fbpx
Country

Expat Chat Ep 4 – Federal Budget, Main Residence Exemption, Biggest Financial Risk

Welcome to our fourth episode of #Expatchat where we discuss the latest financial issues affecting Australian expats.

 

In today’s chat we discuss:

Topics, articles and events featured in this podcast:

 

 

 

Full Transcript : Expat Chat Ep 4 – Federal Budget, Main Residence Exemption Update, Biggest Financial Risk for Expats and Q&A

 

Brett Evans:                        G’day expats. Welcome to Episode Four of Expat Chat. James, it’s another edition, and always lots to talk about. What are we running through today?

James Ridley:                     Always. On today’s agenda, we’ll briefly touch base on the recent webinar that we talked with our expert on the risk side.

Brett Evans:                        Oh, yeah, on risk insurance, with Darko.

James Ridley:                     Talk about the upcoming budget and the webinar that we’re going to be hosting.

Brett Evans:                        Yep.

James Ridley:                     And then also, just what are the biggest financial risk to expats.

Brett Evans:                        Yep.

James Ridley:                     And then just a minor update on what’s going on with the main residence exemption for Australian expats. There was a recent article in the Financial Review. And then I’ve got about three to four questions, just going to throw out to us, just to address something quite straightforward. So, a pretty standard Q&A.

Brett Evans:                        Let’s get the show on the road. Those who are watching on YouTube would have seen the little disclaimer appear down on the bottom. But for those who are listening on the podcast, obviously any information we talk about today is general in nature and you should not consider this as personal advice. Let’s get the show on the road.

 

Top 10 Problems Australian Expats Face With Insurance

 

James Ridley:                     No drama. Brett, obviously, last week, we conducted the webinar on the top 10 problems Australian expats face, in regards to their insurance.

Brett Evans:                        Yes.

James Ridley:                     It was obviously with Darko, I’m going to probably fail pronouncing his surname.

Brett Evans:                        Zigic.

James Ridley:                     Zigic?

Brett Evans:                        Yep.

James Ridley:                     He works with Robina Financial Solutions, he’s our go-to guy for expat insurance.

Brett Evans:                        Exactly.

James Ridley:                     The webinar, it ran for about what was it, it was 30 to 50 minutes or…?

Brett Evans:                        I think it was about 45, 50, yeah.

James Ridley:                     Yeah. And then it’s obviously put on YouTube now, we put it on as one of the podcast.

Brett Evans:                        Yeah. I will put the link in the show notes below, above the description on YouTube, and also show notes on the podcast as well so people can watch that as well.

James Ridley:                     Yeah. That’s right. I think it was a great webinar too because it cuts through a lot of the crap that’s out there on the internet when it comes to insurances and insurance policies. It’s likely to probably raise more questions once you actually watch it because you’re like, “Okay, I actually haven’t looked into that regarding my super fund insurance or these policies that I’ve got, which I thought were safe.”

Brett Evans:                        Most people don’t know they’ve got an insurance at all in super.

James Ridley:                     Yeah.

Brett Evans:                        They just get on a plane, they go away, they’re away for three, five, 10 years, expecting… And they always have the complaint that balances go down, but they’re unaware that…

James Ridley:                     What’s coming out.

Brett Evans:                        There’s actually premiums coming out paying for insurance, that what we’ve found is, most of the time, they can’t claim on it anyway because they’re a non-resident.

James Ridley:                     Yeah. I mean, Darko even mentioned it, a lot of the carve outs that you see on these product’s disclosure statements that are associated with those default insurances on the super funds. They’ll say, worldwide cover, overseas cover. It says, “Yep, you’re covered 24/7 no matter where you are in the world.” But that’s actually mainly referring to like a holiday or a few months that you are seconded overseas for work, not something in the case where you’ve left Australia permanently because you’re a non-resident now. On paper, you’re not coming back, and that’s the treatment of a non-resident for tax purposes. And that changes things, and people don’t know that.

Brett Evans:                        It does. That’s right. The amount of times I’ve spoken to people and they’ve actually been on the front foot. They’ve called the super fund. They said, “We’re going overseas, are we covered?” What they don’t do is tell them the basis of them going overseas. So the call centre just assumes they’re going on a work trip or a holiday.

James Ridley:                     Yes, that’s right.

Brett Evans:                        And they say, “Yeah. No problems at all. You’re covered. You’re covered.” But then they get over there thinking that, “Okay, it’s great. I can claim on my life or TPD insurance.” When in actual fact, if you’re living overseas permanently, then no go.

James Ridley:                     Yeah. It’s the typical one when it comes to assumptions, the mother of all.

Brett Evans:                        Yeah.

James Ridley:                     Anyways. So, yeah. I mean, further on the insurance, I mean, I think Darko didn’t name drop the providers, but he said there’s three main ones, which are usually quite comfortable with providing expat insurance.

Brett Evans:                        Yep, that’s right.

James Ridley:                     And other things that do impact is, where you’re residing, so the type of country.

Brett Evans:                        Yes. DFAT five countries: Iraq, Syria.

James Ridley:                     War-torn. Yeah, war-torn zone. And then the other factors are: years that you’ve been overseas, and I think the last one was the intention to return.

Brett Evans:                        Yeah, ties back to Australia. Yeah, that’s right. I mean, you always got a better chance of getting something when you have something tying you back to Australia, whether it’s property or kids getting out of school, all those sort of things.

I think getting insurance as an expat is very different than, say, a resident because just to sort of, without getting too technical to everyone out there, when you get insurance as an expat, you get what’s called pre-assessed before cover is provided. Which means that you have to go out to all these different insurers and say, “Hi there. We’ve got Fred Smith. He’s 45 years old. He lives in Hong Kong. Wife, kids, all…” You know, giving the whole colour. It’s like a speed dating service because you go out to all these different insurers and say, “Who wants it?”

James Ridley:                     Yeah.

Brett Evans:                        Whereas in Australia, when you’re a resident, normally what happens is, you’ll sit with an advisor and he’ll go and find you the best cover, suits your circumstances, you go through everything, then you get assessed after the process. Whereas with expats, it’s right at the beginning.

It’s funny how different insurers, they’ll tell one advisor one thing, but they’ll tell another advisor something completely different. We obviously had that case quite often where we talked to other advisers who tried to get cover and they can’t. But then when we go through our channels, we can get it because we’ve got a relationship with that underwriter.

James Ridley:                     Yeah, that’s right.

Brett Evans:                        They know our clients, they know what sort of business we’re working with, and they have a little more comfort.

Just to everyone out there who do talk to advisers, if you are looking into getting insurance, just because one advisor can’t get it, doesn’t mean another can’t. So, yeah, just always have a good look around. It comes back to that topic, we’ll do down the track about picking an advisor.

James Ridley:                     Yeah. I mean, further on that, obviously, some advisor, it always comes down to the products they’re aligned with. If they’re only aligned with five insurers, it could be the case where those five insurers don’t actually touch expats at all. So they might go back and go, “Listen, no one’s going to give you expat insurance, we’ve just asked our insurers.” And again, you make an assumption,” I can’t get expat insurance, I can’t apply for it, I’ll wait til we get over in that new country, and then I’ll go through the routes of trying to offer it there.”

Brett Evans:                        Offshore.

James Ridley:                     One other thing Darko mentioned was, if you do get expat insurance set up, when you return to Australia, it’s always good practise to let the insurer know you’re back because it can sometimes be the case that that insurer is taking on extra risk, because you’re going overseas. So now when you come back, your premiums might be actually a little bit less, because they might have loaded on a slide loading to accept that extra risk. So always updating your insurance underwriter and financial planner to set up the, obviously, relative to new insurance policies.

