Henry Tax Review - Shelved for now? - March 9, 2010

The Henry Tax Review - a "root and branch" review of the Australian tax system - was completed in 2009 and delivered to the Government late in the year.  The expectation was that the report would be made publicly available in the early part of 2010.  But the Prime Minister, probably concerned that the Report would affect every single vested interest group in the country ahead of an election (?) has said, "On the tax system, yep, we've got more work to do, but on the timetable for it, we're still working our way through it."  That's Rudd'lish for "don't watch this space".

Expats shouldn't be too concerned for the moment, although the Government has shown a tendency to think the broader expat community is a soft political target - witness the changes made with little or no consultation in last year's Budget to the taxation of offshore employment income earnt by resident Australians (s23AG).  There is still the Cooper Inquiry on superannuation to come in the middle of 2010, with the possibility that the ridiculous tinkering with Australian superannuation will continue unabated and include further restrictions on early access. Remember that one early recommendation of the Henry review was: "The age at which Australians can access their superannuation (the preservation age) should be gradually increased to 67 years."

We continue to suggest that expatriates carefully consider making any major commitments to superannuation until the Cooper recommendations are known and a comparison can be made with the tax efficiency, returns and flexibility offered in other structures and products.
 

The Expat and Australian Real Estate - Hindsight is a lovely thing .. - February 24, 2010
 

We think, like most objective observers, that Australian real estate is generally over valued, perhaps significantly. We also think that Australian expats who intend to return to Australia (which is most of them) should retain real estate in Australia and those who are overseas, and do not have real esate, should consider an investment. Are these approaches in contradiction? Yes, but only in part.

That's because we don't consider real estate a short term trading investment - we have a 5 to 10 year+ horizon. Far too often have we seen expats leave Australia, sell their house and then be  left financially stranded by a booming Australian real estate market, sometimes running in tandem with a strong Australian dollar. The (slightly) complicated chart below tries to illustrates the argument - we've charted quarterly changes in Australian house prices against AUD/GBP exchange rates taking the last quarter of 2003 as the base (=100). The circumstances are extreme because they include the GFC, but they illustrate a huge reduction in the buying power of UK based Australians over the period.

Australian House Prices vs. AUD/GBP Exchange Rate : 2003 - 2010 

The graph illustrates an almost "perfect storm" - a 30% increase in Australian house prices over the period coupled with a 25% reduction in the value of the pound. Bear in mind that UK property prices have also declined and it has put many people in a very difficult situation. We flag this in support of two precepts - stay invested in property in Australia, both for "insurance" and investment return, and regularly return overseas funds to Australia, don't try and "time the market".
 

Exfin ME - Australian Financial Planning in the Middle East - February 18, 2010
 

We've spent the last five years building a network of independent professionals, both within and outside Australia, who share our focus on providing quality services to the Australian expatriate. We continue to be concerned that Australians overseas are still largely "serviced" by investment salesmen focussed on selling products which are often found to inappropriate when Australians return home.

Consequently, we are exceptionally pleased to welcome Exfin Middle East (Exfin ME) to our Network. Based in Dubai, but providing services throughout the Middle East, including financial planning, investment advice and access to Australian mortgages. Advice is provided by an experienced, Australian certified financial planner who continues to be licensed by ASIC. While we think that the current problems in Dubai are real, we also think that it and the rest of the UAE has a bright future as a service hub for large parts of the ME, and hence will continued to be called " home" by many Aussies for years to come.

If you live in the Middle East and want professional "face to face" financial advice just use our contact page and Exfin ME will be in contact shortly.
 

Australian Property Prices - Inexplicable?- February 1, 2010
 

The latest set of Australian property price statistics have just been released by the ABS and they are stunning. I am beginning to believe that it is impossible to attach any sane rationale to the prices - on an annnual basis the established house price index increased as follows : Sydney 12.8%, Melbourne 19.7%, Brisbane 10.9%, Adelaide 5.1%, Perth 11.5%, Hobart 11.0%, Darwin 13.6% and Canberra 12.4%. Some of the numbers seem to represent a "catch up" of sorts - with the cities most negatively affected in recent times showing the greatest rebound, while others like Adelaide which never went into negative growth have shown less bounce. See our chart of Australian capital city prices from 2001 for some interesting patterns.

