The Australian Dollar - Where to from here? - February 2, 2012

The Prime Minister announced yesterday that the Australian dollar would remain "relatively strong for years to come" because of its newfound "safe haven" status. Given that the currency forecasting record of politicians is even poorer than bank economists, there is good reason to completely ignore the comment, and probably look forward to a softening of the currency.

It is undeniable that the strengthening of the currency has had a very large impact on many expatriates and would-be migrants to Australia. We believe a veritable "wall of money" exists outside Australia awaiting a major fall in the AUD. The fact that a significant fall has not happened - see the AUD vs GBP chart below - has placed many people in an invidious position. Having effectively "bet" on a softening, many are now committed to following through with that strategy, despite very high direct and indirect costs. 

At least when it comes to pension monies held overseas, rather than those earmarked for property purchase or investment, we think people should consider moving those funds into Australian superannuation at current exchange rates, and then investing those funds into currency investments. The ASX now has tradable funds which effectively allow a direct investment in GBP and USD -meaning that you can receive the benefit of any increase in these currencies while in a tax effective structure. The downside remains that neither of these currencies attracts any real level of interest income and so there is a real holding cost - you do however have the benefit of flexibility and the ability to move in and out of these currencies, and other investments, at he timing of your choosing.
 

The Australian Share Market in 2011 - January 2, 2012

Australians are one of the world's biggest per capita investors in equities, both directly and indirectly through their superannuation funds. Consequently, 2011 has been a (very) poor year for most people's investment returns, as the chart below illustrates. Despite the relatively good performance of the Australian economy, share prices have generally performed very poorly, largely as a consequence of external factors, such as the US recession and the "rolling car crash" that seems to be the European economy.

With the benefit of 20/20 hindsight, many commentators are now pushing the benefits of fixed interest investments and predicting an even tougher 2012. Given the recent record of pundits, I think there's at least an equal chance that many will look back on late 2011 and 2012 as big buying opportunities for Australian shares.

 LAFHA - Big changes - December 2, 2011
 

The Government has just disclosed plans to fundamentally change how the Living Away From Home Allowance (LAFHA) and other associated benefits will be taxed from 1 July 2012.

In summary, under the proposed changes, the tax treatment of LAFHA will be changed so that it is included as assessable income for the employees unless:

• They are permanent residents or temporary residents maintaining a home in Australia which they are living from for work; and
• Expenses relating to accommodation and for food above a statutory amount can be substantiated.

A temporary resident is considered to be maintaining a home in Australia for their own use when that home is available for their personal use and enjoyment at all times, which includes an owned or rented unit of accommodation defined under the FBT Act. Previously, because temporary residents came from overseas that automatically qualified for LAHA as they were obviously "living away from home".

In the government's view, and there are clear examples which support this view, there has being a significant "rorting" of the system - with the result that temporary residents have enjoyed preferential tax treatment which is not been available to ordinary Australians.

The significant problem that we have with this arrangement - apart from the fact that it seems to be very focused on revenue raising and was clearly being pushed by the ACTU - is that it again involves no transitional arrangements. Consequently, you have many thousands of temporary residents who had moved to Australia with their families, often on long-term contracts which included LAHA arrangements, who will be severely affected by the changes. The situation parallels tax changes made in 2009 with respect to s23AG which affected many Australians working overseas.

Also, changes to the LAFHA arrangements probably mean that Australian residents working overseas receiving LAFHA will need to be able to substantiate expenditure against the allowance from July 1, 2012 - that means collecting (and retaining) your overseas expense receipts! This Governments continues to make it harder and harder to argue cogently for basing internationally mobile staff in Australia rather than more flexible and cheaper locations in Asia and elsewhere.

You also wonder whether the changes of this severity, brought in without transitional/grandfathering arrangements, would have been introduced if temporary residents had the ability to vote.
 

Contributing to Super while a Non-Resident - November 24, 2011
 

We receive a large number of inquiries around the issue of contributing to superannuation while non-resident. In short, you can generally continue contributing to superannuation while outside Australia, except where you have a self managed superannuation fund (SMSF). In the latter case, you need professional tax advice to ensure that you are not putting at risk your fund's tax preferred status.

In most cases however, continuing to contribute to the Australian super is not going to be the optimal approach. That is either going to take the form of contributions to pension schemes in your host country, which are usually tax effective, or contributions to savings or investment accounts held in low or no tax locations. Alternatively, you can even hold investments directly. You then have the option of the value of the funds accrued into superannuation as non-concessional contributions when you return to Australian, or contributing your investments directly into superannuation as "in specie" contributions in certain circumstances.