Brett Evans:                        Definitely.

James Ridley:                     I suppose, we go into it in the webinar, that’s a bit of a sneak peak, essentially.

Brett Evans:                        Yeah. Have a look in the description below. I’ll link both the YouTube and the podcast URLs so you can listen to that or watch it later.

 

How Does The Australian Budget Affect Australian Expats

 

James Ridley:                     Yeah, sounds good. So moving on, obviously, big news, April budget. Brought it forward a month.

Brett Evans:                        Yes, May election.

James Ridley:                     Yeah, that’s right. I can’t wait.

Brett Evans:                        Yes, that’s right. It’s always highlighted on my calendar.

James Ridley:                     I love it. Yeah. I mean, from my own point of view, I’m quite nervous about Labor and their proposals.

Brett Evans:                        Look, it’s something that I don’t know whether it’s arrogance or what. Because, in past years, we’ve seen political parties sort of converge a bit, in terms of their policies. So it wasn’t too extreme, but it appears Mr. Shorten’s taken a very extreme approach to this one.

James Ridley:                     Yeah, that’s right.

Brett Evans:                        And unless you’re, what I call, a party faithful, you’re in their target.

James Ridley:                     Yeah, that’s right. I think, looking at Labor’s proposals, which I’ve downloaded here, it’d be great if we touched base on them last week as well on previous episode. I, honestly, there’s probably five out of 10 proposals which directly impact Australian expats.

Brett Evans:                        Expats, yeah. But you’d never find the word expat in them at all. And that’s the funny thing how expats won’t know about it until it’s too late.

James Ridley:                     Yeah, exactly right. It’s not something, which is specifically targeting them, but it’s something that directly is going to impact them. I mean, the rule regarding personal concessional contributions, the 10% rule, that one really scares me. Because a lot of my own clients, I know that they’d have income coming off properties where they can funnel into their super funds and now they’re looking to reintroduce the 10% rule, which, a brief summary is, you essentially need to be self-employed to be able to make contributions and claim as a tax deduction.

Brett Evans:                        As a concessional contribution, yeah.

James Ridley:                     Yeah, that’s right. So, by removing or reintroducing this old rule, even I can’t go and make personal tax-deductible concessional contributions because I’m an employee.

Brett Evans:                        Employee, yep.

James Ridley:                     So that one is really scary because it’s going to have a drastic impact on the type of tax that expats will pay each year on that sort of income. Obviously, the trust rule, I’m not a big fan of that one.

Brett Evans:                        No, and that’s a scary rule as well too. I think they actually interplay, a lot of those.

James Ridley:                     They do. Yeah, you’re right. I mean, you’ll still get taxed at minimum 30% anyway. But changing that is huge because I know a lot of people still operate trusts when they’re away, which they need to be obviously careful of central and mutual, and those sort of things. But another big scary one, the catch-up rule, catch-up concessional contributions.

Brett Evans:                        Yeah. Because finally we actually saw something that expats could really take advantage of.

James Ridley:                     Absolutely, especially when it comes to overseas provident funds and super funds.

Brett Evans:                        That’s right.

James Ridley:                     Even overseas investment property that’s accumulating in the background. Just an overseas investment essentially, and trying to offset.

Brett Evans:                        Well, it’s the ability to manage your cash flows and funnel in different ways that could sort of negate or remove tax liabilities.

James Ridley:                     Yeah, that’s right. I think when I saw the catch-up concessional contribution rule come into play, I was excited because I knew it’s going to have a great impact on a lot of expats in a positive way. They can essentially maximise this contribution and effectively have a flat line tax rate of 15%, assuming they leave assets behind and whatnot overseas.

The fact that they’re going to yank that away straight away, it means that if people who are using that rule, building up these $25,000 concessional contribution that they haven’t used this year, they’re going to take it away next financial year. Essentially, you’ve missed out making a $25,000 contribution and claiming it as a concession.

Brett Evans:                        Yeah, that’s right.

James Ridley:                     I mean, that’s retrospective in itself.

Brett Evans:                        It is because I think you need to accumulate it first before you can use it.

James Ridley:                     Exactly.

Brett Evans:                        But if they take away the functionality of accumulation, then you can’t use it anyway.

James Ridley:                     Yeah. Exactly right. So those are some of the main key ones. Obviously, the reduction of the non-concessional contribution.

Brett Evans:                        Yeah. Look, it’s becoming harder and harder now to put money into super. Not harder, but in terms of getting reasonable amounts of money in there, the good old days of Johnny Howard with no limits, that was a bit of a free for all, but…

James Ridley:                     You shocked me the other day when you told me that some of the balances in SMSF these days from the old rules.

Brett Evans:                        Yeah, that’s right. I mean, there’s actually SMSFs out there with over $100 million in them. And just to sort of take a step back and not to devote too much, when the government wanted and made a big push, concerted effort into getting Australians to fund their own retirement, they said, “You can put as much as you want into your super.” I actually had clients who were mortgaging their unencumbered properties, sometimes into the millions, and then dumping that whole load into super. And then what they were then doing is then paying down the mortgage and then suddenly got a big lump sum in super and happy days.

James Ridley:                     Yeah. And they’ve funded their retirement, essentially.

Brett Evans:                        Exactly. Even when it was at the $180,000 per year limit, that was still a reasonable limit. You could put in $540,000 quite easily. And that was not even including doing the whole straddle between financial year and the calendar year. I never really had many clients who maximised that one. But now, if we are going to drop below 100, it’s going to mean that expats have to plan further in advance in terms of getting this through because they can’t sort of rely on six years to get all their money into super.

James Ridley:                     Not at all.

Brett Evans:                        It’s got to have to be almost after 12 years. If these balances do go down, if the Labour government does get in, if that does come down to 75, it could go down to 50. It could get worse.

James Ridley:                     Yeah.

Brett Evans:                        Like any of this sort of stuff, it always scares the bejesus out of you when you see these things, whether we see everything implemented in full, if they do get elected, whether there’s a trade off along the way. A lot of the time politicians like to announce things, but then they realise what they announced wasn’t exactly practical, so they sort of water it down or…

James Ridley:                     We’ll touch base on that with the main residence exemption.

Brett Evans:                        Main residence exemption, exactly, that’s a classic case in point. It’s going to be a difficult one, but there’s nothing positive coming out of Labor right now anyway.

James Ridley:                     No. I mean, further on the non-concessional contributions, bringing it back to $75,000, just the kind of impact that’s going to have on expats with bringing back their foreign super funds. I mean, remember when they come back, they’ve got that six month grace period in which they can bring it back, obviously no people are taxed, after that people will fund earnings. But, $225,000 they can get in technically, because obviously that’s to bring forward non-concessional contribution capital now, and previously $300,000. So there’s a huge difference there. If you can’t get it in within those rules, then you can’t necessarily just do it in tranches, because it has to be all or nothing.

Brett Evans:                        That’s right.

James Ridley:                     The only case you can do that is when you’ve got multiple SIPPs with the UK side.

Brett Evans:                        Yeah, you can split it up.

James Ridley:                     Yeah. But then you’ve got to go down the QROPS path which…

Brett Evans:                        Bingo.

James Ridley:                     I mean, its an nightmare in itself. So it’s case by case. Essentially, it is a scary rule because now we can only do, instead of getting $400,000 in two months, which is a complex strategy in itself, you can only do $300,000.

Brett Evans:                        $300,000, that’s right.

James Ridley:                     It’s ridiculous.

Brett Evans:                        And that six month rule does make it difficult because, if you do not bring it in within that six months, essentially, you’ll be taxed on any growth in that time. If it takes you six years to bring a UK pension back or some sort of foreign pension back in that time frame, you could be looking at paying tax at a CGT level for that six year period.

