Welcome to our ninth episode of the #Expatchat podcast where we discuss the latest tax and financial issues affecting Australian expats.
In today’s chat we discuss:
- Main Residence Exemption Update
- How Should An Australian Expat Structure their Property
- Superannuation 101 for Australian expats
Topics, articles and events featured in this podcast:
Expat Chat Ep 9 – MRE Update, Expats Structuring Property, Super 101
Brett Evans: G’day expats and welcome to Episode 9 of Expat Chat. How are things back in Oz, James?
James Ridley: They’re pretty good today I wont rub it in but it’s about a 28 degree day, looking at the ocean there’s not too much wind either so very lucky on the Gold Coast. Obviously, that the fires are still around they’re still wreaking havoc down south, but there’s been a bit of relief as well recently.
Brett Evans: Good to see I think everyone overseas has been following it very carefully and makes you realise how far your way when you see these pretty disastrous looking videos and news reports coming through.
James Ridley: Yeah, that’s right. It’s obviously terrible what’s been going on, and they’re also predicting that it’s going to get worse. Obviously, I digress. Let’s talk about today’s episode Brett, on the agenda today I want to touch base on just a recent update about the Main Residence Exemption. I suppose how an Australian expat should structure their property or properties when they head overseas and that’s mainly looking from a cash flow point of view as well as a bit of a tax cash flow point of view. Lastly, superannuation 101 for Australian expats, what they need to know, structuring those things. Things that they need to pay attention to. Now before we move on, we should probably do that disclaimer.
Brett Evans: Yes, all the information you hear is not just for the benefit of your ear lobes. Information is for entertainment purposes only and certainly should not be construed as personal financial advice.
Main Residence Exemption Update
James Ridley: That’s right. Now let’s move straight into it, the Main Residence Exemption. I mean, we’ve we’ve talked plenty about this already. Obviously, I think, this week’s a very important week for Australian expats and obviously you know why.
Brett Evans: Yeah. Look, it’s all coming to a head pretty quickly. It’s gone from a lot of debate and lot of conjecture to it’s now on both the daily order of business for both the House of Reps and the Senate, and that will be kicking off tomorrow, Tuesday the 26th of November at 12 pm. I’m a little bit suspect by the fact if and I will put these in the show notes, but when you do look at the calendar for the sitting of both the lower and upper house, they got to bang these through as quick as they can go. At 12 noon the House of Reps resumption of debate begins, once again the farcical name the reducing pressure on housing affordability measures, e.g how to rip off Australian expats, is the the first cab off the rank. Then straight after that, you’ve also got the Senate will be debating it. Obviously, they need to pass through the House of Reps first but if they get through, and then you’ll see at the Senate. Theoretically, when we look at the time frames, this could all be done by 2 pm, Australia tomorrow.
James Ridley: I mean, when you read that, and you say the order of business, and I do appreciate you just sent over to me. I would say it’s actually quite unusual that you see those items on the same day at the exact same time to be honest. I mean, I know you look at the order of business, and then you look at the House of Representatives, it’s essentially pretty much first off on Tuesday. Then you can see that when you look at the Senate, I suppose itinerary it’s about third on the list. If they voted through straightaway, it could get voted through straight tomorrow, which is very alarming.
Brett Evans: Look it is and just for a bit of a bedtime reading, the bill was sent to the Senate Standing Committee for the scrutiny of bills on the 13th of November. They reviewed this bill back when is originally presented back in 2018 and they still have a lot of concerns. I mean, I’m reading from here and it says “the committee reiterate it’s long standing concerns that provisions with retrospective application challenges basic value on the rule of law, that in general law should only operate prospectively and that’s our whole issue. Our issue is not the fact that there’s taxes to be paid or its the retrospective nature, this going all the way back. It’s going to hit every Australian expat who owns property as a form of PPR, who… let’s be honest, we do our best to communicate to Australian expats globally, but not everyone’s going to know that this legislation going through.
Brett Evans: Let’s say for example, and I was thinking of this the other night, you’ve lived in a house for 10 years, you go overseas for two to four years, and a short stint as far as Australian expat numbers are concerned. You thought, “You know what, we can’t move back into the house that we previously lived in because we’re now going to be a family or whatever reasons, or we’re going to move to a different city. Let’s sell that house and then buy another house.” Which on paper there’s nothing wrong with that, but guess what, they trigger. Suddenly their going to trigger CGT all the way back for 15 years because of maybe they’re trying to position themselves so that, when they move back to Australia moving into the house, they want to move into rather than the former House, only because they did not know all these changes going through.
James Ridley: Yeah, absolutely. I know that we spoke the other day about the caveats of including now the excluded foreign person, as well as the life events. Our understanding is obviously it’s the preservation of capital and the event those terrible I suppose events are going and then suppose, terrible being terminal medical condition, a death or a divorce, separation. I think one of the comments that has been made as well as potential increasing compliance costs around this and that’s mainly because a lot of Australian expats that bought these main residence, under the assumption that they wouldn’t need to know the original cost base for calculating capital gain in the future. A lot of people are going to be scrambling to find the kind of evidence they need to show the cost base, the capital gain. Those sort of things, potential capital loss, who knows.
