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Blog on Issues impacting Australian Expats

Australian Travel Advisories - the world is very gradually turning "blue" - June 30, 2022

The Australian Government maintains travel advisories for almost all the countries in the world, at 4 different levels - which we track on a world map usually the following colours:

  • Level 1: Exercise normal safety precautions - Blue
  • Level 2: Exercise a high degree of caution - Green
  • Level 3: Reconsider your need to travel - Orange
  • Level 4: Do not travel - Red

Gradually over the last week we have seen more countries returning to their "normal" Level 1 ratings - these countries include Japan, South Korea, Denmark, Iceland, Norway, Sweden, Estonia, Latvia and Croatia - hence our comment that the world is gradually "turning blue".

Apart from being important when planning overseas trips, the travel advisories can be important in terms of arranging travel insurance and also life insurance - in the latter case, Australian insurers will only typically consider applications from individuals resident in countries where travel advisories are at level 1 or 2.

June has been a punishing month on the Australian markets - June 30, 2022

June was an awful month for both Australian equities and dollar - in our updated chart below you can see that the ASX 200 dropped nearly 9% over the months - with extreme volatility and softness continuing - while the Australian dollar dropped almost 4.5% against the US dollar.

As most expats will be aware, June has been a very poor month for stock exchanges around the world and the ASX has followed world markets. What's not more widely appreciated has been the decline in the AUD against the USD, as there has been a traditional flight to the USD as a "safe haven currency". That has left the AUD very undervalued on most assessments - but that doesn't matter much in the current environment.

The only small, faint light on the horizon for expats may be the ability to enter the Australian property market on more reasonable terms as prices moderate or fall - possibly quite substantially in the short term in both Sydney and Melbourne.

Superannuation Changes on July 1 - June 29, 2022

There are a number of changes to super that come into effect on 1 July, 2022 which expats should generally be aware of, particularly since some provide a bit more flexibility in terms of making non-concessional contributions to super after retirement or are return to Australia. We have summarised the three major changes below:

  • The superannuation guarantee is increasing from 10% to 10.5% - and is planned to reach a maximum of 12% on January 1, 2025
  • "Downsizer" payments, which previously allowed individuals aged 65 and older selling their family home to contribute up to $300,000 of the proceeds to superannuation have now been extended to individuals aged 60 and above.
  • A "work test" previously applied to individuals wanting to make personal or salary sacrifice contributions to super from ages 65 to 74 - the work test now no longer applies unless the individual is seeking a tax deduction for their personal contribution. Up to age 75, individuals can make non-concessional contributions to superannuation as long as they have less than $1.7 million in their fund and meet the various cap requirements.

Importantly, what appears to not be changing are the residency requirements around self managed super funds (SMSF) and small Apra Funds (SAF). In the 2021 Budget the Government announced that it intended to relax the residency requirements for both SMSFs and SAFs by extending the "safe harbour" for the central management and control test from 2 to 5 years for SMSFs and removing the "active member" test for both fund types. These changes were intended to take effect from 1 July, 2022 but with no draft legislation and Parliament not scheduled to sit until July, 2022 we expect that the earliest these measure could have effect is now probably 1 July, 2023.

Double digit decreases in Australian property prices forecast - June 16, 2022

Property prices across most Australian cities are expected to fall by double-digit figures according to Australia's leading residential lender - CBA - see the table below. The RBA's latest increase to the cash rate of 0.5% was the largest over twenty years, but has since been overshadowed since by a 0.75% increase by the Federal Reserve as central banks around the world try to get ahead of inflation.

The early brunt of price decreases will be felt by Sydney and Melbourne, but even more affordable markets such as Adelaide and Brisbane will struggle to maintain momentum.

At some point, given an AUD which appears undervalued, the market might represent an "entry point opportunity" for expats during the latter course of the 2022.