We have always adopted the mantra that any Australian expatriate who intends to return to Australia should retain a residential property investment in Australia - to guard against property booms and an adverse exchange rate. At the moment we have both and we couldn't have a better example of the need for expats to hedge their real estate position and remain in the market whilst overseas.

That being said, I remain profoundly uncomfortable about real estate prices in Australia - despite all the talk about Australia being different from the rest of the world (inadequate housing stock, high population growth rate); if the GFC has taught us one thing it is that we shouldn't be investing in things that innately don't make sense.
 

Deemed Disposal of Assets : The "benefits" of hindsight - January 20, 2010
 

Not enough Australian expats realise that upon ceasing to be a tax resident of Australia they are deemed to have disposed of all assets except for those falling within the meaning of “taxable Australian property”. In practice, this means they are deemed to have sold all their Australian assets at market value, other than real estate, and are liable for CGT on any (virtual) gain that may have been realised. Therefter, any actual disposal of these assets while the expat is non-resident will not attract Australian CGT.

An individual can elect for a deemed disposal not to occur however - in which case when you eventually dispose of the asset the whole period of ownership, including any period when the expat was not a resident of Australia, will be taken into account in calculating a gain or loss for CGT purposes.

There is an educational and tax planning aspect to this note. You make your election regarding the treatment of these assets - and the ones most commonly affected are shares and managed funds - in the tax return of the year in which you ceased residency. This means that you have the benefit of "hindsight" when it comes to determining whether you are better off with a deemed disposal (e.g. the share price of an asset has risen substantially since non-residency) or electing for a deemed disposal not to occur (e.g. share price has dropped substantially since non-residency). Expats who use professional tax advisors are even more advantaged. Rather than than having to submit returns by October 31, they typically have a later date for submission of tax returns and this may be 12 to 18 months after the expat ceased residency.

Just for the record, remember that your capital gains may also be taxable in your new country of residency, and if you are an Australian overseas with share options, perhaps issued by your employer, these rules apply to you also. Also, you cannot "cherry pick" in terms of your approach - whether you choose deemed disposal or otherwise, your election applies to all your assets which are not considered "taxable Australian property".

Changes to Tax and Super in the New Year? - January 4, 2010
 

Two Government reviews into taxation and superrannuation - respectively referred to as the "Henry" and "Cooper" reviews after their chairpersons - promise to have a significant impact on the Australian financial environment in 2010 and beyond. The Henry Review is now with the Government, which is considering the review and will release it early this year, whilst he Cooper Review is scehduled to be delivered mid-2010.

Most Australian expatriates currently live outside the Australian tax system - usually "happily" so because of its sheer complexity and relative aggressiveness - so the recommendations of the Henry Review will probably be of largely academic interest, unless you are returning home shortly. The Cooper Review is different because the vast majority of Australian expatriates do return home to retire and any recommendations affecting the taxation of superannuation, lump sum contributions and accessibility (particularly the age of access) will potentially have a significant impact on how, where and in what structure expats should manage retirement savings.

We have already seen some evidence, in terms of the sudden changes to s23AG rules, that the present government, like past Governments, may be insensitive to specific expatriate concerns. Until we find a better method of enfranchising expats and their votes this will probably always be the case.

Finally, we would like to wish all expatriates, and particularly those in countries that do not recognise holidays over the Christmas/New Year season, a very Happy New Year!
 

 Expat Friendly Australian companies? - December 7, 2009
 

We've often been disappointed in the attitude of many Australian employers to returning expats, with some major exceptions. In the early part of next year we are going to explore whether we can develop a list of expatriate friendly employers.  They are going to be organisations which attach value to overseas experience and are "willing and able" to discuss employment with expats prior to their arrival back in Australia.  The ideal situation, which will probably not be achievable in the most cases, but should be capable of being improved, is that expats arrive back to an immediate job.

With an increasing number of Australian companies venturing offshore there should also be a realisation that people with existing overseas experience have a lot to offer - expat assignments are expensive, both directly and indirectly, and having individuals who are used to working outside their culture can increase the chances of success significantly.