James Ridley:                     Absolutely.

Brett Evans:                        Not to mention what you’re being taxed in UK or wherever it may be.

James Ridley:                     Yeah. I mean, it’s not like you get the CGT discount concession doesn’t operate with those type of assets.

Brett Evans:                        That’s right, yeah.

James Ridley:                     Just because you’ve held it for a period of greater than 12 months and you’ve been a tax resident, you don’t get to discount that.

Brett Evans:                        No. Not at all.

James Ridley:                     So, yeah. Like I said, it’s an annoying rule that they’ve announced. It’s going to be interesting to see what they say. I think they’re also looking at maybe changing the $1.4 million or the $1.6 million rule by the looks of it as well, this total superannuation balance cap. But that’s something which I don’t think will happen.

Brett Evans:                        What did they expect? I mean, I know they’re trying to drive up tax revenues.

James Ridley:                     Yep.

Brett Evans:                        I mean, that’s in concert with what they’re trying to do with franking credits as well. So they would rather people accumulate wealth outside of super, which is how I read it, don’t put money into super, put it outside of super.

James Ridley:                     Yeah. The tax that gets taxed at a higher rate.

Brett Evans:                        Exactly. That’s right. We’ve done these strategies before with older clients who didn’t have the benefit of growing up with super, through their working career and withheld assets outside of super, and there’s still benefits we can do there with franking credits, and all those sort of things to offset some tax, but there’s still a lot of tax to pay.

James Ridley:                     Absolutely. I suppose one of the other rules I’ve read out, I didn’t realise they were going to cap out tax, so our accounting fees as well at the moment.

Brett Evans:                        Oh, really?

James Ridley:                     Regarding personal tax deductions. If you’ve got quite complex tax matters, and you’re paying higher tax agent fees, you can only max out at $3,000.

Brett Evans:                        Wow. That’s not a lot for some people out there, who have got some really complex ones.

James Ridley:                     Yeah. Multiple trust, family trust, SMSFs, all these other things.

Brett Evans:                        Yep.

James Ridley:                     So it’s not an exciting budget to be honest.

Brett Evans:                        No. Yeah, I’m not exactly enamored with what’s coming out of there.

James Ridley:                     That’s right, I mean, let’s briefly touch base on the seminar that we’re going to be holding.

Brett Evans:                        Yes.

James Ridley:                     Seminars, sorry.

Brett Evans:                        Seminars, yeah, that’s right. So 2nd of April, it’s probably the earliest budget I’ve ever seen.

James Ridley:                     Yeah.

Brett Evans:                        They’re bringing it forward because, obviously, they’re calling an election in May. So 7:30 p.m. everyone’s excited, on Tuesday night, is it? I think it’s Tuesday night, yeah, 2nd of April, watching the screens. What we got to do is, we’ll analyse what’s announced. And then the next morning at 10:30 a.m. Australian time, and then the same at 9:30 p.m. Australian time, we’ll run live webinars.

So those two time frames pretty much should cover the world. If you’re in the US, obviously the 10:30 one, it’s 8:30 New York time, 5:30 LA time. But also if you’re in Asia and you want to have an early start, I can’t exactly imagine waking up to the budget talk, but anyway, if that’s the way you’re inclined, fantastic. We’ll be there. But then if you want to watch the nighttime one, at 9:30 p.m. Australian time, obviously that’s 7:30 in Singapore, 3:30 in Dubai, and then 11:30 in the morning in London. I think we got everyone covered there.

James Ridley:                     Yeah, I think so. I mean, we’ll be recording it as well, won’t we?

Brett Evans:                        Yep. Virtually, the best way to do it is if you cannot attend to any of these ones, still register. There will be a link below to register for the webinar, either of them. Even if you can’t register… sorry, even if you can’t watch it live, register because we’ll send out a recording after. We will be having Q&A at the end and, even if you can’t attend live, email us your questions at [email protected] You’ll get our email address, when you register, you’ll get a confirmation email from us, so you can reply to that and say, “Hey, I can’t attend, but could you answer these questions for us?” So I mean, it’s going to be a bit hard for them to ask questions when they don’t know when the changes are announced.

James Ridley:                     Yeah, exactly.

Brett Evans:                        But we’ll see how it goes anyways. So if you do want to say that I implore it’s probably our biggest webinar of the year because it affects everyone. And it’s funny how people say, “Oh, it doesn’t affect me.” But I’ve never had a budget before that hasn’t affected an expat from the age of 20 to 100.

James Ridley:                     Yeah, in some sort of way.

Brett Evans:                        There’s always something.

James Ridley:                     I mean, that’s the benefit of doing this webinar, because we’re focusing on just expat issues.

Brett Evans:                        Exactly.

James Ridley:                     We’re not customising it to a standard normal individual Australians, it’s purely customised.

Brett Evans:                        We’re not talking about Centrelink, we’re not talking the age pension, those sort of things.

James Ridley:                     No.

Brett Evans:                        It’s issues that affect expats this very minute. I will put a caveat on there that I’m able to talk about it in a sec about main residence exemption.

James Ridley:                     Yeah.

 

Main Residence Exemption for Australian Expats

 

Brett Evans:                        And I’ll dovetail this into the webinar as well too. There was a Tax Institute National Conference last week, last Friday, it was and the Assistant Treasurer Stewart Robert was asked a question about a piece of legislation regarding distributions to minors from trusts. And his response was, “Sometimes when we propose legislation, we’re better off just leaving it there and forgetting about it.” And then a little bit later someone asked a question about the proposed main residence exemptions for expats. And he said, “Please see my previous response”.

James Ridley:                     I know.

Brett Evans:                        Look, it’s a first good start. My concern is the government hasn’t come out and made a formal announcement that it’s dead.

James Ridley:                     Yeah. Or I mean, I read that article in Financial Review, and I actually took nothing away from it.

Brett Evans:                        No.

James Ridley:                     I was like, typical politician.

Brett Evans:                        It’s a reiteration of what we know and then a politician saying maybe not.

James Ridley:                     Yeah, I don’t know how to answer this question, see above.

Brett Evans:                        Exactly. And not that I’m a suspicious person, but the government has been so hell bent on getting this through.

James Ridley:                     Yeah.

Brett Evans:                        My biggest concern, and we wrote a post about it the other day, but it certainly could be the case, is that we see main residence exemption mark two legislation.

James Ridley:                     2.0

Brett Evans:                        2.0 being announced.

James Ridley:                     What do you think that could be?

Brett Evans:                        It’ll be an abridged version of what it is now. The points that really hit home with Canberra, they didn’t really care about preserving main residence exemption for Australian expats while they’re a resident. The issues were more on the estate planning side and the family law side. So maybe some amendments regarding that. If they are going to push it through, I would love to see that high water mark level reset the cost basis when becoming a non-resident. I mean, if they’re going to put it through, that’s what I want.

James Ridley:                     Essentially, individuals that are heading out will still get the benefit of a partial main residence exemption.

Brett Evans:                        Yes, that’s right. While they own the property as a tax resident in Australia, they’ll get the main residence exemption. They’ll move overseas, they’ll accrue CGT, the nonresident marginal tax rate. But there’s a demarcation there between the two tax statuses. Whereas under the proposed legislation at the moment, there is no demarcation. You could be an expat for two years and an Australian resident for 20, and you’ll still be taxed like an expat for the whole period.

James Ridley:                     Yeah. It would make sense that they would go down that, what I suppose, the Brett Evans proposed amendment. Yeah. We’ll start calling it that actually.

