Get Personal Finance in Order Before Overseas Posting
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.
“For non-residents, their salary and wages will be taxed only in the overseas country and do not have to be reported to the Australian Taxation Office,” he says. “For tax residents working overseas, however, any salary and wages must be reported and taxed in Australia. Where applicable, a credit can be claimed for any foreign tax paid on this income to ensure it is not double taxed.”
Non-residents are only subject to withholding tax on Australian-sourced interest received, generally at the rate of 10 per cent, which can be claimed as a credit against tax on the interest in the foreign country.
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.
“For franked dividends, no withholding tax is payable by non-residents, but you may instead be taxed in the foreign country, with no ability to claim any of the franking credits attached to the dividend,” Bembrick says.
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 accepting an overseas posting to structure their SMSF properly and apply a level of scepticism to any expensive offshore investment products sold by overseas financial advisers.
“Also, beware of currency risk. If you are holding all of your assets in a foreign currency and that currency falls when it is time to come home, you could be in for a nasty surprise.
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.
“What this means is that if you became an expat after May 9, 2017 and were to sell your former principal place of residence while overseas, then you may have to pay capital gains tax on the total gain of the property, including the time that you lived in it,” says Ridley.
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.”
The article Get personal finance in order before overseas posting originally appeared as part of a interview with the Australian Financial Review.