Relocating outside of Australia is commonly related to an improved employment opportunity and often with an increased incentive package. Add to this potentially a lower tax environment and you have a fantastic opportunity to build a considerable amount of wealth.
Planning doesn’t take much time and with a suitable plan, you can rest assured your time spent abroad can create long-term value for you and your family. Here we discuss some of the areas that should be considered when living abroad as an Australian expatriate.
1. Have goals and an appropriate financial plan
Identify the personal and financial goals for you and your family. It is important that these goals are identified, and financially quantifiable. For expats setting goals may be sometimes difficult as you may be unsure of the time you will spend abroad.
Prior to moving abroad or repatriating back to Australia it is important to plan ahead. Valuing your assets, updating providers, sorting out past tax returns, cashing in tax credits and giving yourself time to implement effective strategies well before your move date.
It is important to regularly review how you are tracking towards your goals. A good plan is a flexible plan.
2. Understand your tax residency and obligations
Which country are you currently a tax-resident?
The criteria for residence for tax purposes varies from jurisdiction to jurisdiction. Here are a couple of common tests countries use to establish the matter;
- Physical presence
Often there is a majority of days per year rule for assessing residence. For instance, remaining in a country for greater than 180 days during a year of assessment (or an average of 90 days per year on average) may deem your residency for tax purposes.
- Permanent home
Considerations may be given to a number of factors including (but not limited to) your employment, ownership of property, current fixed term leases, utility bills, active bank accounts, or non-financial or family interests such as where your partner and children are living.
- Nomad rule and country of domicile
A ‘tax nomad’ is where a person finds themselves to not be a tax resident of any country. While at first glance this sounds appealing often becoming a tax nomad may revert your tax residency to your country of domicile. For Australians this could mean being assessed under Australian marginal tax rates and subject to worldwide income tax assessment. This may be unwelcomed surprise.
Personal tax and CGT obligation – Worldwide tax
Not only may you be subject to returns generated within the county you are residing, there may also be worldwide tax implications whereby you are taxed on assets you own anywhere else in the world. It is important to understand any potential capital gains tax implications you may be liable for before selling or purchasing investments, particularly when it comes to real estate.
3. Australian property and managing your debt
If you have decided to rent out your home or are planning to purchase an investment property while you are overseas, is paying off the mortgage the best decision? Here is some food for thought for a non-resident:
Tax deductible debt
The interest cost, along with various other expenses, on your rent generating property may be tax deductible. This means you can utilise these deductions to offset your taxable income in Australia to reduce the overall tax payable. It is important to be well informed and have the appropriate level of debt in place for your situation.
Negative vs positive gearing
Using an appropriate level of borrowing may reduce the tax payable on annual basis, but can be used to create an annual tax loss and as a result accumulate tax credits which may be utilised in later years.
Selling your Australian property
Changes in legislation June 2020 removed the exemption on capital gains tax on a main home for non-residents. It would more than likely make sense to wait until you are permanently resident again in Australia prior to selling a previous place of residence.
4. Wealth accumulation and investment
Where to invest
In the lead up to repatriation it is key to understand the change in tax implications of becoming subject to worldwide tax again, and the understanding the strategies that may be available to mitigate your ongoing tax obligations.
Can you or should you contribute to my superannuation while you are overseas? There may be tax advantages available on the contributions that are made as well as on the future investment returns of the capital contributed to superannuation.
5. Contingency planning
Do you have adequate personal insurance to provide for you and your family in the case of unexpected illness or accident? Further to this does your existing insurance cover continue to remain appropriate following your relocation outside of Australia?
Quite often Australian insurers have ‘territorial exclusions’ on disability cover for Australians living abroad. This may preclude claiming your full insurance benefit in the event of the unfortunate while living overseas. It is important to ensure that you have the right cover in place for your protection and that you are not paying premiums for ineffective cover.
Where there is a Will there’s a way… If you have assets in multiple jurisdictions is your existing Australian Will sufficient? Depending on the complexity of your financial affairs it is often important to consider having separate Wills addressing assets you may have in each jurisdiction.
An Estate Plan enables you to manage the transfer of wealth to the next generation, ensuring your wealth, your wishes and the interest of your loved ones are protected. The best way to understand the complexities is to speak to a licensed estate planning specialist dedicated to expatriate needs and requirements.
Contact us to start a conversation today.