Expat’s Guide to Superannuation vs Direct Shares in Australia

Expat’s Guide to Superannuation vs. Direct Shares in Australia – As Australian expats, diving into work and embracing the expat lifestyle in a post-COVID-19 era, it becomes crucial to grasp the nuances of financial options available for wealth growth.

Especially for those of us eyeing a potential return to the Australian shores, it’s imperative to align a substantial part of our assets with our native currency.

This strategy mitigates the long-term foreign currency risk, steering us away from erratic transfers of surplus earnings to Australia.

Here are some common avenues expats often consider:

  1. Reducing the outstanding amount on a primary residence’s mortgage or an investment property.
  2. Parking funds in a cash offset account, thereby diminishing interest expenses.
  3. Settling personal debts, encompassing credit cards or personal loans.
  4. Allocating funds to a direct share portfolio.
  5. Injecting funds into superannuation.

What ties these options together is the intent behind them: providing a purpose to the savings or surplus, aiming continuously towards wealth accumulation.


Superannuation vs. Direct Shares: Tax Implications for Expats


When an expat looks at the tax implications of Superannuation and shares in Australia, it’s essential to weigh the pros and cons tethered to each investment pathway.


Superannuation Tax Benefits:


  • From a taxation standpoint, funds channelled into superannuation attract a capped rate of 15% on investment profits.
  • If your super fund permits investments in direct shares, the long-term capital gains tax rate is set at a mere 10%. Here, ‘long-term’ signifies investments retained beyond a 12-month period.
  • Super funds are privileged to avail tax credit refunds. For instance, if your super fund predominantly invests in ASX bluechips (known for paying fully franked dividends), it can potentially bag a tax refund up to 15%. This is attributed to the franking credit refund principle, emanating from the disparity between the corporate tax rate (30%) and the 15% tax rate applied to such incomes within super. It’s a mechanism widely favoured by pensioners and retirees.


Direct Shares Tax Treatment for Non-resident Australians:


  • If the share portfolio initiation occurs post the expat’s departure from Australia, the Australian Tax Office (ATO) regards it as a non-Taxable Australian Real Property asset (non-TARP). This categorisation exempts any capital appreciation from ATO tax, ensuring tax-free capital gains for expats.
  • While the growth perspective appears tax-efficient, dividend reception by expats undergoes a different tax treatment. A prevalent misconception among expats is the obligation to pay the non-resident (foreign resident) tax on dividends.
  • However, being derived from a Non-TARP source, the focal point remains the share registry’s withholding tax extraction, which hinges on the double taxation agreement (DTA) in effect. Absence of a DTA necessitates a 30% withholding rate. Some DTAs might stipulate a mere 15% withholding rate. Yet, expats are able to utilise any applicable franking credit to offset the withholding tax on the specific dividend that the franking credit is attached to.


Australian Expats: Superannuation or Shares?


In summary, while Superannuation offers concessional taxation on both income and capital gains (with possible franking credit refunds), direct shares provide capital gains tax exemption with potential tax exemptions on income through withholding tax or franking credits.

However, the primary distinction lies in liquidity. Direct shares ensure easy access to invested funds, while accessing Superannuation demands satisfying specific conditions, such as demonstrating financial duress or reaching the preservation age post-retirement.

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