Brett Evans: Look at that’s the, I guess the farcical nature of this bill as well, too. I’m just scrolling through the legislation because it’s a lot of fun to do. I actually remember in the explanatory bill, they actually said, “There will be little to no increasing compliance costs by foreign residents.” They just have no clue at all.
James Ridley: Yeah, absolutely. I mean, like I said, when they reintroduced they hadn’t even updated the figures in terms of revenue, this is going to rise-
Brett Evans: Copy and paste.
James Ridley: Even, if it’s in the financial year and it just seems lazy. I mean, obviously, to be fair and equitable, and I suppose reasonable, it would make sense that if they consider another amendment, anytime that you’ve been a resident, you still benefit from that main residence exemption. In terms of… that way the legislation isn’t so retrospective in nature and damaging, and therefore any periods that accrues whilst you’re a non resident that’s when they introduced a new piece of legislation to encompass that which makes sense. It’s bizarre that they haven’t really admitted at all, just these little caveats, which are unlikely scenarios.
Brett Evans: Yeah, exactly. I’ll just tell all the listeners and followers and watchers or depending on how you’re consuming this we’ll be putting up a big post tomorrow, Tuesday, the 26th of November on our website. We’ll be sharing it through the usual channels of Facebook and LinkedIn and Twitter. If you want to get real time responses to what’s going on here, by all means, please follow us on those channels. You can also go to our website, and there’s a little notification bell at the top left hand corner that says, “Do you want to receive notifications?” If you hit allowed to that, then what will actually happen is you’ll get a pop up on the screen when an article is released. Go to atlaswealth.com, hit allow and then you will never miss a thing.
James Ridley: Yeah. Well, I mean, we suspect it will have an update either by the end of the day or the day after when they release it formally to the public. Watch this space, it’s obviously going to be on our socials as Brett as said, but if you’re unsure, feel free to contact us and then we’ll talk you through the scenario. What will be the likely tax, I suppose implications should you sell in the future off after that proposed date.
Structuring Your Property As An Australian Expat
James Ridley: Let’s move forward because we’ve talked enough about the Main Residence Exemption and our dislike for what is going to occur. Let’s still focus on property, property structuring in terms of, if we move overseas, having a positively geared property versus a negatively geared property renting out that main residence. I think first off, let’s talk about negative gearing versus positive gearing. What are they? I mean, negative gearing, that’s a bit of I suppose a clear one from our point of view. Brett, what would be a case of how you treat negative gearing from a tax point of view?
Brett Evans: Look, essentially, it’s when your outgoings are greater than your incomings, your expenses are greater than your income. I think, where Australian expats really struggle with this is, in the Australian psyche, we’re all trained to pay down debt, especially if it’s your current or former principal of residence for that exact reason. The problem we’ve got is when you become an Australian expat, the tax status of that property changes, and so too, does the legislation and the marginal tax rates surrounding your property. While negative gearing can be appealing as a tax resident, when you become a non tax resident, you’re still forking out money every year with the hope of building up tax credits, but it’s a fine line to trade and you really need to change caps when you jump on that plane to head overseas.
James Ridley: Yeah, that’s right. I mean, negative gearing is spot on in terms from a tax point of view, your taxable deductions are a lot higher than your net income. You still making that loss on paper. Technically, you can carry forward losses but you really got to look at the l ikely impact of you coming and using those losses again in some way, which people don’t know, they don’t really understand, they don’t really account for. Then the other side is capital gains tax treatment, I mean, if it’s just a normal investment property, you’ve never lived in it, then technically speaking, the capital gain that accrues or growth of that property changes for that period of your non resident, not allowed to access that discounted concession the 50% CGT discount. Essentially, Australian expats should look at getting a evaluation on those properties when they leave that way you get ….
Brett Evans: You need those milestone events. Obviously, when you bought the property, there’s evaluation that’s worth a buck then. Certainly, when you get on the plane and get another valuation because what you’re actually doing is demarcating your time in Australia from 50% capital gains discount point of view. You bought the property for 500, it’s now worth 700. Right? On that $200,000 gain while you’re a resident, you get that 50% discount whereas from 700 when you get overseas for any other growth. You want to be able to make sure that you can very quickly on a bit of a napkin or an Excel spreadsheet, work out what your potential liabilities got to be just by demarcating those different milestones in your life.
James Ridley: Yeah, absolutely. I mean, in a future it’s going to make your life a lot easier as well from a point of view when you might sell it and then you give those valuations to your accountant, and then the accountant has something to go off. Just be mindful people that historical valuations, they can be quite expensive, if you’re getting historical valuation or property from 10 years ago, when you first left Australia, that could cost you a few thousand dollars realistically, I’ve had to do one recently for commercial property for a client. It’s better off getting them as close to when you leave. If you’re overseas, that’s fine few months ago, you can engage plenty of firms to do it. Again, it’s not a real estate agent that can do these, it has to be an accredited valuation firm that obviously has proven accreditation’s and qualifications and is listed on the registries as well.
Brett Evans: It can’t be an appraisal. I think that’s where people get a bit confused when they get an appraisal then they go, “It’s worth this much.” No, it’s not. You actually need a registered valuer to put this licence on the line to say the property is worth X.