Brett Evans:                        Yeah, we’re going to hash tag that one.

James Ridley:                     Trademark it as well.

Brett Evans:                        Yeah, it’s our idea.

James Ridley:                     But the government isn’t. But, essentially, that would operate similar to the way investment properties work.

Brett Evans:                        Exactly.

James Ridley:                     Even in regards to the capital gains tax discount.

Brett Evans:                        That’s right.

James Ridley:                     It absolutely makes sense, obviously, when you leave Australia, okay, treat it as a foreign resident, and essentially no more accruing the main residence exemption. That’s applied, it’s crystallised there. When you come back, obviously, all the rules still apply.

Brett Evans:                        Bingo.

James Ridley:                     But it might be the case where they might still treat it as that investment property where for that period you can never discount it, you can never apply capital gain, and all these other issues that come into play. But you’re right. I mean, there needs to be clarity and probably an amendment of the transition period. Obviously, that’s four months away.

Brett Evans:                        There’s no way they can put this thing through to 30 June. Their focus is going to be on the election.

James Ridley:                     Yeah, of course.

Brett Evans:                        So they’re going to be calling in chips with all the different senators and all those different people, just sort of get through what they can get through. My gut tells me if they do a Brett Evans main residence exemption mark two, then it’ll be probably as of budget night this year with 30 June next year as the deadline. I think it’d be quite quick.

James Ridley:                     So taking out another 12 months?

Brett Evans:                        Yup.

James Ridley:                     Yeah, okay.

Brett Evans:                        Because I think that’s the biggest problem we’re meeting expats every day, who don’t even know this is proposed.

James Ridley:                     No. No they don’t.

Brett Evans:                        I don’t know whether the government expects people to learn by osmosis or ESP or what. We’re sending down our best and trying to get the word out there

James Ridley:                     In these situations, you can educate.

Brett Evans:                        You can, yeah.

James Ridley:                     Educate, educate, educate. Because it’s still draft stage, we can’t tell people what to do.

Brett Evans:                        No. That’s right.

James Ridley:                     It’s a case where you know the piece of legislation, if it goes through, this is what’s going to happen. If you sell your property while you’re a non-resident, this is the potential tax you’ll have to pay.

Brett Evans:                        Bingo. Yes.

James Ridley:                     But at the moment, it’s just flipping a coin, isn’t it?

Brett Evans:                        It is. It’s sort of like it’s trying to hit a moving target. You’re just like, well, we’re aiming over here, now we’re aiming over here. Any time we provide financial advice to an expat, there’s always a chronology in that advice. But right now, we’re like, well, this may or may not go through. 30 June this year may or may not be a big date for you. I think I’ve heard out there talk in the sort of expat media that there’s a lot of hype, unnecessary hype regarding this.

To me, it’s yes or no. I was thinking of this driving yesterday. If you look at the average age of an expat that goes overseas, more than likely it’s a young couple. Now they probably bought their first home together, they probably got engaged, married, and they said, “Alrighty. Let’s go overseas,” and they may be married. So it might be a two or three bedroom place. They go overseas for, say, seven to 10 years. Surprise, surprise, they got a family, those sort of things now.

And that house that they’ve got back in Australia may no longer be suitable for their needs. In the past, they had to sell that house, buy a new house, move back to Australia and move into it. Whereas now, under the proposals, they would have to move back into that house, reestablish themselves, shoehorn the whole family into this tiny little shoe box, and then sell it. And then buy a house that’s going to suit their needs.

James Ridley:                     Yeah, exactly.

Brett Evans:                        Those out there were saying, “This is a storm in the teacup.” For some it is, yeah. I mean, if you’re going overseas for two years, big whoop. But if you’ve been overseas for a lengthy period of time and you’re sitting on a sizeable capital gains tax liability, and you’re worried about the property market going down, and like all these other bits and pieces that come in, then it is a big deal.

James Ridley:                     Yeah, exactly. I mean, we’ve seen the issues at the moment with those markets down south, Sydney, Melbourne, people trying to sell, trying to sell at 2017 prices, but now we’re at 2019.

Brett Evans:                        2019, yeah, that’s right.

James Ridley:                     Well, we’re 2019, we’re past 2015, but 2019 prices now, which the market has gone backwards and people aren’t happy accepting a sale of their properties at these reduced prices because they’ve seen what other prices have done. So people biting the bullet saying, “Do I wait? Do I? What do I do? What do I do?” Yeah, so.

Brett Evans:                        You don’t really make good financial decisions when you’re pressured.

James Ridley:                     No.

Brett Evans:                        When your back’s against the wall, you don’t have the benefit of being able to see the moving parts and understand the implications and think through the process. You just think, I got to act, I got to act. There are some out there who just acted. But the benefit for those people is, if this law did come in, then they’re okay. If it didn’t come in, they can always buy again. In actual fact, they probably sold at a higher price last year, if they sold last year, they could buy back that same house back this year and probably save themselves 10%, 15%.

James Ridley:                     Yeah, that’s right. With the way the market’s going, it has gone back that much so.

Brett Evans:                        To me, yeah. I mean, I think sometimes you got to weigh up the downside liability and the upside potential, and say well, certainly if property prices are at record lows and no one was sitting on capital gains tax, then this would be a storm in a teacup.

James Ridley:                     Yeah, that’s right.

Brett Evans:                        But because property prices are so high, then yeah, it is a big issue.

James Ridley:                     I mean, on the outlook of property, where do we think it’s heading, property market? I mean, do we think it’s still heading down from the 18, 24 months?

Brett Evans:                        I think longer. Personally, to me, there’s three stages to this pullback. The first stage is restraint of capital, e.g. banks stop lending, so the heat comes out of the market straight away. Then you get that… There’s now FONGO.

James Ridley:                     FONGO.

Brett Evans:                        Yeah, fear of not getting out.

James Ridley:                     I was talking to a client the other day about this.

Brett Evans:                        Yeah. So you’ll always get that. Now that shakes out the short-term speculators and investors. Then you got the combination of excess supply in the market, which drives prices down. So that in itself is probably justifying what we’re going through now. Then we’ve got the next stage, which over the next one to three years, you got $500 billion worth of interest earning loans being refinanced to principal interest loans.

The problem you got with that is now that the banks want to know what brand of razor you use and what type of toothpaste you use. All those people who, the reason they got interest earning loans in the first place, is because they couldn’t afford a P&I  loan anyway. So very unlikely are they going to be able to refinance the interest earning loan by the due date, they’re going to have to sell.

So you’re going to see a purge in the mom and dad investors who should only have ever had one or two properties who suddenly own four or five, who couldn’t afford four or five. The only reason they could afford it was because interest only at record low interest rates. So you’re going to see a purge of that side of it.

And then the last one, and this one is going to affect everyone, and I think it could be a really bad one, is interest rates. People forget the official cash rate right now is at 1.5%. It has never been this low since Captain Cook first set foot in Australia. If we get interest rates rising from 1.5% to 3%, it doesn’t mean your repayments go up 1.5%.

James Ridley:                     No.

Brett Evans:                        This is what people don’t realise. There’s going to be a rapid escalation in repayment requirements in a time when the cost of living in Australia is very high. And people are sort of, they’re struggling as it is. Right now they’re struggling to make ends meet, let alone when their mortgage rates double and triple, then you get to see the real purge.

Honestly, I think this could be, this sort of, it’ll come down, it’ll flatten out a bit.

James Ridley:                     Taper off a bit.

Brett Evans:                        Yeah. All the real estate agents will go, “Okay, great. Time to buy. Time to buy.” But then there’s the next bit, and then the next bit. So I think there’s actually two to three stages from this pullback.