Super Fund Performance - June 9, 2022

For Australian expats wondering how their Australian superannuation funds are faring, the answer is that most are showing fairly robust investment returns - although many have been impacted by the retreat in equities over the last few months, and we believe more headwinds are to come, with many balanced funds likely to make losses in the financial year.

The charts below list the best performing balanced funds over 1) the financial year to April 30 and 2) over the five year period to April 30, 2021. A number of funds, highlighted in blue, feature in both lists.

RBA Increases Cash Rate by 0.5% - June 7, 2022

There is every prospect that history will show that the RBA has been consistently "behind the curve" in terms of interest rate policy - moving too late as a consequence of earlier commitments about not increasing rates until 2024, concerned about being seem to be too political in the context of the recent federal election campaign and slow to accept the existence of significant inflationary pressures.

In any event, today the RBA increased interest rates by 50 basis points or half a percentage point, taking the cash rate target to 0.85 per cent - the biggest rate hike in 22 years and the first back-to-back rate hike since May 2010. The Governor also indicated that the RBA would likely keep raising rates over the months ahead and there are some forecasts that the cash rate could reach 2.5% by mid next year.

If that happens then the impact will be substantial - the Table in our May 1st article below shows that a 2% increase in the base rate will mean an additional $837 in monthly repayments on a $750,000 mortgage. It will also be interesting to see the impact on the AUD going forwarded.

Additionally, the rate rises make it more difficult to access a mortgage - banks are required to check that borrowers can repay their loan at 3% more than their present interest rate or the "floor" rate set by the bank - whichever is higher. In concert with APRA indicating it would target banks where customers had higher debt to income (DTI) ratios, banks are likely to be even more conservative in terms of their lending going forward, and this could particularly impact expatriate lending.

Housing Demand in Australia - May 27, 2022

Australian expatriates returning home, and expatriates on assignment to Australia, need to be aware that Australia, like many countries across the world, is facing a significant housing shortage and care needs to be taken to ensure that you have arranged accommodation well in advance of any arrival.

To provide an indication of just how tight the housing market is, the rental vacancy rate across Australia has basically halved over the last 12 months, as illustrated in the chart below, to historically low levels in many major cities - with no improvement currently in sight.

Labor election victory: Impact on expatriates - May 23, 2022

The Labor election victory poses no obvious upsides or downsides for Australian expatriates. Labor adopted a "small target" approach to the election and basically mirrored the LNP's position in relation to most tax and financial matters - effectively relying upon the electorate's distaste for Morrison and a decade's worth of inaction on climate change to give them victory, although at an historically low share of the overall vote.

Given that the Tier 3 personal tax changes will proceed, and changes to GST are incredibly sensitive, particularly with significant current cost of living pressures - Labor has left itself with very few options in terms of Budget repair, although multinationals in Australia can expect to be - and should be - the focus of renewed attention in terms of their tax arrangements.

Although Labor can be expected to be more flexible than the LNP when it comes to listening to expatriates regarding the proposed new tax residency rules, particularly the prospect of being considered resident after 45 days in the country, major changes are probably unlikely at this stage and Labor may be disinclined to consider any changes which reduce revenue, given the above comments.

Overall, it's unfortunate that politics has reached a point in Australia where neither major party seems inclined to take the "long view" on policy matters, and seem unable or incapable of selling or communicating complex and difficult matters to the electorate. The hope is that Labor will surprise in this regard and be less purely "transactional" than the last Government.

Interest Rate Increase(s) Pending in Australia: Monthly Repayment Impact - May 1, 2022

As in many parts of the world the conversation in Australia is all about when, and not if, interest rates will increase and their impact on the housing market. On balance, the expectation is that the Reserve Bank will announce the first increase in the current 0.1% cash rate next Tuesday - perhaps a .15% or .25% increase - since November 2020.