James Ridley: Yeah, that’s right. I mean, plenty of people they’ve used real estate agents in the past of those market appraisals and it’s not going to hold up against anything on the ATO looks and just put in the bin and go, “Where is the proper one? Where is the real one?”
Brett Evans: Exactly, right.
James Ridley: Sorry.
Brett Evans: Yeah.
James Ridley: No, no I was just going to say, most people, they might have a real estate friend that might give them a valuation, which isn’t technically accurate, either.
Brett Evans: It’s good to have those arm’s length type transactions because when you’re, God forbid, hauled up in the into the Administrative Appeals Tribunal fighting the ATO, you need to have the courage or convictions that you’re right. Making sure that everything’s copacetic on the side of, you’ve done the right thing you know your numbers, there is no grey space because that grey space the ATO loves to work in.
James Ridley: Yeah, that’s right. I mean, let’s now look at positively geared property. Obviously, it’s always in the name, your tax deductions are less than the net income or the income coming off the property. Therefore, usually when we’re non resident, we’re going to have a bit of tax to pay to the ATO, because our non resident tax rates, they’re kicking in on the first net dollar at 32 and a half percent. Currently, it means that you’re paying almost one third of your net income to the ATO on that tax.
Brett Evans: I think this is something a strategy that a lot of Australians, both in Dubai Abu Dhabi, Saudi, the Gulf region in general struggle with because they suddenly have surplus cash flow, and in mindset is to pay down debt. The problem is when they pay down debt, therefore, the interest costs are reducing quite rapidly. Therefore, the deductions are reducing quite rapidly while their income is staying the same and or increasing with any rental increases. Suddenly, they don’t realise it until the following year when they file their tax return, that they’re actually stuck with quite a big bill. Because suddenly, they didn’t realise that their expenses are way lower than their money coming in, which is by the nature, but the problem is, they’re paying tax at 32 and a half percent on the first dollar.
Brett Evans: If they just held off, certainly put that money aside, that held off from paying off the mortgage, they can achieve two things, they could reduce that tax liability by maintaining that mortgage, but putting money away as well to make the most of their time as an Australian expat, and find that balancing act. That’s probably the most common conversation we’re having here with Australian expats in the Gulf right now is how to find that optimum level where you’re servicing your debt. You’re putting money away, but you’re not increasing your tax liability.
James Ridley: Yeah, that’s right. I think that’s why I mean a lot of Australian expats when they don’t know what to do, they’ll just throw their money in the offset account. Obviously, as we know, as they throw more money into the offset account, the interest expenses is going to reduce, and therefore the tax deductions and therefore, it’s going to come to a day where they’re going, “Shit, we’re paying actually quite a large tax bill now. We’re not seeking advice on ways to optimise that.” Whether it’s a case of pulling funds back to the offset and doing something with it, or using the net income for something else, and creating another tax deduction.
Brett Evans: It’s so easily avoidable. That’s the thing too, if it was a compulsory tax and everyone had to pay it, but the fact that with a couple of simple little steps and a bit of guidance, you could completely avoid all these complicating matters.
James Ridley: Yeah, that’s right. Now, I think Australian expats also need to have a bit of understanding of their loan structures as well. I mean, we briefly had obviously that conversation in that webinar with Jeremy Harper about the offset account versus the redraw, I mean, the redraw is still just the loan account. It’s one account, you’ve just thrown more into the principle, which is great. In principle, it can actually go against you when you want to pull funds out again to use for something else, because the tax deduction changes on that. Offset is good, offset is a separate account and therefore you can pull funds out, you can do what you want with it, yes, the interest expense is going to go back up, but you can actually still claim the tax deduction on that as well. It’s important to understand the distinction between the two, because a lot of people assume that they can pull funds out of the redraw use it again and it’s still just as tax effective when it’s really not.
Brett Evans: I think also to the amount of people who don’t realise if they are in a positively geared fashion, the benefits of using a concessional contribution strategy into super, and claiming the deduction as well, too.
James Ridley: Yeah. Correct.
Brett Evans: When I mentioned that to people, it’s like I’ve just told them that we live on a planet not called Earth. It’s amazing, and they’re just like, “What? I can actually do that?” I was like, “Yeah, you can do that.”
James Ridley: Yeah, absolutely.
Brett Evans: If done right and structured correctly, you can really manage those liabilities. Look, I think, like we always say that’s what we’re doing here at Expat Chats and all the stuff we do is educating people about these simple little things, but not talking about tax avoidance. We’re not for tax avoidance at all, but the simple little things can improve your financial well being by just being smart.
James Ridley: I mean, that strategy, the easiest way to reduce your tax bill by seventeen and a half percent.
Brett Evans: That’s right. It’s a big difference.
James Ridley: It’s huge. I mean, if you’ve got a property portfolio that’s paying 20 to 25,000 per year net income now.
Brett Evans: It’s a no brainer.
James Ridley: Yeah, exactly. Right. Well, another item I want to talk about on the property service depreciation, because a lot of people aren’t aware of depreciation. What is depreciation? Most people that have bought an investment property, they might not have considered using depreciation before but it’s essentially as people say, when you buy a new car and you drive off a lot or just gone down in value by what 10, 15% or whatever.