James Ridley:                     Few more cycles, but cycle’s going down.

Brett Evans:                        And it depends on, obviously, when the RBA lifts rates, that’s a big one. There’s a great, and I’ll put this in the show notes as well too, there’s a great chart that, or chart pack that the Australian Bureau of Statistics puts out every month called the ABS chart pack. And it’s great because it’s unemotional, it’s data, it’s binary, it’s ones and zeroes. There’s no agenda.

James Ridley:                     It doesn’t lie.

Brett Evans:                        It doesn’t lie. Yeah. They’re not trying to sell property or these sort of things. So you can look at this data and make incredibly informed decisions without emotion. The one that concerns me the most is, and so I’ll put this in the link in the show notes below, when you look at mortgage defaults, or what they call bad-performing assets by the banks, mortgage defaults are on the rise in a time when interest rates are at record lows.

James Ridley:                     Yeah. I see where you’re heading.

Brett Evans:                        When interest rates start to rise, we’re going to see… Yeah. And not only that, but when you look at the other chart that grabs my attention as well too, is the ratio of disposable income to debt. Believe it or not, in the peak of the GFC, it was about 110. It’s 125 now.

James Ridley:                     Yeah, okay.

Brett Evans:                        So we’re actually, when you look at your disposable debt versus how much… sorry, disposable income versus how much debt you’ve got, we’re at record levels now. We’ve smashed the GFC. I think this is why the RBA are running scared. Because they know if they tap the breaks and they start to raise rates, I tell you what, there’s got to be I reckon one in three households in Australia would be in default.

James Ridley:                     Yeah. Well, it’s typically an inverse relationship.

Brett Evans:                        It certainly is.

James Ridley:                     There’s one and then obviously you’re going to see everything else topple over.

Brett Evans:                        Yeah, that’s right.

James Ridley:                     It’s going to have that negative impact.

Brett Evans:                        Bingo. Yeah. I’m pretty nervous about the property market right now. If I look at the commentary by people who don’t have a vested interest, they’re all saying the same. The ones that aren’t saying the same are the ones that are trying to sell things.

James Ridley:                     Yeah. The ones that are already in the market are going, “Hmm, what do we do?”

Brett Evans:                        Exactly. I mean, there’s the newspapers that drive a lot of ad revenue from real estate agents, they’re putting in the good stories. There’s the newspapers that are more on the fence that aren’t swayed by that sort of thing, they’re the ones running the real stories. There’s the data companies that sell their data to real estate agents, they’re saying, “Yeah, it’s all good. It’s all good.” And then there’s the data companies that don’t sell it, they’re going, “No. This is not good at all.” So always do your homework in terms of where you’re reading things from, look at the source.

James Ridley:                     Yeah, exactly. Make sure not someone’s not receiving a benefit from it by being out there.

Brett Evans:                        Bingo. Yeah, that’s right.

James Ridley:                     Exactly right.

Brett Evans:                        That’s right.

James Ridley:                     Okay. Well, I mean, fair view on the main residence exemption just then. Obviously, we’ll hopefully know more next month.

Brett Evans:                        Yeah. 2nd of April, 7:30 p.m. Be there or be square.

James Ridley:                     That’s right.

Brett Evans:                        Or then if you can’t watch it live, then certainly tune in to us on the webinar the following day at 10:30 and 9:30.

James Ridley:                     Yeah, that’s right. Two opportunities to tune in, so don’t miss out, otherwise the recording we send, if you’ve opted in to receive it.

Brett Evans:                        Yep, definitely.

 

Biggest Financial Risk for Australian Expats

 

James Ridley:                     Okay. So we’ve discussed a fair bit then on the main residence exemption and, obviously, we touched base on where the webinars are coming up, so obviously don’t miss out. Now I just want to lead you into one of the biggest financial risks that expats face. It’s something which I honestly think not a lot of expats actually consider yet it is one of their largest risks when they are living and working overseas. What is that risk?

Brett Evans:                        Currency risk.

James Ridley:                     That’s right.

Brett Evans:                        It’s something that I think they’re aware of subconsciously, because when they’re trying to move money around, it’s up and down, it’s up and down, but they never think of the implications in the long-term.

James Ridley:                     No.

Brett Evans:                        Probably the most commonly asked questions I get is: where should I keep my wealth as an expat? And the answer is pretty simple, where do you intend to return to or retire to. Because if you do that, and you are accumulating wealth in that local currency, then when it comes time to return, your money’s here waiting for you. You’re not going, “I hope the currency’s up,” “I hope the currency’s down.”

James Ridley:                     At the end of the term finishing in that foreign country.

Brett Evans:                        Bingo. We had this with clients in the UK through Brexit. I had two families who are about to return back to Australia, all of their wealth was sitting in Stirling. Obviously, the Brexit surprised everyone, the pound fell 15%. They had to delay their repatriation by two years, which really stuffed them up because they had schooling issues, all these sort of things they’ve done. I said to them, “Either take a financial haircut and move for personal reasons, or if you want X dollar amount, you’re going to have to wait there until it comes back.”

I mean, I remember catching up with an old schoolmate of mine in Singapore a number of years ago. He’s been there for a long time. Every eight years, he has his chat with his wife, because around the seven, eight year mark, the Sing Dollar breaches parity with the Australian Dollar. So it’s actually a good time for them to move back to Australia, because all their assets are in Singapore.

As he said to her, and, Paul, if you’re listening on this, good day, he said, “Okay. If we’re going to do it, now’s the time, because we’re all holding properties in Singapore Dollars, all these things are in Singapore Dollars. If we’re going to move back and get as much purchasing power as we can, we do it now, otherwise we’re waiting another seven years.”

James Ridley:                     Now’s the chance.

Brett Evans:                        And they decided on another seven years. But that just goes to show the ramifications of holding all your wealth in a foreign currency, you know, seven years is a long time.

James Ridley:                     Absolutely.

Brett Evans:                        Murphy’s Law always says that when it comes time to move, something will happen.

James Ridley:                     Yeah.

Brett Evans:                        We saw a reverse situation with the Swiss Frank and the Euro a couple years ago. When they de-pegged the Swiss Frank against the Euro, the Swiss Frank jumped 40% in 45 seconds, ended up closing that day up about 18%. But imagine that was the reverse, and you were just about to get on the plane and suddenly your wealth is 40% less. So you got that issue…

James Ridley:                     What about the issue of tax, moving money between countries, how does that operate?

Brett Evans:                        That’s an interesting one because that’s actually our most popular, apart from our home page, our most popular blog post on our whole website. Do I pay tax on repatriating money back to Australia? And the answer is relatively simply no.

James Ridley:                     Yeah.

Brett Evans:                        Depending on the source of the funds, how you’ve paid tax, whether it’s applicable or not.

James Ridley:                     Residency.

Brett Evans:                        Residency is a big one. There’s a lot of fear mongering out there by primarily offshore providers that say, “Do not send your money back to Australia, the ATO will tax you.”

James Ridley:                     Yeah. There’s always that magic number, the $10,000.

Brett Evans:                        Yeah, exactly. Yeah. I mean, by all means, do not send back $9,999.99.

James Ridley:                     It’s more suspicious than anything.

Brett Evans:                        Of course, it is. I mean, the computers from AUSTRAC look at every transfer and it’s got a flag that more so than if you did $10,001. Only because you’re seen to be trying to get under a, what to me is, not really a fair threshold.

James Ridley:                     A well-known threshold.

Brett Evans:                        It is. But it doesn’t really mean anything.

James Ridley:                     No.

Brett Evans:                        You can get pinged for $3,000 like you can get pinged for $300,000.

James Ridley:                     Yeah.