This is just the beginning and views differ as to where interest rates might peak. The Commonwealth Bank expects the cash rate to peak at 1.25 per cent in early 2023, while Westpac predicts a peak of 2 per cent in mid-2023. ANZ expects the cash rate to reach 2 per cent by the end of 2023, and NAB has forecast a peak of 2.25 per cent by the end of 2024. Note that fixed rates have already pre-empted the RBA, they have risen considerably in recent months and their share of nmortgages has dopped from 46% last July to just above 25% in February.

What does this mean for repayments - the table below illustrates the impact on home loan repayments of interest rate increases ranging from 0.15% to 2.0% based on a 30 year principal and interest mortgage.

Federal 2022 Budget: A Non-Event for Australian expatriates, except that nothing was said about Tax Residency – March 30, 2022

Yesterday's Australian Federal Budget turned out to be a non-event for Australian expatriates, with no announced changes having any appreciable impact on non-resident Australians. We have however provided a summary of the major announcements below:

  • The Low and Middle Income Tax Offset (LMITO), which is only applicable to resident taxpayers, was increased by $420 for the 2021-22 tax year to $1,500. Importantly, the Government did not announce a further extension of the LMITO beyond 2021-22 when it is legislated to cease.
  • There were no announced changes to personal tax rates for 2022-23. The Stage 3 tax changes commence from July 1, 2024 as previously legislated. Consequently, from 1 July 2024 the 32.5% marginal tax rate will decrease to 30% and there will have one big tax bracket between $45,000 and $200,000. See our personal tax tables.
  • The temporary 50% reduction in minimum annual payments for superannuation pensions and annuities was extended a further year to include the 2022-23 tax year.

When Parliament resumed on March 29 there were several Bills, covering tax, super and other measures, before both houses of Parliament. It is possible that some or all of these bills will lapse when the Prime Minister calls a Federal election, which is expected to be on the 14th or 21st of May, 2022. Importantly, no comment was included within the Budget papers regarding the proposed changes to tax residency rules - that being the case, there is every possibility that these changes may be delayed and not come into effect until the 2023 tax year.

Important Superannuation Changes introduce additional flexibility for expatriates - February 11, 2021

Recently legislated changes to superannuation, first announced in last year's Federal Budget, provide important additional flexibility for Australia expatriates intending to retire in Australia, and older Australians generally, to make significant additional contributions to their superannuation balance.

The changes, which we were concerned may have been delayed because of the current legislative programme and upcoming Federal election, provide significant strategic planning opportunities from 1 July 2022.

The legislated changes included:

  • removal of the work-test requirement for non-concessional contributions (NCCs) and salary sacrifice contributions, for individuals aged between 67 and 75
  • extended eligibility to make NCCs under the bring-forward rule to individuals aged under 75 at the beginning of the financial year
  • extended eligibility to make downsizer contributions to those age 60 or over
  • removal of the $450 per month minimum income threshold in terms of the application of the super guarantee payment by employers

Note that some of the provisions around age cut-offs are quite specific and subject to balance caps, so professional advice should be sought prior to making any contribution.

More people working remotely – November 9, 2021

With Australia at last opening up, it won't surprise many people that we are receiving many more inquiries about the tax impact of people working internationally on a remote basis. This includes both Australians proceeding overseas with the intention of continuing to work for their same employer in Australia, and Australians returning home who still continue to work for overseas employers.

These arrangements can be wonderfully flexible, but not necessarily simple when the tax aspects are considered. In short, you are typically taxable in the country in which you perform your duties, regardless of whether you are "paid" in Australia, or elsewhere. It really pays to obtain some professional advice before entering into these arrangements - as the area is complex, and the wrong decision taken early can take years to unravel. We provide more details on our remote working page.

New Smartraveller Advice - October 28, 2021

Almost a year ago, the Australian Government dispensed with providing individual country advice and effectively declared the rest of the world a "do not travel" zone.

However, as from October 28, the Government has resumed individual country travel advice - in advance of the resumption of more general travel into an outside of Australia. Go to the Smartraveller website for detailed country assessments or view our World Travel Advice Map.