Brett Evans: Yep.
James Ridley: So, that declining value essentially. Essentially, if you go and get a depreciation schedule, it’s amortised into the corner of the building and depending on the years, it can be up to 25, 30 years. Then there’s different methods that accounts will use diminishing value that will give you the most upfront deductions over the first 10 years compared to the prime cost method, which essentially just equalises out every year. Now, one thing that people aren’t aware of is, when you’re renting out a main residence, you can technically still use depreciation, but because it’s your main residence, you naturally don’t think to go out and get a depreciation schedule.
James Ridley: At the moment, with the current main residence exemption and everything that’s happening around that, a bit of a question mark on whether you would even get depreciation on this again. Depreciation is essentially, it can be almost an easy, tax free deduction from a reporting point of view, you need to be careful now that this main residence exemption is coming through because if you sell your house and it’s taxable, everything you claim on the depreciation side will get added back to the cost base. A lot of people are aware of that, but it’s been an easy give me for the last ever since depreciation existed that people aren’t aware of it. If you’re unsure, definitely contact us and I can happily go through it all with you.
Brett Evans: Look, it’s just those little things done right, isn’t it? At the end of the day, we’re not talking rocket science here. We’re just talking about basic fundamentals that any person investing in property should be aware of. Certainly, there are complicating matters when you do become an Australian expat and no longer resident, but it’s joining those dots and how does that how does that work? There’s still, a lot of opportunity there.
James Ridley: Yeah, absolutely. I mean, property, it’s not a bad investment, it’s just all about structuring everything correctly, and making sure it’s set up correctly for you being a non resident, absolutely.
Brett Evans: Definitely.
James Ridley: Another item that I wanted to mention, and it mainly affects just individuals that love this concept of land banking, and if they’re in that the tax free zones and they have this great cash flow coming through that go out and buy land, develop it in 5, 10 years, whatever might be. They recently enacted and it got Royal Assent this piece of legislation about limiting tax deductions around holding vacant land 28 to October 2019. That’s when received Royal Assent and it applies as of the 1st of July 2019. If you’re an individual that’s holding a vacant land, but you’ve been claiming tax deductions on it, such as holding costs, council rates, interests related to the investment loan to get it, you can actually climb those now as a tax deduction on your tax return.
James Ridley: If you’re holding these land items or vacant land properties through entities that’s a little bit different, it’s managed upon individuals in the moment, but people that have been on the gravy train accruing these careful losses through that method can’t do it anymore. If you’re holding vacant land and you’re unaware of that, it’s best to speak your account urgently because that strategy that can be somewhat of a common strategy with accounts. It’s now the relevant, to be honest, and you might need to look into what is there.
Brett Evans: Look, I think it’s like everything it’s the government won’t tell you about. It’s up to you to have the initiative to know what you don’t know, and go out and talk to someone about it, because and then also find the right person to talk about it. I think that’s in some topics going through recently, which, really scared me with some of the feedback people have been getting from their accountants. Make sure that when you do talk to an accountant or a financial planner or a financial advisor, make sure they match fit in the Australian expat space. Because, just because you’ve got the title doesn’t mean you know how these other complicating factors work, as opposed to just the standard tax resident.
James Ridley: Yeah, that’s right. I think we can both admit that finding a tax account that is non resident specific it’s pretty hard to be honest, and probably three. It’s a specific niche and as we always say, you don’t want to engage and to find out what to do you want to engage on the knows what they’re doing, already they’ve got 50 to 100, 150 whatever Australian expat clients and they understand what you’re dealing with day in day out.
Brett Evans: Bingo. Exactly, right. I think it’s a good financial professionals should save you time, not always saving money, but should save you time and get you the best outcome.
Managing Your Superannuation As An Australian Expat
James Ridley: Yeah, that’s right. I suppose in a sense, tax structuring as well save that bit of tax. The next item that I want to touch base on is superannuation management, Super 101 for Australian expats because I still have consults and nowadays that people are concerned around super whether you can do anything with it when you’re an Australian expat. Me being a non resident, does that impact my ability to do anything with super contribute, does that affect it? As well as self managed should advance and those are the things I think there’s always a bit of a grey area and there’s a lack of understanding of what can be done.
Brett Evans: Well, it’s probably the most widely held asset we have Australian expats, and this way I think a lot of Australia expats will hold super. To me they do one of three things incorrectly, either apathy, they’re like, “Well, I can’t touch it. It’s 20 years until I can access it, pretty much set and forget.”
James Ridley: What’s the point?
Brett Evans: Yeah, exactly. They’re first ones who complain about fees and performance and all those things. The second problem they do is they listen to people who don’t have experience in Australian expat space. Setting up an SMSF before moving their fees, there is just the biggest no go zone in Super around and then contributing to an SMSF while they’re a non resident, which obviously bridges the ages members test and what to get from this. That’s the third one and the fourth one, the third one would have to be Australian expats who, to me put too much faith either in information online and Facebook groups. I’m certainly more leaned towards US based Australia expats here, but also to call centres.
