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Investment for Expats in Australia

Submitted: August 2013

As in any country, expats should be concerned with beating inflation and tax to preserve the value of their savings. Tax is a matter of law, no matter the country you come from. A tax adviser may help you take the right decisions and mitigate your overall tax liability.

Regarding inflation, this is a personal matter, as you must determine for yourself which inflation you want to beat. If you are a long-term immigrant, you are likely to be concerned with Australian inflation. If you plan to return to your home country, you might prefer beating the inflation rate of that country.

Remember that you invest for a purpose, and that this purpose is specific to you. If the purpose of your savings and investments is 100% not Australian but you invest in any Australian dollar assets, you are effectively taking a currency bet.

Inflation in Australia

Inflation in Australia is subject to central bank monitoring, with an inflation target set between 2 and 3%. Inflation may be allowed to move temporarily outside of this range. For more information on monetary policy, see Foreign Exchange for Expats in Australia.

Savings Accounts

Easy-access savings accounts generally have an inflation-matching yield (2 to 3%), and they are subject to tax. However, higher yields are available on fixed-term savings accounts (3 to 4%), but you must expect to lock your savings for up to two years.

Australian Securities (Costs)

Do consider carefully the applicable transaction costs if you wish to trade Australian securities. Here are the main costs you should be aware of:

  • Broker’s commission fees
  • Minimum commission fees (these can go as high as A$20 per transaction)
  • Any other applicable fees that may be charged by your broker.

There is no financial transaction tax (FTT) in Australia. For an overview of the online stockbroker market in Australia, click here.

Australian Securities (Overview)

Be wary of volatility when you invest in securities. Volatility is heavily dependent on the underlying risk. However, higher risk normally means higher reward, and some securities may be low-risk. Additionally, stock market variations are very dependent on central bank interest rate variations or expectations. If interest rates are going down, stock prices should go up. See Foreign Exchange for Expats in Australia.

You can expect Australian securities to be high yield. This ranges from 2.5% on 2-year government bonds to above 10% on certain Australian shares (based on dividend yields).

You are responsible for deciding how much risk you want to take on. There is no set answer to this question, as this largely depends on your personal circumstances. A qualified wealth manager may assist you regarding this matter. See Wealth Management for Expats in Australia.

On the stock market, your emotions are your enemy. You must control them rather than let them control you. Do not, under any circumstances, let (natural) psychological factors make you take irrational decisions.

Overseas Investments Generally

If you wish to invest in overseas assets, there are a few points you need to check:

  • Financial transactions taxes
  • The Australian dividend imputation system (see below)
  • Inheritance tax considerations
  • Asset liquidity
  • Broker’s fees (pricing structures may vary greatly from one jurisdiction to another)
  • Foreign withholding or income taxes
  • Yields available on foreign investments
  • Your residence status for income tax purposes
  • Any foreign financial restrictions or barriers (including fees for international money transfers), and
  • Foreign currency exposure. See Foreign Exchange for Expats in Australia

Retaining overseas assets might be helpful if you plan to return to your home country.

Foreign Currency Investments

Expatriates may also consider buying foreign currency (FX) assets as a hedge against any further Australian dollar depreciation. FX markets are the most liquid markets in the world, and they are influenced by many macroeconomic variables. Foreign currency exposure is complex financial engineering, and you might wish to seek professional advice to help you take the right decisions. See Wealth Management for Expats in Australia.

Taxation

The first thing to do is to check your residence status, as investment income is likely to be tax-exempt if you have non-resident or temporary resident status.

Your tax residence is first determined by Australian domestic law as well as by the law of the country you come from, if applicable. If it results that you are a dual-resident, the tie-breaker rule of a tax treaty (article 4) may help you avoid double taxation. A list of tax treaties concluded by Australia is available here.

If you are resident in Australia for tax purposes, you should apply quickly for a Tax File Number (TFN). Otherwise, the payer of your investment income will be required to withhold tax at source at the highest marginal rate, i.e. 46.5% including Medicare Levy. The Medicare Levy is separate from Australian individual income tax, and it is very possible for an expat to be subject to income tax but not Medicare Levy. See HEALTHCARE – National Health Service for Expats in Australia.

In Australia, investment income is taxed as part of your general income, and the tax year is from 1 July to 30 June.

In 2013/2014, the income tax rates for residents (excluding Medicare Levy) are as follows:

Income (A$) Tax Rate (%)
Less than $18,200 0%
$18,201 to $37,000 19%
$37,001 to $80,000 32.5%
$80,001 to $180,000 37%
$180,001 and greater 45%

Capital gains accrued by residents on the sale of assets held for at least one year are 50% taxable. Portfolio capital gains derived by non-residents are tax-free. Non-residents are subject to a 10% withholding tax on Australian source interest, and to a 30% withholding tax on unfranked dividends.

Dividend Imputation System

The Australian dividend imputation system can be a problem for expatriates, as it may provide a strong disincentive from investing in foreign companies. Put simply, the imputation system involves ‘piercing the corporate veil’ to avoid economic double taxation. Thus, you can claim credit against your dividend tax for the company tax already paid by the company paying the dividends.

Your dividend is ‘franked’ if the paying company attaches a franking tax credit in respect of its 30% company tax already paid. If it fails to do so, your dividend is unfranked and no tax credit is available. In practice, your dividend may be partly franked. In any event, the paying company must send you a dividend statement to advise you of your franked and unfranked amounts. Franked dividends are grossed-up and taxable at the marginal rates. The franking tax credit offsets any resulting tax due. Unfranked dividends are taxable at the marginal rates outright.

Example

Annie invests in an Australian company. On 15 July 2013, she receives A$2,000 worth of dividends. Her dividend statement shows that her franked dividends are A$1,400 and her unfranked dividends are A$600. The franking tax credit attached to her franked dividends is A$600.

While filing her tax return, Annie will have to report A$2,600 in taxable dividends. As her taxable salary is A$100,000 and she is subject to the Medicare Levy, her marginal tax rate is 38.5%.

Consequently, her dividend tax is 0.385*2,600 - 600 = A$401. Effective tax rate: 20%.

Expatriates should know that only Australian and New Zealand companies qualify for the dividend imputation system. This means that dividends from foreign companies (other than New Zealand firms) are subject to much higher effective tax rates, as no franking tax credit is available. A foreign tax credit may still be available to relieve you from foreign withholding taxes.

 

 

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