Determining where to build your assets and invest your money is a key decision for any expat. For Aussies living in the US, currency fluctuations and tax implications can have a big impact on your return and can determine whether you achieve your financial goals.
Here are our tips for navigating asset accumulation and investments for Australians living in the US.
Plan for currency fluctuation
Currency markets are incredibly volatile, and there are lots of different factors at play, so speculating on future direction can be both difficult and dangerous. Transferring large sums at the wrong time can severely erode your capital, so putting a strategy in place to manage the transfer of assets across borders from the outset is a good idea.
If you are earning income in the US, but intend to move home in the future, transferring smaller amounts of cash home on a regular basis can be an effective strategy to minimise the impact of fluctuations. On average, you’ll get a fairly steady exchange rate over time, and avoid putting yourself in the position where you need to make a lump sum transfer at a particular time, leaving your return at the mercy of currency markets.
If at some point you know you will need to transfer a lump sum, plan for it early, making sure you understand the potential impact of currency fluctuations and leave yourself a window of time to make the move to get the best possible rate.
Build assets where you intend to use them
For most of us, investment is about funding our future goals, such as retirement, supporting loved ones, or leaving a legacy. It’s best to slowly build your assets in the location you intend to use them to reduce future risks.
If you intend to retire at home in Australia, it’s best to build the assets you plan to use to fund your retirement here. If you hold all of your retirement assets in a foreign country, you will constantly need to convert cash to meet your expenditure needs. So, alongside market ups-and-downs, you’ll need to navigate currency fluctuation, which can greatly vary your return and erode your retirement funds.
Consider taxes now and on eventual sale
The tax implications of your investments, both as you hold them and when you sell, will greatly impact your return. If you’re holding Australian investments while living in the US, this can be a minefield, and the implications can vary widely based on the type of assets you hold:
Property
If you’re a non-resident for Australian tax purposes, you won’t receive the 50% capital gains tax discount on your Australian investment property for any gains accumulated from 8 May 2012 until you become an Australian tax resident again.
So, the lowest capital gains tax rate on your investment property whilst you’re overseas is 32.5% and can be as high as 45%. You will also pay Australian income tax on rental income at between 32.5% to 45%.
Shares
Capital gains on Australian shares are typically capital gains tax free in Australia whilst you’re a non-resident for Australian taxes. For Australian tax purposes, you will likely be deemed to have purchased the shares on the day you become an Australian tax resident again. Depending on the specific circumstances, there is a chance that you won’t pay US capital gains tax for the shares you hold when you leave the US tax system. Dividends will be taxed at between 0%-15% in Australia.
However, be aware that if you’re a US tax payer and hold any non-US managed funds, ETFs, retail property trusts, listed investment companies or any other non-direct investment there will likely be harsh tax consequences on your US tax returns.
These will be deemed Passive Foreign Investment Companies (PFICs), potentially incurring penalty tax rates (up to 39.6% on the income and unrealised growth each year) and onerous reporting requirements on US tax returns.
A common strategy I deploy for my clients, and one worth considering if you are in this position, is investing in a direct share portfolio in Australia that avoids the PFIC US tax treatment, whilst still enjoying the low tax treatment in Australia. Before you use this strategy, you need to make sure you understand the PFIC rules or seek some professional assistance.
Retirement savings
Retirement savings is a complex area for Australians living in the US. Whilst there may be some advantages to building your retirement assets while you’re in the US, note that if you draw down your US pensions when you’re an Australian tax resident, any earnings that have accumulated within the fund will be taxed as income on your Australian tax return. This is regardless of whether you were an Australian tax resident when you accrued the US retirement accounts.
Contributions to your superannuation fund whilst you’re a US taxpayer can alter the US tax treatment of superannuation, so care needs to be taken with any superannuation strategy. Building a retirement strategy for an Aussie in the US can be complex, how you go about doing this will depend on a number of factors, so it is well worth seeking expert advice.
Seek advice from experts who understand both locations.
Always choose an accountant who understands both jurisdictions to look after your tax filing and provide taxation advice. To put yourself in the best position to achieve your financial goals, it is also beneficial to partner with a financial planner who has a good understanding of tax issues for Aussies in the US.
If you are an Australian living in the US and want advice to get or keep your finances on track, get in touch to start the discussion.
General Advice warning
The information provided in this blog does not constitute financial product advice. The information is of a general nature only and does not take into account your individual objectives, financial situation or needs. It should not be used, relied upon, or treated as a substitute for specific professional advice. Apt Wealth Partners (AFSL and ACL 436121 ABN 49 159 583 847) and Apt Wealth Home Loans (powered by Smartline ACL 385325) recommends that you obtain professional advice before making any decision in relation to your particular requirements or circumstances.