Brett Evans: Now, just to give the listeners and the watchers a bit of one on one, if you call a call centre for a Superfund you are not dealing with a financial professional, you’re dealing with someone who has been trained to answer questions according to how the super fan wants you to answer. Certainly provide information, they have no experience in Australian expat work management, if you’re not careful in what you say to them, you could have deemed to get an answer that you wanted to get like insurance inside surveys are valid from overseas, of course, it is. They don’t know that you’re living overseas, they may just assume that you’re on a work trip or on holiday.
Brett Evans: I think potentially Super could and should be your largest asset in retirement and it’s the little things on now that give you the best results down the track. This whole, “I don’t care about super.” It’s only a small amount. We had a conversation yesterday with someone who had a balance of 100,000 like, “Well, I don’t and care about it because I can’t touch it anyway.” I said to him, “If you saw $100,000 sitting on the ground, would you pick it up?” He’s like, “Yeah, of course.” It is, pick it up, you can’t physically touch it, but it’s the little things done now. It’s amazing when you go through reviews super accounts for Australian expats, just the lack of how the dots join from an Australian expat point of view because there’s a lot of mystery especially in the Gulf region about Super. One of the best ones that goes around here is that you cannot contribute to Super as an Australian expat.
James Ridley: Yeah, imagine.
Brett Evans: Surprise that’s been propagated by a lot of offshore advisers.
James Ridley: I was just going to say, tax rate is very up, come this way I will do it in this investment bond. This is better.
Brett Evans: Yeah, exactly. I just want to go on the record to say, yes, you contribute to Super, no, you can’t contribute to SMSFs. I just to put that on the record, because I feel like I’m repeating myself being here for the last five months, talking to people at that exact issue, there’s a lot of misinformation. Certainly, consolidating accounts, it’s amazing how, when you go through and look at the underlying costs, and just before off air, I was telling you about a gentleman who’s looking at coming across him, $25,000 in fees we’re going to save him by putting forward our recommendations.
Brett Evans: I mean, it’s huge numbers, it’s a big balance super account, but also it’s a lot of money. It’s these little things that just… it takes a bit of effort, you got to get the statements together and feel better paperwork in and do that things but it’s not hard. You just need to give it that time of day, presence of mind. “Okay, I’m going to smash this out. I’m going to get done now and then I can relax.”
James Ridley: Yeah, that’s right. I mean, most people don’t like dealing with Super, I think most people I think the stats are that they usually take advice in the superannuation maybe five years out from retirement. By then, it’s a case where, you’ve been lucky where you might have accrued a good balance. You can restructure, then do some things in or sometimes too little too late, and you’ve got to throw in a large amount to get up to scratch. Don’t leave it to the last second where you’re three years retiring and go, “I need some advice on what to do with my super.” When three years, it’s a little hard and the higher stake it’s just not enough, but it’s important. You go Brett.
Brett Evans: I had a conversation a couple months ago with a gentleman who’d been overseas, he’s 55. He’s been overseas for 20 years. He said, “I moved to overseas from Australia at 35.” His super balanced wasn’t big at all. He’s virtually sad because he’s like, “Okay, 10 years to retirement, I need to get serious.” When I just threw a couple of random numbers at him, he was floored about how much he has to put away for the next 10 years for a year to get to this number he wants at retirement. He’s like, “I didn’t think it’d be this hard.” I said, “Boy, if you did this at 35 the number would be one fifth of what you’re doing right now, but because you’ve left it for so long, and because of the complicating factors of compounding interest and all those things. You’re going to have to do the heavy lifting rather than if you did it a while ago your money does the heavy lifting for you.”
James Ridley: Yeah, that’s right. I want to come back around to fees and taxes and those things on Super because the self managed fund, that’s a major one and people need to understand that if ATO deems you to be running a non complying superannuation fund due to central management control rules. No breaching, essentially the active members test because you’re a non resident, then the ATO will tax you on half the balance as well as the income. Therefore, you’re taxed at essentially 47%. Obviously, factoring in Medicare as well, but you’re losing half your balance and they give you 12 months to wrap it up or wind it up. If you don’t do that, which can be difficult, obviously, if you’re holding property assets and those things then they’ll hear you again.
James Ridley: I think there was a case published last year where the members were lucky enough to receive relief from that because there was a terminal medical condition diagnosis and one of the members was actually going to pass away within the next 12 months. They said, “We won’t do it, you will still got to wrap it up, but we won’t tax to you because we’ll try and preserve that capital because we can see what you’re about to go through.” You really need to be careful on the way those are structured.
Brett Evans: Especially when people work very hard for this imbalances, that’s the thing that gets me is virtue your personal exertion 9:00 to 5:00 is your Super balance. You’re working hard to get an income of which you get that money. Certainly, treated like gold and did the right thing, but I think the fact that it’s not out of sight out of mind, but there is a bit of apathy that goes along with Super. Certainly, I think a lot of people also forget that when they do become an Australian expat that straightaway, unless they’re putting money aside, they’re the final financial disadvantage to Australian citizens. Because Australian citizens, Australian residents, I should say, they’ve got nine and a half percent every month, going towards their Super account, whereas as an Australian expat, it’s up to you. If you’re not putting money aside, technically, your colleague in Australia getting ahead while you’re going backwards.