Government Urged to Change Proposed New Tax Residency Rules – October 16, 2021

Australian business groups, particularly in Hong Kong, are actively lobbying the Federal government to change aspects of the proposed new tax residency rules, which we have summarised in detail on this site, because of significant negative tax consequences. Their concerns center largely around the prospect of Australian expatriates being considered Australian tax residents if they spend 45 days or more in the country in one year - and the prospect of double taxation if they are resident in countries (or regions) such as Hong Kong, where there is no double tax agreement.

As we mentioned earlier this month, see below, there have been no public announcements, such as draft legislation, regarding the new rules which are supposedly to be in place by 1 July 2022.

Expats are reminded that it was the LNP government that – for no clear reason - doggedly pursued the recent adverse, discriminatory changes to capital gains tax on main residences, and indeed back in 2012 remove the capital gains tax discount from non-residents. The Government's clear view is that expats don't vote and therefore have "no leverage". However, the Government is however under pressure on multiple fronts, given its inability to manage the Covid vaccination rollout and Net Zero, with an election pending in May 2022- so the "pips might be starting to squeak" and consistent pressure may bear fruit.

New Tax Residency Tests - A quick summary of where we are - October 12, 2021

No draft legislation or proposed start date as yet.
No transitional rules for individuals qualifying as non-residents under current rules
Counting days in Australia will be critical under the 183 day test.
The issues will be primarily in the ceasing residency test; the commencing residency test is not a radical departure from the existing position.
The Board recommendation that where an Australian is treated as a resident of another country under one of Australia’s comprehensive tax treaty arrangements the individual should also be treated as a ‘non-resident’ for domestic tax law purposes should be applauded and will simplify many issues going forward, if enacted.
The concept of "adhesive residency" means that the longer an individual is a tax resident the more difficult it is to cease residency. Clearly it will be more difficult for long term residents to break Australian tax residency and a number of mismatches will occur - for example, some members of a family may break residency, while others remain resident.

Foreign Transfers – Supporting Documentation – September 24, 2021

Whenever we have discussed making foreign currency transfers into or out of Australia we have focused on the need for all individuals and entities to maintain appropriate documentation regarding the source of those funds. That is against the background of regular approaches being made to individuals by the ATO, often based on Austrac information and sometimes months or years after the transfer, seeking to confirm the source of funds.

That position now needs to be stressed further given a recent Taxpayer Alert (TA 2021/2) - Disguising undeclared foreign income as gifts or loans from related overseas entities. The main ATO focus is on the following behaviour:

"....the arrangements with which this Alert is concerned are ones where taxpayers are aware of their residency status, as well as the tax implications that flow from it, but attempt to avoid or evade tax on their foreign assessable income by concealing the character of funds upon their repatriation to Australia by disguising the funds received as a gift, or a loan, from a related overseas entity."

The alert specifically mentions that "genuine" gifts or loans are not the ATO's focus and indicates that they generally have the following characteristics:

  • the characterisation of the transaction as a gift or loan is supported by appropriate documentation
  • the parties' behaviour is consistent with that characterisation, and
  • the monies provided are sourced from funds genuinely independent of the taxpayer.

In terms of what supporting documentation is required for a gift or loan, the ATO indicates as follows::

"Appropriate documentation for a genuine gift will depend on the size of the gift and whether the nature of the relationship is one where gifts might be made in the ordinary course of that relationship. For larger gifts or where there is an atypical relationship between the donor and donee, this might require a contemporaneous Deed of Gift. We would also expect there to be evidence showing the donor's capacity to make the gift from their own resources as well as financial records reflecting the donor's transfer.

Appropriate documentation for a genuine loan would typically include a properly documented loan agreement that evidences the parties to the loan, its terms and relevant conditions. We would also expect there to be financial records showing the advance of funds and repayments of principal and interest."

Retiring into Malaysia? Perhaps time to think again – September 8, 2021

For Australian and other expats looking to retire into Asia, Malaysia has previously been one of the more attractive options - with a well structured foreign retiree program called "Malaysia My Second Home" (MM2H).

