Getting an overseas posting is an exciting time – but it is essential for anyone in this position to ensure their personal finances are ship-shape. Because unless you understand where you will be paying tax and how your retirement savings should be managed during an overseas assignment, you could end up paying far more tax than is necessary.
The major issue is whether an expat working overseas remains an Australian tax resident or becomes a non-resident.
“There are many factors to consider, but as a rule of thumb, someone going on a short-term secondment of between six and 12 months or less would be treated as a resident. While someone moving overseas for three years or more, with no fixed return date, is more likely to experience a change in tax residency,” says Peter Bembrick, taxation services partner with HLB Mann Judd.
Bembrick says periods in between can be a grey area. So, it is important to give a lot of thought to this issue before moving overseas, or if the original time frame changes, as to the potential tax implications of a change in residency.
Interest income issues
“Residents working overseas, however, continue to report and pay tax on Australian interest income as normal, although if they also pay tax on the income in the foreign country they should also make sure they claim a foreign tax credit in one country or the other,” Bembrick says.
The same consideration applies for unfranked dividends, although the withholding tax rate for non-residents can vary from 5 to 30 per cent, depending if the executive is working in a country with which Australia has a double tax agreement.
He says the net rent received by a non-resident from an Australian investment property will generally be taxed in both countries, with the higher taxing country allowing a credit for any taxes paid in the lower taxing country.
“There is a general exemption for non-residents from reporting and paying Australian tax on foreign-sourced investment income,” Bembrick says.
Capital gains tax rules are also quite different for residents and non-residents. First, when there is a change in tax residency, only Australian real property stays in the Australian CGT system, with all other assets deemed to be sold for their market value at the date of the change, triggering a capital gains or loss.
“This is unless a choice is made to defer the taxing point until actual sale, in which case the final taxable capital gain could potentially be larger. This can require a significant amount of careful planning, and an element of guesswork as to the likely direction and extent of future asset value movements,” Bembrick says.
Another issue for expats is that since May 8, 2012, the 50 per cent CGT discount has not been available to non-residents.
“Only a partial discount is allowed for expats who owned an asset when they left Australia, which depends on the number of days during which they were a non-resident as a proportion of the total days owned,” he says, adding there are further complications for assets already owned at May 8, 2012.
James Ridley, a financial planner with Atlas Wealth Management, urges executives moving overseas to structure their SMSF properly and apply a level of scepticism to any expensive offshore investment products sold by overseas financial advisers.
Ridley recommends that, when negotiating pay, executives try to ensure as many expenses as possible are included in their total package, rather than being paid a flat amount. “These items could include housing, schooling and health care.”
Another consideration is what to do with the family home. In the 2017 budget, the Coalition government proposed scrapping the main residence exemption for non-residents including expats.
Expats who were already overseas on that date have until June 30, 2019 to decide whether to sell and take advantage of the main residence exemption. This legislation is due to go before the Senate in June.
In terms of the best way to maximise your financial position as an expat, Ridley’s advice is do not get swept up by the lifestyle.
“The opportunity to take more overseas holidays, hire domestic help and live in a nicer place will become very appealing. But you need to remember that you may not have the benefit of your employer putting away 9.5 per cent of your salary in super savings every year. So, start budgeting and putting away excess cash before your lifestyle adjusts to your new salary.”