So, if you know of a company you would regard as "expatriate friendly" please let us know by email to contact [at] exfin.com  We are also contemplating developing a database of returning expats, but not on a normal recruitment basis - we have always seen ourselves as expatriate advocates and would like to take a more active role in developing employment than simply managing a database.  Any thoughts on this would be equally as welcome.
 

Remember the impact of s23AG changes - November 23, 2009

Just a reminder to Australians working offshore who remain tax residents of Australia - in most circumstances, because of changes to the operation of s23AG, you are going to be liable for Australian tax at the end of this financial year.  You need to see a tax advisor, make an assessment of the additional tax payable, and make provison to have the money available at the end of the tax year.  Our briefing paper on s23AG changes, published a number of months ago, provides a summary of the changes made but it is no substitute for individual tax advice. 
 

Retiring into Asia - a no brainer?  - November 16, 2009
 

Apologies if I keep returning to this issue, but there is beginning to be quite a dialogue in Australia about the country being inadequately prepared for the tsunami wave (demographically speaking) of retirees and those in need of nursing home care,  The first is being addressed by stretching the pension access age and trying to keep people in employment longer - using both the carrot and stick approach.  Watch for the forthcoming superannuation and tax reviews due out early next year.

Looking after people in nursing homes, or who need low levels of assistance, is more difficult though as the services are (still) people intensive - and expensive, with one source quoting Government costs of AUD100K to AUD200K per annum to maintain a person in a nursing home environment.

Having lived in Asia, in developing countries with a surplus of young people (eg. half the population below age 20), I can't but see a perfectly complementary match.  There must be a considerable opportunity for Australian retirees to live a (very) comfortable, tax and cost effective life in a number of these countries.  That doesn't neglect the difficulties, and they include issues relating to health care, security and the fact that it will not be a life for everyone, but it represents, in my mind, a considerable business and social opportunity.  Just like everything else, it needs to be done properly, and not by the type of marketers who made a perfectly good concept like time-sharing into a dirty word.

The growing importance of Asia .... - November 1, 2009

An interesting passage from a recent speech by an Assistant Governor of the RBA, Philip Lowe:

"Perhaps nowhere is the impact clearer than in the structure of our international trade,especially our exports. The recent trade data showthat Australia’s four most important merchandise export destinations this year have been China, Japan, South Korea and India – all in Asia (Graph 6). The fifth largest is the United States. Just six years ago the United States was ranked second, but it was first overtaken by China, then South Korea, and then just recently, by India. Collectively, these four large Asian trading partners have accounted for around 55 per cent of our total exports of goods over the past 12 months. Adding in the rest of Asia, the figure is around 70 per cent".

This is the future, our major national customers are now regional and yet, with few exceptions, I've found Australian companies and their senior managers to be extremely timid in terms of developing businesses - outside of mining and oil and gas - in Asia. This has to change or an extraordinary opportunity will be lost.
 

Time to buy property in Asia? - October 28, 2009

One aspect of the recent strength of the AUD is that it significantly improves the ability of resident Australians to buy into the overseas property market - and particularly into Asia where many of the currencies are related to the USD.  In some countries it is now possible for Australians to access local financing for purchases, but in most markets the reality is that cash is still needed to complete a purchase.  If purchasing an investment property this can often be tax effectively financed via loan on your Australian residential property but seek financial planning/tax advice first!

We remain convinced that there is a terrific opportunity for Australians to spend at least part of their retirement in (tax effective) comfort in Asia.  It's not for everyone, particularly if you would miss constant contact with family in Australia, but it can be a comfortable, cost effective lifestyle if you approach it realistically and if you have been an expat previously and know what to expect.

Even if people don't intend to spend years overseas and become non-resident it's becoming practical to envisage large numbers of Australians spending months in Asia on a regular basis - access to medical care has significantly improved in many countries and we can expect accommodation options to increase. 
 

Tax Non-Residency ... you can (normally) keep the house - October 5, 2009
 

Tax residency is a topical question these days. It's a complicated area that should be left to professional tax advisors because individual cases differ widely. But one thing regularly "vexes" us, and that is Australian expats being told that they have to sell the family house to be considered non-resident. If you are told this by your advisor then we strongly recommend you get a second opinion. There may be circumstances where it is warranted, although we struggle to think of any.  It is not acceptable for the adviser to simply say he is being "ultra conservative".

