The age-old debate of property versus shares has been around since the first stock exchange opened. Whether you are living in Australia or overseas, there are valid points on either side and I want to address the pros and cons of each asset class for Australian expats.
The first cab off the rank is property. Australians have a big love affair with property and it has been part of the Australian psyche since the quarter acre block was first developed. Things have changed a lot since then, the block sizes are certainly getting smaller, but most importantly the respective tax laws and how they affect Australian expats, have changed.
Pros of owning property as an Australian expat
• Leverage – You can put down a deposit and borrow the remaining money from the bank and get a leveraged return on your money. What this means is that if the property increases in value, you not only make money on your initial deposit but also on the money you borrowed from the bank.
• Bricks and mortar – A lot of property investors love the fact that they have a physical attachment to their investment. They can drive by and see the property, which gives them a certain satisfaction.
• Ignorance - People often find it confusing when I explain this is a benefit of owning property. You don’t have a ticker tape on the front of the house telling you what the property is worth on any particular day. You only know what the price of the property is worth when you buy it and when you sell it. Some people like not worrying about the daily fluctuations of the market price of their house.
There are a number of cons of owning Australian property as an Aussie expat and this list has increased over the last couple of years with the changes to the tax laws.
Cons of owning property as an Australian expat
• Potential of high capital gains tax – The Australia government changed the tax rules back on 8 May 2012. Prior to that, Australian residents and expats could receive a 50 per cent capital gains discount on property if they sold it after holding the property for 12 months or longer. Since the change in 2012, Australian citizens who are classified as a non-resident for tax purposes are no longer able to invest in Australian property and receive the 50 per cent CGT discount. What this means is that you will be accruing 100 per cent capital gains tax for the time that you are a non-resident should the property increase in value in that period. What confuses many people is that even if you return to Australia after buying the property as a non-resident, any potential gains are calculated pro rata. What this means is that if you held an investment property for 10 years, five as a non-resident for tax purposes and five as a resident, and sold the property you would still be liable for 100 per cent capital gains tax on the amount the property accrued by during your five years as a non-resident.
• Management – Time and again, clients complain to us about trying to manage their property while they are overseas. Whether they are having problems with agents or residents, there is always something that causes them concern and stress.
• Leverage – If you were to buy an investment property in a heated market and borrowed money from the bank to fund the purchase, you are also exposing yourself to leverage on the downside if the property value were to fall. You are not just exposed to your initial investment, you’re also exposed to the value of the loan on the property. As an example, if you invested A$50,000 in a property as a deposit and borrowed A$450,000 and the property value fell by 20 per cent, not only have you lost your $50,000 but you also owe the bank an extra A$50,000.
Shares are becoming a more appealing investment vehicle for Australian expats and this is not only due to the different way it is taxed in Australia, but also the rapid increase in digital technology that enables you to manage and monitor your investment portfolio.
Pros of owning shares as an Australian expat
• Don’t accrue capital gains tax (CGT) – Australian shares are not treated as Australian taxable property and as such do not accrue capital gains tax with the ATO while you are classified as a non-resident for tax purposes. What that means is if you bought a ANZ or BHP share the day after you left Australia and you sold it before you returned to Australia you do not have to pay any capital gains tax if they increased in value to the ATO.
• Franking credits – The second benefit is the ability to use franking credits to offset any withholding tax that may accrue on the dividends. When listed shares pay company tax to the ATO, they may accrue franking credits on the dividend which means that they have a 30 per cent tax credit attaching to the payment. Depending on the country you are a resident of, you may be liable to pay withholding tax (WHT) on the income at a rate of either 15 per cent or 30 per cent. The exact rate of WHT is determined by whether the country you are domiciled in has a double taxation agreement (DTA) with Australia. The franking credit that attaches to the dividend can offset against the WHT, which in turn may totally remove any taxation on the dividend amount.
• Liquidity – The third benefit of owning shares as an expat is liquidity. When you own property, you cannot sell a balcony if you need an extra $20,000. However, with shares, as long as the stock market is open and the shares are trading, you can sell off as much as you need. Liquidity is a key aspect of expat lives and we are constantly working with clients to manage funding gaps, whether it is for business or personal reasons.
There are also several cons of owning Australian shares as an expat which can include but is not limited to the following list.
Cons of owning shares as an Australian expat
• Volatility – the nature of a share portfolio means you can check at any time of the day and see what the share price is. Some clients like this transparency, but others may not be able to stomach the machinations of the prices moving up or down.
• Knowledge – For a lot of investors, the reason they pick property is because they understand and maybe have previously bought and sold it. The share market can be a foreign environment to some and if you are not working with an adviser to guide you, it can seem like a lot of information to take in. The good news is that this can be alleviated by educating yourself and increasing your knowledge.
• Diversification – If your share portfolio isn’t properly diversified and you have a high exposure to a particular company or sector, that exposure may expose the portfolio to excessive volatility if they were to experiences problems. For example, if one of your investment choices is to invest heavily in a sector such as energy, the value of your investment, and in turn your portfolio, might change significantly should the price of oil fluctuate wildly.
The above pros and cons are not an exhaustive list of both assets classes. However, they give you a broad understanding the keys areas you need to consider when looking to invest in Australia as an expat.
Brett Evans, managing director, Atlas Wealth Management