taxation rules and rates will apply to them. Click here to access the tax ruling.
On becoming an Australian tax resident, you become subject to income tax (up to 45% for those earning more than $180,000 p.a. plus 2% Medicare levy) and capital gains tax (CGT) on your worldwide income and assets. As at the day of your return, you will need to value each of your assets, including foreign currency holdings, as that value becomes your cost base for assessment of capital gain when you subsequently sell (or otherwise dispose of) that asset. Taxable Australian property (residential and commercial property as well as some business interests) does not need to be revalued, nor do assets (such as shares) you held at the time and on which you elected not to pay CGT when you departed Australia.
Importantly, on resuming Australian tax residency, you become eligible again for the CGT discount on assets held for more than one year. Many expats still don’t realise that whilst a non-resident for tax purposes, 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 you resume tax residency.
One benefit of resuming Australian tax residency is that you access the tax-free threshold on income up to $18,200, then 19% to $45,000, and 32.5% to $120,000 (compared to the flat non-resident rate of 32.5% to $120,000). The tax-free threshold and lower rates can help minimise tax on investment income received and on capital gains. Further tax reduction may be available for jointly held assets or assets held in other structures, such as family trusts, companies, or insurance bonds.
As a non-resident, you are not required to pay the Medicare levy of 2%. However, if you are back in Australia and working, it is likely you will be paying an extra 2% on top of income tax, unless you are a low income earner.
Should I buy a house to live in before or after I return to Australia?
The game has changed in Australia over recent years in relation to buying a house. As a non-resident, there is now:
- Additional stamp duty on purchase in most states;
- Additional land tax in most states;
- An annual vacancy fee if your property is vacant for more than six months a year;
- Increasingly tight bank lending rules; and
- No CGT discount on sale, in proportion to the period of non-resident ownership.
All things being equal, you might avoid the above complications and wait to buy your home until you return to Australia. But if you find your dream home (or site) in a great location at a fair price, then at least be aware of the above and seek professional assistance to plan ahead and minimise taxes. Careful planning is also required to manage debt structure and taxation for investment property.
How do I use Australian superannuation to reduce taxation and build an asset for retirement?
A superannuation account-based pension is one of the few tax-free assets you can have in Australia. Before you retire, and while you are an expat, you can potentially save Australian income tax by making tax-deductible contributions to superannuation of up to $27,500 p.a. and also add up to $110,000 p.a. as a capital contribution each year up to a balance limit of $1.9m (or $3.8m for a couple). The annual contribution limits mean that as an expat, you need to consider starting your superannuation contribution strategy well before you return to Australia so that your capital may be sheltered in the tax-free environment when you retire.
Note that if you have a total superannuation balance of less than $500,000, you may be eligible to take advantage of concessional catch-up contributions. The catch-up rule allows you to use up to the previous five years’ concessional contribution caps to make contributions and claim those contributions as a tax deduction. For the financial year 2023/ 24, there is potentially a $157,500 tax deduction available to offset taxable income, including capital gains. There is some nuance to this rule with regard to eligibility and whether or not it is advantageous, so you should seek professional advice in contemplation of using it.
Depending on your employment overseas, you may have a company or government retirement plan (provident funds in Asia, 401k or the like in the USA, or a pension fund in the UK or Europe, for example). Alternatively, you may have set up a personal retirement fund. Some foreign schemes (mainly UK-based schemes) are recognised by the ATO as foreign superannuation funds. Foreign retirement funds that allow you to access your benefits upon ceasing employment and leaving the country where the fund is based are usually not recognised as foreign superannuation funds.
If your retirement scheme is recognised by the ATO as a foreign superannuation fund, then you can generally transfer benefits to an Australian fund subject to:
1. The restrictions of your foreign fund and any foreign tax which may apply. It is very important that you understand any potential taxes and penalties which apply on transfer or exit from your fund to ensure there are no nasty surprises.
2. Your non-concessional cap of $110,000 p.a. (or $330,000 at one time using the bring forward rule). The cap does provide a practical limit on transferring your foreign benefit, particularly if the amount is greater than $330,000 and the provider won’t allow you to split the transfer.
As for all assets, you need to value your foreign retirement fund at the date you become an Australian tax resident. You have six months from then to the date the Australian fund receives the transfer for the benefit to not be taxable in Australia. Longer than six months, and the growth component is taxed in the Australian fund. Similarly, if you cash your benefit within six months of becoming an Australian tax resident, it is tax-free and, after six months, the growth component is included in your income and taxed accordingly.
The non-concessional cap applies whether you transfer a foreign superannuation benefit or cash it and then make a personal contribution so the strategy you use – whether to transfer or cash in your foreign retirement benefits – will very much depend on the specific attributes of your fund and your broader financial strategy.
A word of caution; if your retirement scheme is not recognised by the ATO as a foreign superannuation fund, then there can potentially be harsh tax implications on any withdrawals you make from the fund while you are a tax resident of Australia. This is because the withdrawal is often treated as a “foreign trust distribution” and the whole amount is subject to Australian tax. If you are able to show that a portion of the withdrawal relates to capital of the trust, you are able to reduce the assessable amount by that portion, however this treatment does mean that any gains derived by the fund over its entire life will be assessable in Australia (irrespective of any periods of non-residency).
How do I integrate insurances and estate planning into my re-entry plan?