Instead, it is our considered opinion developed over too many years to count, that Australian expats who intend to return (that's the great majority) should retain real estate in Australia. This is from both a defensive perspective - we've regularly seen Australian real estate booms outpace the savings rate of expats - and because the long term rate of return on Australian real estate has been very solid. We don't recommend an over investment - the further you get from Australia the more you tend to wonder why housing is so exceptionally expensive in Australia and whether prices can be sustained.

As a postscript, also look very carefully at any suggested solution that sees your home moved into a trust structure - there are considerable transfer costs involved, potential CGT impacts and a macabre situation in which you pay rental to your trust when you move back in. We're not saying that this sort of advice is wrong, because it won't always be, just that it deserves some very careful attention by you and/or another advisor.
 

Reminders - Self Managed Super and Wills - October 3, 2009
 

Just a couple of important reminders, based on recent cases.  If you are a non-resident and have a self managed superannuation fund you need to get tax/legal advice to ensure that the fund itself remains "resident" - otherwise you have the potential for the fund to lose it's "complying superannuation fund" status and heavy taxation of your superannuation earnings.  Even more importantly, there are still expats overseas who have not made valid wills - it is exceptionally important that all expats, and particularly those with families, have a valid will (or wills).  The complexities and grief that can arise from dying intestate are severe  - also remember that wills give you an opportunity to indicate who whould look after any surviving children!
 

Calculating 23AG tax - September 30, 2009
 

The following is an example of how to calculate s23AG tax, courtesy of the ATO.

There are few things which seem to make this example simplistic: 1) Tax systems vary and it may be that PNG is taxing the Australian on income which is not taxable in Australia eg. items which attract FBT in Australia and are paid by the employer 2) PAYG obligations are likley to be monthly and hence these calculation need to be carried out monthly, and 3) determining the appropriate exchange rate for calculations is often difficult.  This is a simple example - doing it monthly for someone in receipt of a range of work and other allowances (possibly quoted in a foreign language) would be horrible.

Finally, it's a matter of detail which doesn't affect the example, but the PNG income tax rate seems too low; the marginal top rate is 42% and comes in at K250,000 per annum - the average rate applying in this case should probably be in the 30%'s.  If you are currently working in PNG the chances are that the new s23AG changes will not have much impact unless your taxation is subject to special arrangements.
 

AUD vs Various Currencies over 30 Years - September 30, 2009
 

We've had a bit of interest in the GBP vs. AUD chart below so thought we would look at an analysis which included a few more currencies - USD, Euro, JPY, SGD, HKD.  Using RBA monthly data we assigned each currency a value = 1.00 versus the AUD at the start of the data series - thus if it moves to a value of 2.00 it is worth twice what it was originally, and .50 means it is worth 50% of the initial value.  I'm not sure of the value of the analysis, but find it interesting - see how the USD and the currencies directly linked to it (SGD and HK) move in step.  Also interesting, if you are looking for a currency with relative stability versus the AUD, is the Euro since it was established in 1999 - even though the economies are very different.
 

GBP vs AUD - an exceptional situation - September 25, 2009
 

A long time overseas has led me to understand that you can never predict exchange rates.  As a result, our advice has always been that expats regularly send money back to Australia in economically sized parcels - this is the forex version of what financial planners call "dollar cost averaging".  It's premise is that you shouldn't try and time the market. 

I think its good general advice, but it doesn't help much when you suddenly have a large capital sum to transfer - whether it is the proceeds of a house sale or pension - and the sending currency is very depressed.  That's the situation with the UK pound at the moment, with the exchange rate today around 54p to the Australian dollar.  It's difficult to get long term forex data but the graph below (averaged monthly data from the RBA) shows the situation is exceptional - you need to go back to the mid 90's and 80's for comparable situations.  Everyone will see the chart from a slightly different perspective, and history is a poor short term guide to the future. My own perspective is that I wouldn't be in a hurry to transfer money out of the UK, but would not expect a short term return to the AUD = 40p days that we have generally seen over the last ten years.

s23AG Changes -  An Individual's Options - September 18, 2009
 

We'll be posting a separate page on this issue shortly, but just a summary of what your options are if you are affected by the recent changes to s23AG. You can generally take one of three approaches:

1) You give up the job and find work in Australia. This is obvious and we won't spend much time discussing it - strangely, the Government doesn't seem to have contemplated that many overseas jobs won't be attractive under the new tax regime.

