How Should An Australian Expat in the UAE Invest Their Wealth?
How Should An Australian Expat in the UAE Invest their Wealth? – A few months ago we wrote about how to structure yourself financially as an Australian expat in the UAE and spoke of the ‘3 pots’ guide of your expenses pot, emergency pot and investment pot. Since then we wrote a follow up article specifically on the ‘Expenses Pot’ and how an Australian expat in the UAE should manage their expenses, as well as on the ‘Emergency Pot’ and how an Expat should manage their Emergency Funds.
As previously discussed, there is no right of survivor-ship in the UAE meaning assets are not passed to the surviving spouse. Instead, assets of a deceased person will be distributed as per sharia law which favours male relatives.
Additionally, local accounts may be frozen if you are called to a court order or change employers.
As the final installment of this series, we will talk more about the “Investment Pot” specifically.
The Investment Pot
Invest everything above the 3 months wages / 6 months expenses in the Emergency Pot
As we described in a previous Blog post, we recommend keeping a maximum amount of funds of 1.5 months of your expenses in your UAE current account due to the issues mentioned above.
Additionally, as described in our last blog post, you should maintain an Emergency fund of either 3 month’s wages or 6 month’s expenses (whichever is higher). Anything over and above this should be invested to maximize your return on investment and ‘inflation proof’ your wealth.
Australian expats may choose to invest their excess wealth in some of the below options:
- Purchase Australian Property
- Clear the mortgage on existing Australian Property
- International Property
- Share Portfolio
The first home buyer’s grant and negative gearing are just some of the many reasons why property is an attractive and tax efficient investment for Australian Residents. Buying property as a Non-resident however, presents a different proposition:
- Mortgage lenders will only allow for a minimum 30% deposit (instead of the usual 20% for residents). Additionally the interest rate on a Non-resident mortgage is usually 0.5 to 1% higher than a normal mortgage
- Non-residents are not eligible for the tax free threshold and are subjected to higher rates of Tax. The first $90,000 of income is subject to 32.5% tax. $90,001 to $180,000 of income is taxed at 37%, and $180,001 of income or above is subject to 45% tax.
- For most expats, any rental income losses (i.e. the rent is less than the interest repayment) cannot be used to offset salary income given there isn’t anything to offset. These losses however, may be carried forward to future tax years. For instance, if you were accruing a $10,000 loss per year whilst living abroad and then were to return home 10 years later, a $100,000 income loss could be used to offset your salary the year you returned home. (Note – this may change with Labor’s proposed changes to negative gearing)
- Ineligible for first home buyer’s grant given you must live in the property for a minimum of 6 months after completion
- For Australian property under contracts entered into from 1 July 2016 where the seller of these Australian assets is deemed a foreign resident, the buyer must pay 12.5% (10% for contracts entered into from 1/7/2016 to 1/7/2017) of the purchase price to the ATO as a foreign resident capital gains withholding payment. This only applies for property with a market value of at least $750,000 ($2mil for contracts entered into between 1/7/16 and 1/7/2017) and which is being sold by a seller who is classified as a non-resident of Australia.
- There is no CGT discount for non-residents as of May 8 2012. Eligibility in relation to existing assets is based on a formula which takes into account the number of days a taxpayer was resident or non-resident from that date, on a pro-rating basis.
- On 9th May 2019, the federal government announced a proposal to remove the 6 yr CGT exemption on the sale of a principal place of residence for expats with properties purchased after 9th May 2017. For existing properties purchased before 9th May 2019, the removal of the exemption will be grandfathered til 30th June 2019. The cost base for establishing the capital gain is to be backdated til the time of initial purchase also. This is a bill at the moment however with the deadline fast approaching it looks likely that this bill will take effect in its current form.
Clearing your Australian Mortgage
While this may be a viable strategy as an Australian resident, any net rental income (that is rent received over and above the interest payment) is taxable at the Non-resident marginal tax rate which starts at 32.5% with no tax free threshold.
Simultaneously, the greater the property is negatively geared, the greater the income losses that can be passed forward into future years when you return home to Australia. Paying down your mortgage meanwhile will see a guaranteed ‘return’ of whatever the interest rate on the loan is.
For instance, if your interest rate is 4%, then that is your rate of return, or so one would assume. Recently we had this very debate with an Australian expat friend of ours and we pointed out to him that if his interest rate is 4% and his property is already neutral or positively geared, then paying down the mortgage only represents a return of 2.7% as 32.5% of the 4% is lost to non-resident tax (4 – 32.5% = 2.7).
In contrast, the ASX200 has averaged returns of 6.69% annually over the last 10 years. For those not looking to return home at all, a neutrally geared property may be the right option given the tax benefit of any loss on the property cannot be realized in the future.
Many nations are comparatively lenient tax wise on foreign owners compared to Australia. The UK for example, does not have a separate set of income tax rates for foreign owners and its CGT rate is a flat 18% (or 28% for income earners over £46,350). Germany meanwhile, waives CGT for property held longer than 10 years. If you are returning to Australia however, and have purchased International property, the income will be assessable for tax in both in Australia and the country that the property is held. If there is a double taxation treaty in place, the tax already paid in the foreign country may be claimed as a tax credit on your Australian tax return, with any difference being taxable. This applies to both capital gains and income. Furthermore foreign property is ineligible for the 50% CGT discount regardless of residency.
Shares and Listed Assets
Unlike Australian property, Australian shares and listed assets are not assessable for CGT if held whilst you are a non-resident. Dividends meanwhile are subjected to a 30% withholding tax, or 15% if you are resident of a country that has a double taxation treaty with Australia.
For your knowledge, the UAE does not have a double a double taxation treaty with Australia. However, if your shares provide a full franked dividend then a 30% franking credit can be claimed offsetting the withholding tax in this case.
Investing excess wealth into a share portfolio, whether as regular amounts or lumps sum, before then transferring the accrued wealth into property upon return to Australia, is a favored option for many informed expat Australians due the tax considerations outlined.
General advice warning. The information on this site is of a general nature. It does not take your specific needs or circumstances into consideration, so you should look at your own financial position, objectives and requirements and seek financial advice before making any financial decisions.