Brett Evans:                        When it comes to moving money back to Australia, if you’re deemed to be a resident, or have resident tax that ties to Australia, and money’s coming in, then the ATO may deem that as you’re working overseas trying to avoid paying tax, and you’re bringing money back to Australia. If you’re a resident in Hong Kong, Dubai, London, and you’re earning money there and you’re paying tax there, and you’re sending money back to Australia to either pay a mortgage, kid’s school fees, start an investment account, top up super, there’s nothing wrong with that.

James Ridley:                     Yeah. I mean, basically, you wanna to send money back, but you want to make sure it has a purpose.

Brett Evans:                        Yes, that’s right.

James Ridley:                     For an active purpose.

Brett Evans:                        Look, don’t send it back and just have it sitting in a bank account. A, The interest rates are absolutely crap.

James Ridley:                     Oh, they are.

Brett Evans:                        Why would you bother? And, B, it does raise suspicions that it could be deemed as a salary or living expenses, as opposed to money coming back, “Okay. I’m going to go set up an investment account with blue chip shares,” or, “I’m going to go and buy a property,” or all these sort of things. There’s an equally weighted offset to the money. So if AUSTRAC or the ATO does go, “Why did you transfer $13,000 back?” It’s like, “Easy. I’m paying for my kid’s school fees.” Simple.

James Ridley:                     Yeah, straightforward.

Brett Evans:                        So it’s the urban myth in expat land. They’re always quite humorous.

James Ridley:                     Yeah.

Brett Evans:                        We always laugh at them. But they’re founded based on fear and people will just do not know how to act. So happy to go on the record, as long as you’re tax status is solid. You’ve paid the tax where you should have paid the tax, and you have a reasonable and defined purpose for those funds, transfer away.

James Ridley:                     Okay. Now let’s look at a different scenario. Okay. I’ve left money overseas, but I’ve returned to Australia. I’ve money that’s doing strong, US dollar. So I’ve come back from the US, I’ve got $50,000 US. I’ve been a tax resident now for 18 months in Australia. I’ve left that money in the US and I bring it back.

Brett Evans:                        Capital gains event.

James Ridley:                     Exactly.

Brett Evans:                        No different to buying gold at $1 and selling it for $2. Your cash is a financial product. You’re seen to be getting a capital gain out of taking that arbitrage opportunity by, you’ve had the opportunity to bring money back to Australia. The reason you’ve left it overseas, unless in very rare circumstances, but more often that not, you’re trying to game the system. You’re like, “Well, I’ll leave it there and I’ll try and get a better exchange rate.” The ATO views that as a capital gains event.

James Ridley:                     Yeah. I mean, it’s typically the case when you reenter the country, or reentering Australia. Tax residency is formed now that you’re back permanently. So, therefore, it’s almost like the cost base on the currency, that’s when you’re starting to accrue some sort of tax with the ATO.

Brett Evans:                        100%, yeah.

James Ridley:                     Obviously, if it goes the opposite way, and you make a currency loss, that’s great.

Brett Evans:                        That’s great. It’s tax losses.

James Ridley:                     It’s a capital loss, you can use it to offset other things.

Brett Evans:                        Yeah, that’s right.

James Ridley:                     Capital gain, absolutely a taxable event. Yeah. I mean, there’s not generally, there’s not really much flexibility regarding timeframes because you’re holding a financial product technically when you return.

Brett Evans:                        That’s right, yeah.

James Ridley:                     So it’s very different in the way a foreign super fund operates and all those sort of things.

Brett Evans:                        Yeah. That’s the thing. It’s treated like cash as like buying a property. It changes in value. As you said, it might be going up or down. But if you’ve made a gain, you’ve had the chance to bring it back. You haven’t taken it back and that’s almost your election to say that, “I am aiming in myself to a capital gain or loss on a tax point of view from that asset because of, me not bringing the money back.”

James Ridley:                     I remember a long time ago, I did a consult with someone who, they’d come back to Australia, that they said they invested this money in crypto assets. I was just like, “Okay. Don’t tell ATO, don’t go the rabbit hole.” But I was like, “Listen, it’s technically a currency, therefore, there is likely going to be a currency gain if you’re leaving it in there.” Just because it’s in crypto doesn’t mean it’s not a taxable asset within Australia. We’ve already seen the ATO come out and provide, I suppose, recommendations on how it’s meant to be taxed.

Brett Evans:                        Look, crypto is easy for the ATO. They say if you buy crypto as a source of currency to pay for a good, then it’s not taxable as an asset. If you buy crypto and sit on that money, you’re investing, so it’s capital gains.

James Ridley:                     Yeah. And that’s what usually everyone’s doing. They’re holding the top three or whatever, the Bitcoins and whatnot.

Brett Evans:                        Yeah. Ethereum, Monero, yeah.

James Ridley:                     Yeah, Bitcoin and everything. They’re holding it because they know it’s likely to go up. Obviously, we saw the overnight Bitcoin millionaires, that’s obviously all changed now.

Brett Evans:                        That’s right. Wrong side of the tracks now, yeah.

James Ridley:                     Yeah. Exactly right. So, yeah. I mean, that’s great, you applied clear clarity there on overseas currency, transferring it back when you’re a resident versus non-resident, how tax can be applicable or non-applicable, and obviously sending it back for that active purpose that you ran us through. So that’s really good.

Brett Evans:                        I mean, think of this scenario. If you use a dollar cost strategy to repatriate currency over time, some months as opposed to other months, you’re going to get good and bad exchange rates. But it should smooth out over time.

I remember doing this as an experiment for a client in the US. This was when the dollar was about 0.84. We were on the way back down from parity, so the dollar hit $1.06, $1.07 to the US. I was trying to talk him through the process because he didn’t want to send money back when the Australian dollar was higher than the US. I said, “Take emotion out of it. Just on the first day of every month, just do it.” And he didn’t believe me. So I went back and looked at the data for 10 years. If he followed what I was talking about, instead of getting $0.84 in the dollar, he would have got $0.74 in the dollar.

James Ridley:                     Yeah, okay.

Brett Evans:                        Because people, when the currency hits 0.71, they go, “Oh, it’s going to go to 0.69. I’m going to do it then.” They never do it. It goes back up to 0.85 and they end up transferring at 0.85.

James Ridley:                     Yeah.

Brett Evans:                        Whereas if you make an undisciplined… sorry, a disciplined approach to…

James Ridley:                     Remove emotion.

Brett Evans:                        Remove emotion. Just set something up, monthly, quarterly, annually, it doesn’t matter what it is. But by taking emotion out of it, yeah, some months, quarters, years, you’ll get bad ones; but some, you’ll get really good ones too.

James Ridley:                     Yeah, absolutely.

Brett Evans:                        If we see, mind you, the feds this week announced that they have to put rights on holding the US for probably the rest of this year.

James Ridley:                     Yeah. I think they overcooked it to be honest.

Brett Evans:                        But there is still talk about interest rates falling in Australia.

James Ridley:                     Yeah.

Brett Evans:                        If they do that, the dollar’s going to have a six in front of it.

James Ridley:                     Yeah, with widening interest rate gap.

Brett Evans:                        Exactly.

James Ridley:                     Yeah, absolutely. I think a lot of our US clients will be quite happy.

Brett Evans:                        Yeah. Well, I mean, US clients, Hong Kong clients, gulf-based clients, any currency that’s pegged to the US dollar, they’ll be loving it.

James Ridley:                     Yeah. Exactly right. I mean, we’ve talked a fair bit on currency, but one thing that I didn’t mention was transferring money back, how to go about it?

Brett Evans:                        Do not use the banks. That’s all. Yeah, that’s the biggest one. I wish I could be in on this caper, and it is a caper.