2) If family, work and other circumstances permit, then usually the most tax effective approach is to relocate offshore and become tax non-resident. You should get professional tax advice to ensure that you do this properly and meet ATO requiremnts. You generally have two choices - become resident in the country in which you are working, or in a third country. A lot of factors will determine your choice in this regard. If you are in job that means you move around the world regularly, on a FIFO basis, then it is worthwhile considering relocating to a "base" country on a long term basis that "ticks" as many of the boxes as possible - low taxation, security, convenient visa processes, good travel connections, quality accommodation, good educational facilities and accommodation, and a low cost of living.

3) If a move offshore can't be made, and many will fall into this category for personal and family reasons, then you must consider detailed Australian tax planning to minimise your exposure. This will probably include, in most circumstances, a mix of superannuation and negative gearing strategies which will reduce the effective tax burden. How effective these approaches will be in eliminating the tax increases is going to be dependent on a number of factors, including your existing financial position, and tolerance for risk - thus a financial planner should be involved to provide both investment advice and an assessment of risk. Doing "nothing" is not really an option unless you are happy to pay Australian marginal rates of tax on the income that was formerly tax exempt.
 

New Australian expat website - Ozexpats.com - August 26, 2009
 

One of our partners is due to launch a new forum site for Aussie expats soon - www.ozexpats.com  We've suggested that, apart from country forums, that they also include one for people on fly in - fly out (FIFO) assignments, and for "internationals" - people who don't have a country of residence.  We've been surprised by how many Australians work in jobs, such as crewing yachts, that means that they aren't resident anywhere.  Employers usually say this means they "don't pay tax anywhere" - as usual, it's not that simple!

The site will also include a feature which allows expats to map their location on a map - so you can actually see who's living nearby.
 

Bringing UK pensions back to Australia -  Exchange Rate Issues - August 22, 2009
 

It's often in an expat's best interest to transfer a UK pension into Australian superannuation.  That's not the situation 100% of the time though, particularly if you have a defined benefit pension, and we would always advise people to consider in detail whether a transfer is appropriate in their situation and pursue professional advice.

A major problem in recent times has been a (very) poor GBP/AUD exchange - which continues to hover around the 1AUD = 50p level.  People are obviously loathe to make transfer at this exchange rate, with history suggesting the rate is considerably below the long term rate - see our 10 year currency charts to put things in perspective. You have to wonder how much of a guide history is, and bear in mind the relative strength of the (current) Australian and UK economies.

One alternative is to consider establishing a self managed superannuation scheme in Australia - which is QROPS certified so it can accept UK transfers - and then retain all or part of the transfer in UK pounds.  You can then decide when, and if, to convert the pounds into AUD - this may later give rise to a taxable gain but it will be within the superannuation scheme at preferential rates.

This approach should only be contemplated with professional advice, and it will not be suitable in all situations - please contact us if you wish to discuss this option with a financial planner.
 

Taxation of Overseas Redundancy Payments - August 4, 2009
 

A couple of recent cases has reminded us that some people are not aware that if you have had overseas services with your current employer and are being made redundant, then some part of that payment may not be taxable.  Review our page on taxation of overseas redundancy payments for more details - the situation has to be handled very precisely, but it can have a dramatic impact on net redundancy payments.
 

Australians highest paid expatriates?! - July 15, 2009
 

Several Australian newspaper have been running headlines along the lines of, "Australians are world's highest paid expatriates", based on a recent report from the HSBC Bank. The words should have been "Australians are (amongst) the worlds highest paid expatriates - adding that single word makes quite a bit of difference but doesn't sell as much copy.  The point is also made that expatriates in Australia are amongst the lowest paid - not really surprising when you consider that expatriates salaries reflect the harshness of the location and the cost of living.  We've added a copy of the HSBC Expat report for downloading - we would have liked more detail on how the base data was collected, but there aren't that many surprises in it. 

Forex and Australian Banks - More Publicity Needed!
 