However, that programme was frozen in July 2020 on the basis that that it would be reassessed, and only recently has the Malaysian Government announced a reactivation in October 2021, but with significantly increased eligibility criteria and an announced intention to focus on "wealthier foreigners". See the table below for more details.

These changes are entirely within the Government's prerogative, but our major issue is that the new criteria are apparently going to be applied to existing visa holders. So, for example, after a period of one year's grace, existing visa holders will apparently need to demonstrate that they have monthly available income of RM40,000, rather than the RM10,000 required previously. That's a 400% increase in the minimum income required, and the fixed deposit that needs to be paid into a Malaysia and bank has increased in some cases from RM150,000 to RM1,000,000 - a near 700% increase.

If this news is correct, and we would dispute whether Malaysia is attractive enough to compete on the new criteria with other destinations, we regard it as unethical for the Government to apply these obligations to existing holders. They should be "grandfathered" and either left to continue on until the end of their visa, then either meeting the new requirements or leaving the country. Either way, retiring into a country requires trust and stability in the local Government, and that no longer exists in Malaysia.

We can no longer recommend Malaysia as a retirement option and indeed we project a high probability that the new rules will fail, and be subject to reversal/review with 12 to 24 months. Even should that be the case Malaysia has done irreparable damage to its damage as a retiree destination, and perhaps intentionally.

High asset prices everywhere, where to invest? - September 7, 2021

As we have described previously, there has been a tremendous run up in most asset classes in Australia - and indeed in most parts of the western developed world - reflecting historically low interest rates. The table and charts below illustrate astonishing increases in capital city house prices over the last 12 months, without exception, and indeed for the first time in living memory these sorts of prices have also extended to larger regional towns.

There is only just now the impression that price rises are topping out, with affordability stretched at almost every point in the price scale, and justifiable concerns around what would happen if inflation were to return and interest rates (perhaps dramatically) increase.

The only thing that we can perhaps stress in relation to house prices is that it supports the contention that we've had for well over a decade that Australian expatriates should always maintain, unless there is a clear intention to remain overseas permanently, some exposure to the residential property market in Australia. This is both as a hedge against price increases such as those we have seen lately and also to adverse foreign exchange movements.

In terms of the Australian equity market, the market has bounced back nearly 50% from the plummet which initially followed the beginning of the Covid pandemic in March 2020. Perhaps more interestingly however, the market is only up just under 10% on the market high that preceded the market correction in March and, if you remember, the ASX had just recovered to pre GFC index levels - taking nearly a decade.

So, there is an argument that says that the ASX is not nearly as stretched as the property market. However, although on almost every metric it is not as stretched as a US market, it still mirrors movement in that market very closely and is exposed to a major US correction.

Expats who are long on cash at the moment and worrying about re-entry at some stage should probably be focusing on the flexibility it provides, rather than whether it represents a lost opportunity.

Migration Approach needs a Thorough Review - August 8, 2021

Recent media reports suggest that nearly 15,000 permanent and temporary resident visas have been granted by the Federal Government since Australian borders were closed 15 months ago. These "business innovation" and "investment" visas typically require applicants to invest millions of dollars in personal or business assets in Australia, but have been very controversial in terms of their real value to the country.

More controversially, they seem to have allowed access to the country without the need for an exemption, whilst Australian expatriates have been unable for a variety of reasons to return home.

A relatively recent report Grattan Institute showed that the majority of Australians generally supported continuing migration, but the majority also thought that migration rates - currently reduced by virtue of the pandemic - were too high.

In these circumstances, why does the Government continually push migration even during a pandemic? Simply because it's an easy, lazy way to post economic growth.

We have significant doubts about the (net) value of innovation and business investment visas, compared to a focus on skilled, young professional migrants - a clear, economic rather than political, re-evaluation of Australia's whole migration apparatus is very much needed.

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