The COVID-19 pandemic has caused significant disruption to economies and markets, with the flow-on effects impacting finances for many individuals. For those living overseas, it can be an even more stressful time; job and financial uncertainty is often tougher when we are away from home and our loved ones.
For US citizens living in Australia, this crisis presents some significant financial challenges, but also some potential opportunities. Here are a few tips for US citizens in Australia:
Make use of the strong US dollar
If you own US assets or you are earning US dollars at the moment, there is a silver lining. In times of economic uncertainty, the US Dollar typically strengthens, as investors traditionally flock to “safe haven” assets, like US currency.
The COVID-19 pandemic has been no different, with the US Dollar strengthening to its highest level against the Australian Dollar in seventeen years. For those planning to reside in Australia long-term, this may present a unique opportunity to convert your US dollars to Australian dollars at the current valuation.
If you are a US taxpayer, however, you should be aware of the potential tax implications of paying down your Australian debt. At the time of making a lump sum repayment, if the US Dollar value of your Australian loan is less than when you took it out, this will be perceived as a US Dollar “gain”, which may well be taxable on your US tax return.
Explore options for government assistance
The Australian Government has announced a number of measures to assist employees and employers through the COVID-19 crisis. Some government benefits have become easier to access for those who have arrived in Australia more recently. Government assistance measures you may wish to explore include the following:
Jobseeker Allowance for the unemployed. The “newly-arrived residents” waiting period has been removed to allow earlier access to the allowance for permanent residents.
Jobkeeper Allowance for employers who have seen a decline during COVID-19 to retain employees. The allowance consists of a wage subsidy of $1,500 per fortnight, per eligible employee. To be eligible, employees must be permanent residents or citizens.
Early access to superannuation – You may be eligible to access up to $10,000 of your superannuation early, under certain conditions.
However, please be aware that while there will be no tax applied to the payment in Australia, drawdown from your superannuation is likely to be a taxable event on your US tax return.
Also, should you hold insurance within your superannuation, full withdrawal of your fund or if your dropping the balance below $6,000 can result in cancellation of your insurance cover.
You may be eligible, if you are:
- Currently unemployed, or
- Entitled to receive job seeker, youth allowance for jobseekers, parenting, special benefit, or farm household allowance payments from Centrelink, or
After 1 January 2020 you:
- Were made redundant, or
- Had your working hours reduced by at least 20%, or
- Had your sole-trader business suspended or saw a reduction in turnover of 20% or more.
Maintain a Cash Reserve
Maintaining a cash reserve is always an important part of planning your finances, but it will take on extra significance in the weeks and months ahead. For those who have the ability, I typically suggest keeping 6 months’ worth of expenses in cash. If you don’t have this, it might be well worth thinking about how you can build even a small reserve, as having cash in the bank is vital during uncertain times.
It’s a good time to review your budget in detail and ensure you are across exactly where your money is going. You should consider reducing non-essential expenses where possible. This could include your subscription and streaming services, for example. There’s no denying that Netflix will become increasingly important but consider having only one subscription instead of many. With most sports across the US currently suspended, cancelling sport streaming subscriptions that are sitting idle is a good idea.
With extensive social restrictions in place, you may have an opportunity to save in areas such as entertainment, dining out, and travel. If you are in this position, make use of it, and ensure you are putting this money aside.
Don’t discount investing
The economic fallout from COVID-19 has caused equity markets to drop rapidly, with the ASX, Nasdaq and Dow Jones all falling between 25%-35% from their valuations reached in February 2020.
There are likely to be many ups and downs for share markets in the coming weeks and months, as the economic fallout from COVID-19 plays out. However, history shows that the point of maximum panic is often the point of maximum financial opportunity. For those who have a sound budget and funds above their safe cash reserve, this may be a good opportunity to acquire assets that are far cheaper than just two months ago.
There will be companies who will not survive this crisis, so right now, it’s crucial that you know exactly where your money is invested – not just the asset mix, but the actual companies. Larger companies with low debt and stable earnings are more likely to be able to absorb the economic fallout we are about to experience than smaller companies with high debt or unstable earnings.
Understand tax implications
Many may be thinking of taking advantage of the current USD/AUD exchange rate and investing in Australian assets, given the recent falls in asset prices. While this can present a unique opportunity, if you’re a US taxpayer, make sure you understand the US tax implications of investing outside the US.
Non-US managed funds (including Australian managed funds) held by an individual with a US tax obligation can have harsh consequences on your US tax returns. These will be deemed “Passive Foreign Investment Companies (PFICs)”, potentially incurring penalty tax rates and onerous reporting requirements on US tax returns.
The same treatment will likely apply to the following investments domiciled outside the US:
- Exchange Traded Funds (ETFs),
- Retail Property Trusts (such as AREITS),
- Listed Investment Companies (LICs)
- Stapled Securities.
Certain direct share investments held outside the US can avoid PFIC treatment; however, care needs to be taken to ensure that you fully understand PFICs before undertaking a direct share strategy.
Don’t go it alone
Seeking expert advice is recommended before making any financial move. As you can see from some of the above, even seemingly harmless acts like paying off your Australian debt or investing in an Australian Exchange Traded Fund (ETF) can have negative US tax consequences.
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 financial issues for US citizens living in Australia.
General Advice warning
The information provided on 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) recommends that you obtain professional advice before making any decision in relation to your particular requirements or circumstances.