James Ridley:                     Yeah.

Brett Evans:                        They’ll say to you, “We don’t charge you any fees at all,” and you think, “Oh, fantastic.”

James Ridley:                     Amazing.

Brett Evans:                        But what they don’t tell you is the exchange rate they give you, can be 3% to 5% higher or worse than alternatives.

James Ridley:                     Yeah, using a currency path.

Brett Evans:                        Exactly. These days, the reason their excuse now, these days, we work with OFX quite closely. You can almost get your money into Australia in the same time frame using a currency broker as opposed to a bank.

James Ridley:                     Yeah.

Brett Evans:                        Now people, they’re obviously, not lazy, but time poor, so they’re like “I can’t be bothered setting up an OFX account.” It’s just once and then it’s great because, once it’s set up, and you go, “Right now I need to move money back to Australia today.” You go into the OFX account, you go, “I want to transfer 10,000 US dollars to Australia, They’ll say, “We’ll give you that rate.” They’ll even give you comparison rates for the banks.

James Ridley:                     Yeah, they do.

Brett Evans:                        And it’s amazing how, like even on 10,000, we’re talking hundreds of dollars you save. And you hit lock-in, they’ll give you a local bank account. So if you’re in the US, they’ll give you a US bank account. You just transfer from your Chase or Wells Fargo, or whatever bank you bank with in the US to that bank account. Two days later, it spits out in Australian into your Australian bank account.

James Ridley:                     Yeah. It’s too easy.

Brett Evans:                        That’s no slower than a lot of banks. I think there’s a lot of misconceived ideas out there in terms of how it works. Now there’s a lot of, I call it start-up players in FX game. They do worry me. And the reason being is, companies like World First, OFX, the reason why we work with those companies, is because they actually transfer the cash, which is a big difference to, what’s the one that a lot of people use it for the small balances?

James Ridley:                     TransferWise.

Brett Evans:                        TransferWise. And there’s a new one now too that’s actually in a bit of financial issues right now. They don’t actually transfer the money.

James Ridley:                     No.

Brett Evans:                        What they do is they pool everyone’s money together and they say, “Alrighty. Brett and James is transferring money back from the US to Australia. And Frank and Sarah in Australia are putting money into the US.” The money doesn’t cross paths, they just net things off, and then everyone gets their money.

James Ridley:                     Yeah.

Brett Evans:                        When it comes to money, I like my money to go where I want it to go. I don’t want it pooled within there and it’s someone else’s and then goes off in this direction over here, and all that sort of stuff. There’s a lot of homework you need to do, obviously when picking a foreign exchange broker. The big ones that I always say are: make sure they have an Australian financial services licence, so you have recourse against them; make sure they are a member of a complaint’s authority, like the Australian Financial Consumer Complaints Authority, AFCA, so you can complain to someone. By working with those providers, you have recourse if something goes wrong.

James Ridley:                     Yeah, they are regulated.

Brett Evans:                        Bingo.

James Ridley:                     They operate in a highly regulated environment.

Brett Evans:                        Exactly.

James Ridley:                     So there’s almost a bit of, some assurance that things are going to go smoothly. I mean, you’ve just explained how OFX and how smooth the process can be. I’ve personally used OFX when I’ve been over in the UK, and it was literally two business days.

Brett Evans:                        Yeah, that’s right.

James Ridley:                     I got text messages, I got emails, constant updates. I’ve even had an account manager call me to help me walk through the process. So it’s setting up the account once and then whenever you need to transfer money, it literally takes you maybe one to two minutes, if that.

Brett Evans:                        Yeah, that’s right. I think people just love the laziness of, on internet banking, they’re on there anyway, I’ll transfer some money now. The bank’s relying on your laziness, so don’t get caught.

 

Australian Expat Question & Answer

 

James Ridley:                     Yeah. Exactly right. Exactly right. Okay. so we’ve talked a fair bit about currencies. So now let’s move onto a bit of Q&A. So just as an example, so I’ve got a UN pension, when I retire in Australia, is a UN pension taxable? I’m happy to address this one because I have a few UN clients.

Brett Evans:                        Yup. You’ve got quite a few UN clients, yeah.

James Ridley:                     Unfortunately, it is taxable in Australia. The ATO doesn’t provide any release. There was a court case that was released in 2015 about the taxation of UN pensions. So, unfortunately, it is. But one thing that you can do is that you can apply for a UPP. So that’s undeducted purchase price deduction. It might give you a 3% to 6% deduction of your annual income that you receive from that UN pension to try and reduce it a little bit, that way you’re not paying as much tax.

Brett Evans:                        Not much though. Yeah.

James Ridley:                     It’s not much at all, but it’s better than a kick in the teeth. Unfortunately, yes, it is taxable. I’ve only come across one sort of organisation in the world that is very likely to not have their pensions taxable, and that’s World Bank employees.

Brett Evans:                        Wow. Okay.

James Ridley:                     I know. I was shocked, actually.

Brett Evans:                        Let’s go join the World Bank.

James Ridley:                     I know. Again, there was a court case that was released, a case where the law said that World Bank’s pensions, they’re exempt from tax in Australia. And even if it’s from the US, the US actually, the IRS doesn’t even tax you on it.

Brett Evans:                        Wow. Okay.

James Ridley:                     When I read that, I was shocked. If the IRS does try and tax you, you can actually apply for a tax supplement from the World Bank, and they’ll pay the tax on your behalf. So each jurisdiction is obviously different. But the way it’s treated in Australia at the moment is completely tax-exempt for World Bank employees, but in terms of UN pensions, no.

Brett Evans:                        I’ve gotta say though, the UN pension is a pretty good one. If you make those milestone marks, yeah, I think I’d go live in a tent in Africa and work for a while there to get some of those pensions.

James Ridley:                     Well, I mean, it’s guaranteed for the rest of your life. So you can either cash out, and then cash out value is usually quite good, or you can have a guaranteed annual payment made to you. You can even peg it to the US dollar or your local currency. Yeah. Again, depending on how many years you worked for them, it depends. But it can be comfortably over $50,000 Australian each year.

Brett Evans:                        Yup.

James Ridley:                     You’ve also got to weigh the tax out of that. But it’s a small cost to pay for a guaranteed pension for the rest of your life.

Brett Evans:                        Well, it’s an annuity, isn’t it?

James Ridley:                     Yeah, it is. And then there’s even a benefit of when you pass away, your beneficiary can receive that for another 10 years.

Brett Evans:                        Wow. Okay. I didn’t know that, okay. Yeah, that’s good.

James Ridley:                     So they take care of you. The UN definitely takes care of you.

Brett Evans:                        Yeah.

James Ridley:                     But we’re not promoting to go and work for the UN.

Brett Evans:                        No. That’s right, no.

James Ridley:                     Obviously we’re not.

Brett Evans:                        I will. See you later.

James Ridley:                     The retirement benefits are there, if you’re happy working for them 10 plus years. So that’s on the UN pension side. Another question, Brett, I throw it out to you. I have an investment property in Vietnam, which I’ve recently purchased. I’m living in actually Italy, I’m a non-resident of Australia. I only recently purchased a property. Does the ATO need to know about this investment property?

Brett Evans:                        No.

James Ridley:                     And why is that?

Brett Evans:                        Because you’re a tax resident in Italy, and that’s where it comes down to. So, like we’ve always said in episodes one, two, three, and now four, domicile, domicile, domicile.

James Ridley:                     That’s right.

Brett Evans:                        Obviously, you’ll have to deal with that with the Italian tax authorities. But as far as the ATO’s concerned, it’s only when you step back in their sandpit, so to speak, and you’re back in Australia as a permanent resident and established residence do your worldwide assets become assessable?