After many years outside Australia, you may now have too little or too much life insurance and are perhaps paying unnecessary premiums embedded in old superannuation accounts. In reviewing your insurance, you should consider the insurance options available to you and also new insurance products in Australia. Your estate plan needs to take account of insurance proceeds and superannuation which are not assets necessarily covered by your will. Most expats can benefit from obtaining a comprehensive financial plan which deals with residency tax planning and asset management that also integrates insurances and estate planning.
How do I manage currency, both before and after I return to Australia?
In my experience, understanding of currency strategy is quite often poor among Australian expats. This is quite surprising, given Australians, great travellers as we are, are thrust into a multi-currency world as soon as we leave Australia. As expats, in an ideal world, we generally want the AUD to weaken prior to our return to Australia and then, the day after we have returned and exchanged into Aussie dollars, strengthen again. Sad to say such an outcome is nearly impossible to plan and a pervading behavioural optimism that the currency will move in the direction we hope for often gets in the way of reasoned strategy.
Broadly, the two most important currency considerations for an Aussie planning to return to Australia are:
1. avoid selling foreign currency low and buying AUD high; and
2. understand and manage Australian taxation on foreign currency gains.
Like any asset, foreign currency has a value and as with all decisions to buy or sell an asset, we would ideally buy and sell at what we perceive is a good price. The problem can be that the decision to repatriate to Australia may be planned for some time, but the currency strategy is focused around the time of the actual move. That can lead to the embracement of a large amount of luck in terms of value for the years of hard work and capital accumulation while overseas. For example, if you are planning to bring back the equivalent of $2m AUD, a 5% appreciation of the AUD in the months before you transfer to AUD would lead to a loss of $100,000. Over longer time periods, currency moves can seriously affect an expat’s financial success. Moving from a high of $1.10 USD in 2011 to $0.67 at the time of writing has clearly been a big move and is very beneficial for Australians earning or holding USD and linked currencies. But it wasn’t so good for those returning to Australia when the AUD was strengthening from $0.62 in December 2008 to $1.10 in July 2011.
The other key factor is that increases in the value of foreign currency are taxable for an Australian tax resident. Currency holdings must be valued at the date of resuming Australian tax residency and realised gains thereafter (that is the sale of currency at a higher price) are classified as foreign currency gains for the purposes of Australian taxation. For example, if you hold $100,000 AUD equivalent in a foreign currency when you come back to Australia and you sell that currency when it rises in value to $110,000 AUD equivalent, then you will have made a $10,000 foreign currency gain which must be included in your Australian income tax return and taxed at applicable marginal tax rates.
As noted above, currency gains are assessed as income, but where a foreign asset is sold, for example a property, then the gain or loss on disposal of the asset, part of which will be from currency movement, is treated as a capital gain under the CGT rules. In such circumstances, the 50% discount rule will apply where any capital gain is realised in the first 12 months.
Tax on foreign currency can be complex so it is important to understand the tax rules in relation to your circumstances and seek advice well in advance of resuming Australian tax residency.
There is the potential for an exemption on foreign currency gains for up to $250,000 AUD equivalent cash holdings where such currency is held for the primary purpose of facilitating foreign transactions. This exemption arises when a person or company makes a limited balance election in relation to specified accounts.
What can you do to reduce the risk of unfavourable currency movements and tax on favourable currency movements eroding your wealth? Here are some possible solutions:
1. If you plan to return to Australia, even at some relatively distant point in the future, consider starting to build a portfolio of AUD assets – cash, property, shares, superannuation, etc. – well out from your planned return date. Most of us are smart enough to be informed about what the AUD is likely to do but none of us know for sure. What we do know is that if the AUD strengthens, our foreign currency holdings will become less valuable in AUD terms. Therefore, building an AUD portfolio over time can utilise the principle of averaging to reduce specific currency risk. The portfolio might be held offshore or in Australia depending on the country you live in and taxation. It might be as simple as saving in an AUD bank account or it may be a more sophisticated or diversified approach, such as holding currency ETFs, investment in Australian property or shares, or building Australian superannuation.
2. If large lump sums are becoming available to you in the lead up to your return to Australia (for example, from the sale of property) you may consider locking in some or all of the amount in forward currency contracts with a bank or currency broker. Hedging large amounts is a relatively cheap, short-term way to minimise the risk that a short-term adverse event can have on your repatriation plan. Unexpected, adverse moves of 5-10% or more are not welcome. Potentially worse, if you defer currency exchange because of such an adverse move and the currency subsequently recovers, you will be liable for tax on that recovery if you have become an Australian tax resident in the interim.
3. As an Australian tax resident, if you are aware of the potential tax problem of holding appreciating foreign currency, then you can consider buying AUD before you become a tax resident and then putting in place hedging positions through ETFs held in structures with better tax outcomes, for example, in the account of a low income spouse, superannuation accumulation or pension funds, family trusts, or companies. The solution will be very individual-based, not only on your personal financial circumstances and objectives, but also on the extent to which you want to maintain a pure foreign currency exposure.
The above ‘questions and answers’ are a brief summary of some of the financial issues in repatriating to Australia. If you have a question in relation to the themes discussed in this article or would like to arrange a time for a quick call, please email us at email@example.com or call our office at (07) 3391 5055.
Any advice included in this article 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. Before you make any decision about whether to acquire a certain financial product, you should obtain and read the relevant product disclosure statement. Any tax information in this article refers to current laws, is not based on your unique circumstances and should not be relied on as tax advice.