Given the predilection of politicians from both parties to constantly meddle with superannuation, we also think there are considerable advantages in building flexible investments outside of superannuation. Anyone contemplating along period overseas should definitely consult a financial advisor regarding their options.

Offshore AUD term deposits still not competitive - October 27, 2011
 

We've been critical of Australian and international banks in terms of the competitiveness of their offshore AUD interest rates in the past, and nothing appears to have changed. Bank pricing still appears to include a significant margin over rates available in Australia for similar amounts and terms - as the following comparison shows. When comparing, bear in mind that 1) withholding tax of 10% applies to Australian interest income earned by non-residents and 2) a government guarantee applies to Australian deposits - it does not apply to deposits sitting in branches of Australian banks overseas from February 2012.

NABAsia is the only offshore Australian bank included for comparison because it is the only bank - to our knowledge - that publishes term deposit interest rates and it should be applauded for doing so. Previous research also suggests that it is amongst the most competitive. Also note that some banks, such as the ANZ, have minimum deposit sizes of AUD100,000 and strategies clearly focused on "high net worth individuals" - in the main, Australian expatriates continue to remain poorly served by these banks.
 

UK Tax Returns - Late Penalties - October 25, 2011
 

Quite a few Australian expatriates, and the UK migrants to Australia, are required to complete UK tax returns. Late penalties have applied for a number of years and that they are summarized in the following webpage:. http://www.hmrc.gov.uk/sa/deadlines-penalties.htm#3

What has happened recently is that whilst these penalties haven't changed, they are apparently going to be applied much more rigorously. For example,while late penalties used to be cancelled in many cases where there was no tax final liability, they will now apply regardless of whether there is any tax liability. Bear in mind that whilst the UK does have online tax returns, in practice they can be very difficult/impossible for expatriates to use. For example, many people trying to file their own returns find they can’t complete the residence pages.

So, either make sure you are going to put in a return on time or use a a tax advisor. There are also new tax residency rules being developed in the UK - more on that shortly.
 

"Australia in the Asian Century" - October 19, 2011

It's troubling that the Australian government has only now, 10 years into the 21st century, decided to commission a White Paper that will:

"...provide a national blueprint for Australia at a time of transformative economic growth and change in Asia. It will help Australia navigate the Asian Century – to seize the opportunities it offers and to meet the challenges it poses."

Clearly, the horse has well and truly bolted, but some governmental and business appreciation that Australia's economic future largely lies in Asia is worthwhile. What will be interesting to see who will comprise the "committee of cabinet", chaired by Ken Henry, charged with producing the Paper. Experience suggests a group top heavy with politicians and foreign affairs bureaucrats, and with little or no input from Australians who have lived and worked "on the ground" in Asia for prolonged periods.

Experience of the latter kind might have helped recently when it came to the (too well publicised) case of the 14-year-old Australian arrested for drug possession in Indonesia. I wonder how many Australians with significant Asian experience would have suggested the high-profile intervention of the Australian Prime Minister and Foreign Affairs Minister as the best, and most effective means, of resolving this issue? Hopefully, the White Paper instead of just focusing on the economic relationships between the countries, also helps Australians appreciate and understand that different legal, cultural and political systems operate in Asia and that in most of them arrogance is viewed very poorly.
 

Questioning Superannuation - October 5, 2011
 

It may seem strange, but one of the problems with expatriation is that individuals lose the "forced savings, which are a characteristic of the superannuation system in Australia. As a result, expatriate retirement savings will often plateau unless individuals themselves put in placereplacement savings/investment mechanisms. Even the latter can be a problem, with many overseas "investment advisers" continuing to sell Australians expensive, inappropriate products.

In this environment, we've often taken the view that continuing to contribute to superannuation while overseas, while often not exceptionally efficient from a tax or investment standpoint, is not a bad "default option" - the funds are safe within a reasonably well regulated system that offers security until retirement age is reached, and flexibility thereafter. However, we are beginning to question that assumption, based on the following views:

1. Superannuation is unusual in a global context insofar as funds are taxed going into the structure, and largely exempt on payout. We believe that there is a significant risk that the government will move over time to regulate the manner in which funds are withdrawn from superannuation - moving potentially to a system where a portion of the money will be required to purchase annuities. Tinkering with superannuation has been the endemic habit of both major political parties, and both can be expected to face funding pressure as time goes by simply by virtue of demographics. "Tinkering" is a lighthearted word that poses significant risks.