James Ridley: Yeah, that’s right. If you’re not doing something to prepare for your terminal create that wealth on the side, if it’s outside of Super, then you’re not really making the most of that time and that opportunity overseas, obviously, great progression and those sort of things, but you’re missing out a lot of opportunities there. I mean, that leads to another thing, when client, I suppose or individual Australian expats head overseas, depending where they’re residing, they might get an end of service gratuity in your realm. Now, provident funds, Hong Kong, most of the Asian areas, and the what people forget that you need to look at what to do with those as well when you return.
Brett Evans: Look, I mean, certainly bring forward roles, contribution caps all those things. That’s a big part of the conversation as to what you do with that lump sum. It is tempting to go out and have some fun with it and go a buy boat or the fast car you’ve always wanted that. If you treat it like it’s preserved even though you can’t touch it, you can get great results of that. Certainly, in retirement that’s for sure.
James Ridley: Yeah, absolutely. I think a lot of people need to understand that, like what you just said, it needs to be treated for your time and the rules are constantly changing with the age. I mean, most, I suppose foreign pensions and those sort of things aren’t treated like an ordinary foreign Superfund transfer anymore. I mean, now, I think with UK pensions, obviously, we need to stay within those non concessional contribution caps with applicable fund earnings, the most of the time, if you can withdraw that from Superfund or foreign pension within six months of returning back to Australia, that’s fine. That’s a tax free transaction, which is good.
James Ridley: Then you’ve also got to look at ways of trading it for today’s, let’s throw it into Super, let’s use it. Bring forward rules, let’s get in there, let’s bring that environment, which is only tax conditionally 15% and those things we use it, I suppose, as part of another retirement strategy. That might be paying down tax or using a family trust vehicle to put into some other investments and keep growing wealth in another sense.
Transferring a 401k to Australian Super
Brett Evans: I think that’s probably a good point too to touch on probably one of the most commonly asked questions is 401k transfers to Super.
James Ridley: Yeah, okay.
Brett Evans: Shall we have a chat about that?
James Ridley: Yeah, let’s go down that rabbit hole. Almost a labyrinth, actually, I should say.
Brett Evans: Yeah. Because, it is a very commonly asked question. Especially according to Google, it’s up there. Obviously, with US being one of the most popular Australian expat destinations for Australians.
James Ridley: Yeah, I mean, it’s shocking actually, how many Australians think that they can actually transfer the 401k straight into this Superfund. I don’t know where that’s been published on Google or whoever’s saying it out there or it’s just bizarre. I mean, they’re completely different tax vehicles. There’s no scenario that plays out where you can directly transfer a 401k, 403b whatever you want to say IRA, any form of IRA in the US directly into an Australian to Australian Superfund. The ATO has plenty of income taxation rulings identifying what they are and it’s not treated as a foreign Superfund at all. It’s a tax deferred account, most of them are obviously Roth are treated as a tax free account, depending on the distribution in the future.
James Ridley: How old you are on the US side, but you will pay tax to the ATO on either that lump sum withdrawal or as an income stream. Then there’s more that goes down into that in terms of right now, the common treatment of that kind of withdrawal is that most of your contributions as well as the employer contributions they’re technically not taxable in the eyes of the ATO. They are technically taxable in the eyes of the IRS because it’s all tax free, but the ATO mainly only cares about the growth of that account. It doesn’t matter if you’ve only been an Australian tax resident for two years, they care about the growth of that entire balance. They don’t care about the fact that you only been a tax resident for six months or whatever it might be.
James Ridley: A lot of people get hung up on that, because they look at the foreign Superfund transfer rules and they think, “Okay, well, I’ve got six months to actually bring that over and it’s a tax free transaction.” Then it’s not the case. I talked with an individual earlier in the year and he said, “I just pulled out.” I think it was just over 200,000, withdrawal because he was leaving in the US apparently. I said, “Are you aware of the tax that you’re going to pay to the IRS on that?” He said, “What do you mean?” Then I had a bit of an awkward, long conversation, but I had to explain to him that it’s a tax deferred accounts that you’ve just withdrawn from, therefore, there’s going to be a large amount of taxes needs to go to the IRS. Then I said, “Are you aware of how the ATO is going to treat that as well?” He said, “No, I thought was tax rate because of the foreign Superfund.” I said, “Well, it’s not.” Then, sending the relevant, there’s probably about 10 different income tax rulings. Then he panicking going, “Okay, shit what do I do?”
James Ridley: There are ways that you can technically reduce your tax penalty ATO, now the first thing that comes into mind is the DTA that exists, the double taxation agreement allows for these things in terms of accounting for tax credits, tax to be paid to another, tax authority and then you can make use of catch up concessional contributions, those sort of strategies. You might want to a bit, essentially, the ATO does not treat them favourably at all.
Brett Evans: I think also too, if you do decide to redeem 401k, whether it’s before you’re 59 and a half or after.
James Ridley: Yes, of course.
Brett Evans: Also, the country that you resident in will have a big factor in terms of how much you pay into which jurisdiction.
