Usually the key items that prospective expats consider include where they are going to live, what schools the kids are going to attend and how much extra money they are possibly going to make by joining the estimated one million Australian expats already living and working overseas. However, there are several key issues that need to be considered beforehand.
This can be achieved by conducting a pre-departure review. What this review achieves is a snapshot of your current financial circumstances and what changes may need to be made to ensure your move overseas is successful financially as well as personally.
Below are some of the key topics that are addressed in this review and the problems that may need to be addressed:
Superannuation Almost everyone has superannuation in one shape another (or multiple funds for those who haven’t already consolidated them). Whether it is an industry super fund, retail/public offer fund or a self-managed super fund (SMSF), they all require careful review before making the move. The key areas you need to look at in your superannuation are:
- Risk Insurance – If you have an industry or retail/public offer super fund, quite often inside of the account you may have risk insurance (e.g. life, total and permanent disability insurance) under a group cover policy. Our experience shows that the clear majority of super funds/insurers will not pay out if, when it comes time to claim, you are a non-resident for tax purposes, even if you have been paying your premiums.
- Fees, charges, asset allocation and consolidation – We often find that this is a good time to review your super to look at what you have and to ensure that it’s working for you and not against you. Do you know how your money is invested compared to your risk profile? If you have multiple super accounts, have you added them all up to see what fees and charges you’re paying? Does your super fund allow members who do not live in the country? Don’t forget that when you move overseas, in most cases your employer will not be making contributions to your super account so you want to make sure that it’s operating as optimally as possible.
- International jurisdictional issues – Did you know that the United States, for example, does not classify Australian super accounts as a pension account? This may lead to personal tax consequences by the IRS if your super is not managed correctly.
- Compliance – With the increased popularity of self-managed super funds, more Australians are choosing to manage their super this way, but do you know that when you move overseas, your SMSF may be deemed non-compliant? To determine whether an SMSF is compliant and can be treated as an Australian super fund, the fund must satisfy all three residency tests under income tax law – Income Tax Assessment Act 1997, s295-95 (2). These tests are:
– Is the fund established in Australia or are assets of the fund located in Australia?
– Central Management and control (CM&C) of the fund is ordinarily in Australia;
– The active member test. For this test to be satisfied, the fund must either have no active member(s) or at least 50 per cent of 1. the total market value of the fund’s assets attributable to superannuation interests held by active members or 2. the sum of the accounts that would be payable to or in respect of active members if they voluntarily ceased to be members.
If it fails these tests, it is deemed a non-complying SMSF and all its assets that have been accumulated over the years (minus member contributions received by the SMSF where no deduction has been claimed) plus earnings on investments received in the financial will be taxed at 47 per cent.
Going forward for every year the SMSF remains a non-complying fund, the income that is received will also be taxed at 47 per cent. And it doesn’t finish there. When you return to Australia and your SMSF becomes compliant again, all its assets (minus member contributions) are assessable income of the SMSF in the year that the SMSF becomes compliant again and will be taxed at either 47 per cent (if the SMSF members return to Australia during the financial year) or 15 per cent (if they return to Australia for the full financial year). There are strategies around ensuring your SMSF is compliant as an expat, so make sure you seek professional advice.
On the date that you leave Australia and become an expat, the ATO deems that you have disposed of any investments that are not classified as taxable Australian property. These investments may include shares and managed funds. You essentially have two options available to you when dealing with this:
- Pay the capital gains tax (CGT) – There is good news here because once you have paid the tax, any capital appreciation that you accrue on these investments while you are a non-resident is CGT free.
- Disregard the deemed disposal – Where the situation warrants it, you may elect to ignore the deemed disposal due to high capital gains that you have already accrued which would in turn lead to a high CGT bill. If you choose to take this option, the investment is effectively treated as taxable Australian property and you still accrue CGT even though you are classified as a non-resident.
Which strategy you decide to pursue should depend on care analysis of the numbers. Are you better off paying a bit of tax now and none later or will it be better if you don’t pay the tax and continue to accrue CGT?
If you have been living in a property in Australia and it is classified as your principle place of residence, you may treat this property in two ways:
- Rent it out – If you choose to rent the property out, you can continue to treat it as your main residence for up to six years and not accrue CGT.
- Don’t rent it out – If you don’t rent it out, you can treat the property as your main residence indefinitely.
For new expats who own investment properties here, things don’t look as good. Up until 8 May 2012 non-residents, like residents, received the 50 per cent capital gains discount if a property was held for longer than 12 months and a gain was crystallised. After 8 May 2012, non-resident Australian citizens who own an investment property are no longer able to utilise this discount and will be liable to pay 100 per cent CGT on all gains accrued while they are a non-resident.
Last year, legislation was passed requiring Australian expats who have a HECS/HELP/TSL debt to start making repayments on their accrued student debt. The legislation came into force on 1 January 2016 for those in Australia about to become an expat and the 1 July 2017 for expats already overseas. Consideration needs to be taken into account surrounding reporting time frames, with the ATO and strategies put in place to take into account the possibility of having to make payments to the ATO next year.
The above items are not inclusive of all financial considerations that need to be factored when you become an expat but they represent the most common areas that are covered when we conduct a pre-departure review. As you can see, it’s not the most exciting of topics when you compare it to researching expat topics like where to live and play, but it is equally important to ensure that there are no surprises when you get on board that plane.
Brett Evans, managing director, Atlas Wealth Management