James Ridley:                     Yeah, okay. I mean, you don’t need to alert the ATO about it until you return as Australian tax resident.

Brett Evans:                        That’s right. And that will just be something very simple as when you do your first tax return back in Australia. You just say, “Hey guys, I’ve got this. I’m getting this rental income,” or if it’s a capital event because you sold it, you got to declare that as well too.

James Ridley:                     Yep. Easy. Okay. So pretty straightforward there. And then just the last one regarding an expat living in Denmark. So it looks like they might have read an old article that we wrote. “I’m an expat living in Denmark. I’m just wondering if there’s any particular investments I need to be aware of. I remember reading something on your blog a long time ago.”

Brett Evans:                        Yeah. Now this is an interesting one because I haven’t actually found any other countries that do this. And there probably are. But Denmark’s probably got the worst rule, and they are looking at changing it. But essentially what it means is, if you own an Australian or any international ETF as a resident of Denmark, then you’ll get taxed on what they call a mark to market basis.

So if you bought an exchange traded fund that matches the ASX 200, the S&P 500, it doesn’t matter what it is, as long as it’s not listed in Denmark, you bought it for $1 and went great guns on the first of January, by the end of the year, it was worth $2, but you didn’t sell it. The Danish tax authorities will actually tax you on that capital gain, even though you haven’t realised it.

James Ridley:                     Wow. Okay.

Brett Evans:                        So…

James Ridley:                     So taxation of unrealized gains.

Brett Evans:                        Yeah, that’s right. So it’s called a mark to market. They go, “Alrighty. Oh, what’s the value on the 31st of December? Ping.”

James Ridley:                     Yeah. I mean, I know we’re not obviously Denmark taxation specialists.

Brett Evans:                        No.

James Ridley:                     But I wonder what happens if you make capital loss, whether that can be used to offset other capital gains or unrealized gains, technically. And whether you did… Actually, you probably wouldn’t get a carry-on forward because it’s year-to-year, mark to market.

Brett Evans:                        That’s right. Exactly.

James Ridley:                     Yeah. Okay.

Brett Evans:                        Yeah. So you’ve hit the nails. But to say that you hit the nail on the head, it’s from 1 Jan to 31 December. What happens in that period?

James Ridley:                     It gets taxed.

Brett Evans:                        It gets taxed. I mean, we’re sort of fortunate where our clients haven’t had losses, they’ve actually had gains, so we’ve had to pay a bit of tax. But it’s something that just goes to show the nuances of different countries. And expats, Australian expats do move around quite a bit, so their portfolio that they held in Australia, may not suit them in Denmark.

James Ridley:                     Yeah.

Brett Evans:                        If you had an ETF portfolio in Australia, move to Hong Kong, once again, deemed disposal. Don’t forget one, guys, from last week, deemed disposal. And then maintain that portfolio, great guns. If you then move from Hong Kong to say, the United States or Denmark, it’s the worst thing you can hold.

James Ridley:                     It is. You’re right. I’m glad you dropped the US there as well.

Brett Evans:                        Yeah. Because with ETF, they’re PFIC’s.

James Ridley:                     Yeah, that’s right.

Brett Evans:                        Then that’s where we always talk to clients and certainly try and educate expats. Just because you’ve moved from country to country, doesn’t mean it’s the same system.

James Ridley:                     Yeah, that’s right.

Brett Evans:                        I mean, certainly languages are different, and the way things are different, but your personal circumstances can change quite a fair bit all depending on what country you’re moving to, or from.

James Ridley:                     Yeah. And how taxation arises. I know in Switzerland, they’ve got that annual wealth tax, something like 0.5% to 1.5% on your total wealth, which seems ridiculous. I mean, it’s a small percentage but if you’ve got quite a large portfolio you’re paying a fair bit in tax just on the balance of it, not actually on the growth, just the balance.

Brett Evans:                        Yeah. That’s right. Exactly. It’s worth X amount, there you go, well, there’s a tax bill.

James Ridley:                     Yeah. Exactly right. Okay. So taxation does arise every year, mark to market election, capital gain, or unrealized capital gains, ETFs. I mean, I imagine ETF rule probably manage fund rule as well.

Brett Evans:                        Yes.

James Ridley:                     I reckon it would probably say in their legislation, “foreign mutual funds.”

Brett Evans:                        It’s actually ETF. They specifically refer to ETF, but then when you read the legislation, it does extend to managed funds as well too. So it’s actually… who knows? The local ETF startup businesses probably lobbied Copenhagen to try and, you know?

James Ridley:                     That’s a very good point, yeah.

Brett Evans:                        To say, “Guys, let’s get everyone out. Let’s focus on.

James Ridley:                     Let’s get everyone investing in us. Not overseas

Brett Evans:                        Exactly. But yeah what it’s actually meant, is no one’s invested in any of those things. So instead of investing in an ETF, they’ve walked BHP, Telstra, and Wesfarmers. So it still doesn’t fix the same.

James Ridley:                     No. Some people would just choose to invest in new blue chips.

Brett Evans:                        Well, look, there’s a reason why they’re investing in Australia, because they want to invest in Australia. If they want to invest in Denmark, they would invest in  Denmark anyway.

James Ridley:                     Yeah, exactly. I mean, when people are doing that, they know the companies they’re buying. That’s why they’re sending money back home.

Brett Evans:                        Bingo.

James Ridley:                     They understand their own business, so they understand the market itself. Whereas they don’t know these ETFs or managed funds that they’re buying in the local jurisdiction, that can be anything.

Brett Evans:                        Yeah. That’s right.

James Ridley:                     Yeah. Exactly right. Well, Brett, that’s all I have to run through today. That’s the Q&A.

Brett Evans:                        Okay. Fantastic. Well, hopefully, guys, you got a bit of value out of that. Certainly, we appreciate everyone’s feedback. We’re watching the numbers, they’re going up, so thank you very much. But once again, we’d sincerely appreciate, if you’re watching on YouTube, subscribe, give us a comment below, hit the bell so you know when the new episode’s coming out. For those on the podcast, look, it’d mean the world to us if you subscribe and gives us a rating, and most importantly, give us feedback. Regardless what the feedback says, I mean, we obviously like it to be good, but we’re sitting here speaking, thinking we know what you guys need to hear. But if we don’t hear back from you guys, then we’ll just keep doing this.

James Ridley:                     Yeah, exactly right.

Brett Evans:                        Even if it’s to say just a thumbs up. Yeah, that’d make our day.

James Ridley:                     Well, it’s going to let us know that we’re talking about the right things, we’re interested in the right topics.

Brett Evans:                        Bingo.

James Ridley:                     I mean, you know that we’re talking mainly financial, but there might be something outside of the financial world that we’re not touching base on that you want us to touch base on. I mean, Brett’s got a huge background of being an expat, so he’s always happy sharing his two cents.

Brett Evans:                        Yep, five cents.

James Ridley:                     Five cents, maybe 10.

Brett Evans:                        Yeah. A dollar already, after tax.

James Ridley:                     Yeah. That’s right. All right. Well, okay, thanks for your time today, Brett, it’s been great.

Brett Evans:                        Thanks, James. We look forward to talking to you guys on Episode Five of Expat Chat.

James Ridley:                     Speak to you soon.

Brett Evans:                        Take care.

Like this article?

Share on facebook
Share on Facebook
Share on twitter
Share on Twitter
Share on linkedin
Share on Linkdin
Share on pinterest
Share on Pinterest

Leave a Comment

Your email address will not be published. Required fields are marked *

Sign up to receive news & financial tips directly