James Ridley: Yeah, that’s right. I mean, I’ll be honest, some accounts in Australia are wrong still, I spoken to another gentleman where he said, I think he was 51. He’d been paying tax on the growth of his 401k each year, even though he was a normal Australian tax resident again, and I thought that was very unusual. It’s almost like the reverse scenario of PFIC actually. When he told me that, I really questioned that and I introduced him to a few tax voice just to get a bit more of an understanding of why the account has been doing that, but I haven’t come across that before to be honest, that was a very unusual situation.
Brett Evans: That’s what comes back to before we were saying before about working with people who know what they’re talking about, makes all the difference because at the end of the day, good advice, should do your effort, bad advice can cost you a lot of money.
James Ridley: Absolutely. I mean, that individual might just been paying tax a year to year but he might not actually get the benefit of the fact that he’s paid that tax money withdrawals it. I mean, the IRS isn’t going to give him any relief for that retrospective tax that he’s paid.
Brett Evans: It’s going to thank him.
James Ridley: Yeah, that’s right. This is another thing that I tell people about 401k withdrawals. I mean, generally speaking, the IRS is not going to give you tax relief on taxi pay to the ATO first on that which all. It’s not how it works, it’s meant to be taxed at source first. If I’m filling funds there in between January and June, I’m obviously going to pay tax the ATO first because I’m an ordinary Australian tax resident and then that’s obviously US’s calendar year, where you have yearly financial years. You’ve got to be mindful of the fact that if the IRS doesn’t acknowledge the tax paid to the ATO you’re paying… you’re going to get double tax, you’re going to pay a fair bit of tax. You got to be strategic, look at the periods between July and December that lines up perfectly with our own tax year and the US’s tax year. Just these key considerations, which you don’t think about, you don’t seek advice and get you in a huge amount of strife.
Brett Evans: Yeah, and timing of it. You hit the nail on the head before timing is everything, where you do the redemption, whether it’s in the universe or back in Australia, the timing of the year you’re doing the redemption. All those things just have can have monumental differences in terms of your liabilities.
James Ridley: Yeah, absolutely. That’s another good point you make because I mean, technically I saw on that it’s still in the US and it’s a new calendar year, January. They’ve resigned from their job and they’re not going to have any employment income and they’re say 60, 61. Technically speaking, they could look at withdrawing an amount if they’re going to be in the US for another few months and pay some tax to the IRS first because they still haven’t returned to Australia, they haven’t returned and become an ordinary Australian tax resident. Then in those scenarios where they’re not returning to Australia straight away, they’re just going to be an ordinary US tax residence still, those can be favourable because you’re on the tax the IRS and then you can repatriate with those funds in a sensible manner and look at doing other things. Obviously, always seek advice and that exact scenario, because anything can be play out.
Brett Evans: It’s not hard just to pick up the phone or drop an email to someone to say, “Hey look, at doing this, what’s the goal?” Because, it’s usually people come to us after and they’ve gone, “I’ve done this, I shouldn’t have done it. What can I do to fix it?” It’s like well, Atlas hasn’t invented a time machine yet, there’s pretty much nothing you can do.
James Ridley: That’s right. Now you can’t really just roll it back in to be honest, that’s not how the IRS works. As we know the IRS, they love finding people, they love charging people, over disclosure is their mantra. That way, if there’s any outliers year to year, they’ve got you. I suppose that’s probably a word, that recent article that was published about the Green Card. It was the six year rule or that year I should say, but the six it’s really six to be honest.
Brett Evans: Probably, 6. That’s right.
James Ridley: I completely forgot about mentioning the 401k, but I don’t like to scare too many people, to be honest, Brett.
Brett Evans: I guess, that’s what we’re about here, isn’t it? It’s a being forewarned is forearmed, as I say. I think it would, a lot of these things, there’s so much grey space and how all these different parts work. You hit the nail on the head, people assuming and I’ll use the word assuming not knowing that overseas savings games are considered as foreign pensions foreign Super funds. Essentially, from off the top my head is anyone that really classified as foreign Superfund that’s the UK. Every other country and if it’s portable, would be considered as a non concessional contribution.
The UN Pension Scheme & Australian Expats
James Ridley: Yeah, that’s right. I mean, mainly if you’re unsure, and there’s no clear tax determination or tax ruling, which provides specific as far as outlining how its traded, then you can go through the process of submitting a private ruling to the ATO. You’ve got to give them a fair bit of documentation so they can provide an assessment and the benefit in doing that is you’re going to have clear guidance on how it should be traded. You come across a lot of cases where UN pensions, a UN pension in most countries, it’s usually tax free. In Australia, depending on the division and who you work for, it’s not tax free. It really depends on I suppose the specific the division that you work for, for the UN, but then people need to look at, “Okay, I’m receiving an income stream. It’s a great income stream each year because I’ve been worth the UN for 30 years, what’s another route I can do to reduce that taxable income now?” Then that’s when under deducted purchase price deductions come into it, which again, is a form of the private ruling.
Brett Evans: Just a question on the on that UN pension scheme, is it because if the division you’re working for is registered as an NGO, non-government organisation like what do you call it? Non for profit?
James Ridley: Yeah. You’re pretty much spot on and most of countries you’ve signed up to those scams and yes, we’ll allow that but there are some which just won’t. I mean, I’ve got a client who they’re residing overseas, they’re going to receive UN pension, but based on the outlining on the actual UN pension website, the specific division says, “Unfortunately, it is still taxable as foreign source income in Australia.” Which is unfortunate, but they’re lucky enough to receive a great income stream from this as well, it just takes some careful tax planning. You’re weighing up, yes, pay some tax, but it’s a great income stream until you pass away.