A lot of publicity in Australia is given to credit card interest rates and how much money the banks make by charging huge margings over their cost of funds. Nothing ever seems to change, but it does get publicity. However, no publicity ever seems to attach to the margins Australian banks make on foreign exchange, largely because apart from occasional holidays overseas the average Australian isn't affected by the ridiculous margins made by the banks.

I was reminded of this reading about the new TravelMoney Card being offered by the Commonwealth Bank. There is nothing wrong with the product, to quote.. "the first prepaid travel card that enables travellers to lock in the exchange rate of up to six prominent currencies on one card, providing anyone who travels with a highly convenient, cost effective and secure way of spending and accessing money overseas". The problem remains the price, and particularly the exchange rates applicable.

Currency is loaded onto the card at what appear to be cash exchange rates. Using what are called mid-market rates (neither buy nor sell rates) I calculate that the margin made by the bank on the following currencies is at least: USD 2.2%; GBP 3.4%; Euro 4.0%, CAD 4.5% - this in addition to having to pay $15 for the card. Remember that part of the reason why cash rates are so poor is because, the Banks argue, they need to keep stocks of physical currency - not here they don't.

It mightn't seem much, but if you take AUD10,000 to pay for a six week holiday in the US, UK and then Europe my guess is that exchange conversion plus withdrawal costs will cost you more than AUD400. This is more than it should, but is chickenfeed compared to the money banks make on large expatriate transfers where it is not abnormal to see them make a 1.5%+ margin on a AUD 500,000 transfer into Australia - that's $6500 for effectively pushing a button. I have no problems with fair returns, but this doesn't qualify and reinforces the view that anyone transferring money to Australia shoud first consider the alternatives, such as Ozforex. If you are talking very large amounts, consider talking to the banks in advance and negotiating a cost for them to exchange the funds - it will save you many thousands of dollars.

By the way, any money left on the MoneyTravel card after expiry is forfeited to the bank - please ensure this doesn't happen.
 

Senate Committee Report - Section 23AG Changes - June 22, 2009
 

The Senate Inquiry Report into the proposed changes to 23AG did a fair job of summarising the problems associated with the proposed changes to the legislation and then largely proceeded to ignore them and focus upon some relatively minor issues - including the potential double taxation of fringe benefits and the compliance problems associated with the taxation of Australian backpackers.  There was no significant discussion of the economic damage this legislation will cause and no detailed examination of the Treasury figures on projected savings - particularly in light of the fact that many Australians engaged in these activities are mobile and may to become non-resident.

The Coalition members of the Inquiry did provide a dissenting view, which included the following passage:

"Coalition Senators have received literally hundreds of emails regarding this proposal from such Australians engaged in work in overseas locations from south-east Asia to Europe, Kazakhstan, Africa and the Americas. All write of the inconvenience the introduction of this measure will cause in disrupting their financial affairs and many regard the failure to give them time to prepare for the introduction of this measure as an indictment of the an indictment of the Rudd government for the lack of consideration shown to them and their families."

There is nothing however in this Report to suggest that the Government, who dominated the Inquiry, will adjust or defer the Budget measures announced in May.  Those potentially affected by the changes, whether individuals or companies, are advised to seek professional advice regarding their options. This is a poor piece of work by both the Government and Treasury who did the revenue estimates.  Again, the Australian newspaper has been critical both of the legislation and the process - see "Panel warns against expat rule".

We'll shortly review some of the revenue assumptions made by Treasury - it should be interesting.
 

The increasing importance of Tax Residency ... - May 21, 2009
 

The proposed changes to s23AG (see below) announced in the Budget have generated a lot of inquiries regarding tax residency, and it is going to heighten further the long term importance of being considered tax non-resident.  This can be a complicated area - see our section on the rules applying to Australian tax residency - and we would suggest that employers and employees give it some professional attention before staff move offshore on an assignment.  The impact of getting it wrong can be very expensive - and even if the assignment length is relatively short length, and non-residency is not an option - remuneration can probably be structured much more effectively through the use of allowances.   More on this when the picture becomes clearer.

We will also expand on the practicalities of people basing themselves offshore in Asia, rather than cycling out of Australia.  We believe this a real option for a proportion of  Australians otherwise caught by the s23AG changes.   There is no word yet on whether the Government is prepared to defer, or make changes to the proposed changes; they have met a lot of criticism over intended changes to the taxation of share options and that has taken the spotlight.