2. There will almost certainly come a time when the tax exemptions which currently apply to superannuation payments post age 60 will come under pressure. Again, simple demographics.

Expatriates remain perhaps the only major segment of the Australian community which has the flexibility and resources to accumulate significant retirement assets outside of superannuation. We think they should take the opportunity to construct a portfolio which includes assets both within and outside superannuation - accepting, on their return to Australia that marginally smaller after-tax return on non-superannuation assets is offset by additional flexibility. Too many eggs in one basket would one day almost certainly prove a problem with superannuation.

Australian Banks Overseas - Simply Not Good Enough! - July 28, 2011
 

Regular Australians find it difficult to think warmly of their banks, and their cosy oligopoly, and those views shouldn't change when you go overseas. Most Australan bank branches oversea are clearly elitist, focussed on private banking and high net worth clients - a minimum deposit of AUD250,000 (might) get you through the door. We secretly think that the retail/private banking operations, at least in most parts of Asia, are probably loss making on any fair accounting basis.

One area in which Australian expatriates should not be supporting these banks, unless you have good commercial or personal reasons to the contrary, is with offshore AUD Term Deposits. Two reasons:

1. The rates are markedly lower than those available in Australia. For example, term deposit rates at the end of July in Australia for an amount of $100,000 over 12 months are typically around 6% for the major banks. Current rates in Singapore and Hong Kong through the Australian banks are around 4.35%. This is an enormous differential and makes it far more economic, even after allowing for a 10% withholding tax in Australia, to place your deposit in Australia.

2. Close reading of the materials will show that deposits in certain countries, such as Singapore and Hong Kong, are either not subject to guarantee or they are limited in nature - for example in Hong Kong to HKD500K. So, read the T&C's carefully.
 

It is completely and utterly FAF'able - June 3, 2011
 

There was once a piece of arcane Australian tax law which regulated the taxation of Foreign Investment Funds (FIF) - effectively overseas investment and pension funds held by resident Australians. It was complicated, generally misunderstood or often ignored, by the great majority of tax practitioners, much less the ordinary taxpayer. It was nonetheless very important to expatriates and migrants because it regulated the taxation of significant investments and pensions left overseas once they had return to Australia.

From July 1, 2010 these rules no longer applied and were to be replaced by new Foreign Accumulation Fund (FAF) rules - the new acronym presumably reflecting a break from the past, and the promise of new rules which encompassed clarity and fairness. Actually, in tax, clarity is often to be preferred over fairness - because at least it allows you to plan appropriately.

Unfortunately, despite two attempts at draft legislation since July 2010, no final legislation has been passed and a legal vacuum now effectively exists in relation to taxation in this area. Just yesterday the ATO announced it's approach to FAF, and it's a doozy. Effectively, taxpayers are being asked to complete their returns in a manner consistent with the Assistant Treasurer's January media release, and the most recent Exposure Draft, and then later seek amendments depending upon whether they had declared too little, or to much, income according to the final legislation!

This announcement will please no one - neither the ATO, tax professionals or clients. It can only be presumed that there exist continuing concerns that even the most recent Exposure Draft rules are either too imprecise, unworkable or both. It only remains for advisors and clients to exercise extreme caution in this area until some clarity is delivered.
 

The 2011 Federal Budget - A "Non Event" - May 12 2011
 

For most Australians, and that includes expatriates, the 2011 Federal Budget turned out to be a non-event.  Given the Government's penchant for introducing some remarkably stupid legislation in recent years which have adversely affected expatriates and resident Australians working overseas that is probably a relief.  The Australian dollar is making it hard enough to compete without further extending the tax ambit.

Some things to remember.  Although this is something like the first time in nine years that the personal tax rates have not changed in the Budget, a Flood Levy applies to any income over $50,000 in the 2011/12 tax year - this applies to both resident and non-resident rates. Also, the ability for individuals over 50 to make concessional contributions of up to $50,000 per annum into superannuation ceases at the end of the 2011/12 financial year and reverts to a maximum of $25,000 unless you have a superannuation account of less than $500,000 (yet to be legislated).

Australian Residential Property - Where to Now? - February 14, 2011
 

As ever, it remains difficult to be entirely certain about the direction of Australian residential property. However, the general consensus is that the market is soft, particularly in places like the Gold Coast. Underpinning this are some significant increases, year on year, in the number of houses and units up for sale - see the chart below. Australia represents several markets however, as illustrated by the varying historical price patterns in each capital city, with all significant short-term price increases almost always resulting in "hangovers" - such as we see in Perth, and probably Darwin in the near future.