Brett Evans: Devil and the deep blue sea, isn’t it?
James Ridley: Yeah, that’s right. It’d be good if you could just withdraw in traded favourably by the age here, but it wouldn’t be either he has a lump sum because they don’t recognise it as a foreign pensions game or foreign Superfund.
Brett Evans: Yep. Got you.
Insurance Inside of Australian Super
James Ridley: It’s just those careful considerations, I suppose. I know you briefly touched on insurance before, literally. I think a great example case study of this was client residing overseas, and I suppose we’ve been through this with multiple clients. It’s a case where you’ve just got to ask the right questions. We asked the right questions, they said, “Yes, technically the insurance is valid for up to three years while serving a non resident. Then after that period, that’s when you need to submit a request to either keep it valid or identify whether it is valid or not.” We went through that exact case, she has been in overseas 10 years. They actually had on far that the individual was residing in another country, but when we actually assess the insurance with the underwriter, they told us that it was invalid. We were lucky enough to go through that a lengthy process of providing a lot of documentation and getting a big refund for them, which was really great.
Brett Evans: She got a refund?
James Ridley: Yeah, we did. I think the refund was over $13,000, actually, from previous years, but it wasn’t a quick process. It was a case where you’d submit the documentation they requested, they would go dark, you’d follow them up three, four or five times, you still wouldn’t hear from them. Then I’d pop up again, like a Meerkat saying, “We need this.” Then they disappear. You’d ask them, they’d never give you a case manager either, you don’t know, you’re dealing with the Superfund. That was essentially a reference and you indicate, speaking to them and trying to find out what was going on. We were quite lucky that they were able to, obviously pay the refund into the designated Superfund account, but that just goes to show that it can happen. It’s always worth assessing whether the insurance is valid and asking those right questions.
Brett Evans: Well, I think you hit the nail on the head with the questions. I mean, I remember the last time I looked at our question sheet when we do talk to Superfunds, I think there’s 35 different sections that we ask. A lot of it, we have to impress upon whoever we’re talking to, to qualify those answers. They’ll give us an answer, and then we’ll go back and say, “Are you sure?” They’ll go, “Wait a minute, I’ll come later.” They’ll go away and come back and give you a different answer.
James Ridley: Yeah, that’s right. I mean, usually when you’re speaking to someone about the insurance, you want to speak directly to the underwriters or the person that’s actually going to be on the assessors team. You go through the process and go, “Listen, they’re a non resident, this is actually the definition as per the tax, forking it from a tax point of view. Can they still order claim?” Then give them sometime, they’ve got to put you on hold and speak to their manager and go through that process.
Brett Evans: Yeah, that’s a good point. I mean, it’s every little dollar counts, and we all work too hard for these days for money to be further away, that’s for sure.
James Ridley: Yeah, that’s right. I suppose, you already mentioned the consolidation, it’s shocking how many Australians have more than five Superfund accounts and they just do nothing. We’re taking on a client shortly, they’ve got six and when you tally up all the individual fees, it adds up to being, probably three to 4% of their balance. I suppose, leading onto that it’s great that there’s been legislation published about how they’re reducing on the Super side, how Superfunds can only charge a certain percentage now fees on the account balance. I think they reduced it to two to 3%, which is still astronomical, but essentially, at least that’s all coming through. It’s just something that when you look at five Superfunds, five, lots of admin fees, investment fees, MERs, manager expense ratio fees, and then insurance fees, it adds up.
Brett Evans: I think usually what the killer is always a minimum admin fee, whether it’s three, four or $500 per account, and that’s the biggest thing that I talk to people about is, it was all just percentage based on its fees it wouldn’t be such a big issue. The fact that it’s, a minimum account, like if you’ve got five accounts, and each account has got a minimum keeping fee of $495 per annum, that’s two and a half thousand ozzy, just there. Not to mention any hours and all those other bits and pieces that do increase the cost of running a Superfund.
James Ridley: Yeah, that’s right. I mean, again, now in their head, they can’t just apathy, not care about it, not think about it, out of sight, out of mind, those things. They need to pay attention to their Super because it’s tax and essentially over the last time, it’s the longest investment we have as Australian citizens. If we’ve worked in Australia, and then we need to be mindful of that.
Brett Evans: Yep, definitely. I think before we go and confusion on any further, I think, we’ve covered off on a fair bit today. We’ve always got lots to talk about and lots of update Australian expats on so. Let’s wrap it up then, and thanks very much for the call today. To everyone, guys to keep informed, make sure you subscribe to our social media channels, links are in the description below and also in the show notes. Send me on our website, and we look forward to seeing you on the next Expat Chat Episode 10, going the double digits.
James Ridley: That’s right guys. Speak to you very soon. Obviously, feel free to submit your inquiries or put those comments on those YouTube channels as well, so we can always come back to you.
Brett Evans: Fantastic. Thanks, James.
James Ridley: Thanks, man. Speak soon.
Brett Evans: Take care.