Australian Retail - under pressure and actually having to compete! - February 1, 2011
 

A typical refrain of tourists, migrants and returning expats to Australia is "why is everything so expensive". The usual answer revolves around Australia's small population size, distance from markets, tax and duties and that's partly right - the other part is that Australia has an incredibly concentrated retail market which has often made for poor service and inflated margins. At last however some part of that market is now under attack from the internet - with Australian shoppers turning to shopping online overseas for greater choice and cheaper prices. In part, this has been assisted by a tax system that allows overseas purchases below $1,000 to avoid GST, something which retailers are jumping up and down about - but the trend is clearly going to continue, almost without regard to the exchange rate, although the strong dollar has accelerated the move.

Another impact, which is important for Australian investors, is that it should start to put pressure on retail rents - on any global measure they are stunningly high and need to come down to make local retail competitive. Time to start trimming your sails if you are invested in retail property in Australia, either directly or indirectly.

We just may be starting to see the internet starting to pull apart some of the cosy oligopolies in Australia - hopefully the banks and supermarkets will be next. 

Australian Companies .... just too slow? - December 3, 2010
 

The just released 2010 PwC Melbourne Institute Asialink Index report includes the following statement:

"Australian outbound investment to Asia declined. Australians investing abroad clearly prefer the United States, New Zealand and the European Union over Asian economies. At the same time, foreign direct investment (FDI) from Asia into Australia increased substantially, despite a 43 per cent worldwide decline."

So, in a period where Australia's economic relationship with Asia has never mattered so much, Australian companies have largely preferred to continue investing in the western European environments where they presumably feel comfortable, and which are currently in dire financial shape. It is a generalisation that nevertheless contains a grain of truth, that Australians normally make very good expatriates - well educated, flexible and robust in a range of circumstances. There is another generalisation, with which I also agree, that says Australian companies have a poor reputation in Asia - inflexible and amongst the first to leave when the going gets tough.

Australian companies are all too often managed by individuals with absolutely no experience of Asia and an abiding attraction to Europe and other places which are perceived as comfortably "Western". They need to change their focus, become expansionist and used to doing business in Asia ... and they need to do it quickly.
 

Offshore Banking - November 23, 2010

The table below illustrates the current term deposit rates for three currencies offered by an offshore bank in Asia, as at November 22, 2010. A little research suggests that the rates are not astonishingly good, but at least the bank makes them public. And this is important because one of our major criticism of offshore banks is the opaque, closeted fashion in which they work - with interest rates and other details available "only on request". Many Australian banks overseas also seem to take the attitude that their branches are simply intended as outposts of the private wealth department - focused only on high net wealth expatriates and local residents rather than the wider Australian expatriate population.

Our comments would be as follows:

1. The best Australian dollar interest rates continue to be available in Australia, rather than offshore, even allowing for a 10% withholding tax.

2. The opportunity cost of holding US dollars and Sterling can only be characterised as enormous. Australians with large holdings in either currency who are waiting for a "devaluation" of the Australian dollar need to rethink their strategy. Many commentators are beginning to flag the prospect of a strong Australian dollar for years to come. This does not simply mean that you should switch entirely into Australian dollars now, but may include a move into equities or other investments that offer better long-term returns than cash.

3. Having an offshore bank is often a necessity as an expatriate. Look beyond the "frills" and special "club membership" offers to determine the value being offered - and part of the assessment should include the transparency of the bank's interest rate offering.
 
 

Yet more commentary on the Australian Dollar - October 1, 2010
 

There is much talk of the AUD again breaching parity with the USD - much the same dialogue that was taking place just before the GFC hit and the AUD briefly plunged to just short of 60c in late 2008. However, there are many rational reasons underpinning its recent strength, including a comparative weakness in the US dollar and on balance it seems likely that Australian expatriate's will continue to face a relatively strong home currency for the medium term. This has significant connotations for the many Australian expatriate's who have retained funds, particularly in GBP, awaiting an improvement ( i.e. devaluation) in the Australian dollar. Now is probably the time for them to formally review their position in terms of what they do with these funds, which have typically been kept in cash and generated negligible income.

In general,we continue to believe that the best approach to "managing forex", as mentioned previously, is to regularly transfer amounts back to Australia; with a logic similar to the "dollar cost averaging" used in share purchases. We take the view that the ability to forecast the forex market, except in very general terms, is limited. In that context, back in May this year, we looked at the forex forecasts of a major Australian bank. The chart below examines how closely those forecasts have mirrored the real world. In general, the forecasts reflected with reasonable accuracy the continuing appreciation of the Australian dollar, but did not (or could not) predict the very rapid appreciation of the Australian dollar against the US dollar over the last three months. We've also added the bank's most recent (October) forecasts, which illustrate how changeable these forecasts can be even over a six-month period.

 
 Retirement Overseas and Healthcare - August 31, 2010
 

We think that retirement overseas, particularly in Asia, offers significant advantages for many Australians. The cost of living is often much lower than in Australia and it is an interesting and attractive alternative to the normal retirement lifestyle in Australia. A major hurdle though, as we found out this week, is the cost of expat health insurance. Whilst it is an absolute necessity in practice, it is also a requirement of most retirement visas.

The costs can be quite enormous - one quote we received for a 60-year-old retiring into Indonesia for fully comprehensive expatriate health insurance, including repatriation, exceeded USD10,000 per annum, with the premium increasing every year. We believe that as time goes by, and health services improve in Asia, it will become more effective to access local health insurance policies in tandem with repatriation insurance. But in the meantime, it certainly pays to be very careful and methodical about choosing expatriate health cover - particularly since many plans do not allow access over the age of 60 or 65. You should not economise however when it comes to repatriation cover - the costs associated with the returning someone ill or injured to Australia can be enormous.
 

Tiger Airways - be cautious - August 30, 2010
 

Apologies for moving a little off track, but we know that this is a time of year when the expat families start to plan a trip back to Australia at Christmas. From a distance it's very easy to assume that all airlines operating domestic routes in Australia are much alike and that "reliability is a given". You may also assume that any airline owned by Singapore airlines would share the parent's concern for quality of service. I'm afraid that in the case of Tiger Airways however, at least in Australia, that neither assumption necessarily holds true. We suggest that expats looking to arrange travel within Australia review the airline's reputation for punctuality and service very carefully, and meticulously read through their fare conditions, before purchasing tickets and look at the additional check-in and other costs. This shouldn't be necessary, but it is with Tiger Airways. 

Australian Expat Numbers - June 2, 2010
 

We are regularly asked whether the GFC and economic conditions aoutside Australia have affected expat numbers.  The best we can make is a guess, because the statistics and information are so poor in this area, and rely to a degree on our own experience. 

We believe that numbers may be down in Europe (and that largely means the UK), the Middle East and the US, but up marginally across Asia and China.  In any event, we don't believe the impact of economic conditions has been as significant as some commentators have made out. And to some degree the figures below from DFAT regarding resident departures from Australia support the view that expat numbers have remained largely unaffected - though bear in mind that the numbers includes permanent departures, long term departures and short term departures of Australian residents. 

The 2011 Australian Budget - May 12, 2010
 

The 2011 Australian Federal Budget was a stolid and reponsible effort, and a non-event from an expatriate point of view. Unless of course we find anything hidden away in the fine print, which seems unlikely at this point. If you are reading this blog you are probably going to be aware of most of the major points, some of which we have already mentioned below in relation to the Henry Review, but I will briefly summarise some of the more notable elements below:

• No changes to the personal income tax rates already announced.
   
• As announced prior to the Budget, a 40% resources super profits tax (RSPT) will apply to the profits of non-renewable resource projects, after allowing for extraction costs and recoupment of capital investment. We expect this to change significantly prior to implementation.
   
• A lower tax on savings; a 50% tax discount on up to $1,000 of interest income. Expats paywithholding tax on this income - which there is a move to do away with as part of a move to position Australia as a regional finnacial centre.
   
• The super guarantee extended to workers aged between 70 and 75, and
   
• Workers aged 50 and over with super balances below $500,000 to be allowed to double concessional superannuation contributions to $50,000 from 1 July 2012.

No mention in the Budget of whether last years changes to s23AG are meeting the revenue projections - that is probably because they aren't getting even close. 

 

Purchasing Australian Property - FIRB Changes - April 24, 2010
 

The Australian Government today announced a "U turn" on the rules regarding the purchase of established homes by temporary residents. Temporary residents are now required to seek FIRB approval prior to any purchase of established (second hand) homes, and to sell them upon departure from Australia. Purchasers of vacant land are now also required to commence construction within 2 years.

This is not strictly an expat issue - but often the rules regarding FIRB approval are not well understood.  For instance, Australian expats often have spouses who are not citizens or permanent residents - they can purchase any property they like as joint tenants without FIRB approval, but not as tenants in common.  We are developing a series of flow charts which try and explain the process - see the following draft flow chart regarding the FIRB approval process for established homes.   

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".
 

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".
 

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.
 

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.
 

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. 
 

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. 
 

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.