Five Financial Pitfalls Expats Should Try to Avoid When Returning to Australia

Australia is currently in the midst of an unprecedented influx of expats returning home from Hong Kong. Driven by a combination of factors such as an increasingly authoritarian rule, China’s harsh zero COVID policy, and tight border rules alongside general geo-political tensions, many Australians are eager to return before Christmas.

However, according to Richard Marsden, Director at MGD Wealth, this rush to repatriate is proving costly when individuals return to Australia without the right advice.

“Repatriation can often be an emotional process, and we appreciate that people can be in a rush to return home, however without forward planning, individuals can lose thousands of dollars in tax and lost opportunities for better wealth outcomes.”

So, what are the five financial pitfalls Australian expats should try to avoid when returning to Australia?

According to Richard, the five potential (and costly) mistakes expats should be aware of when repatriating are tax residency timing, superannuation contributions and structure, currency management, timing the purchase of a new home, and wealth protection.

When it comes to tax residency timing, Richard explains “The timing of the return to Australia, in conjunction with proactive tax planning, will determine when returning expats will once again become subject to income tax (which can be up to 45% plus 2% Medicare Levy) as well as capital gains tax (CGT) on worldwide income and assets.”

It is also critical to know that upon resuming tax residency status, returning expats are once again eligible for the CGT discount on assets held for more than one year. Many expats don’t realise that since 8 May 2012, you have to include 100% of a gain on taxable Australian property, and you only get to discount this gain to 50% for the period before 8 May 2012 and after your resumption of tax residency.”

The second potential pitfall for Aussie expats returning from Hong Kong revolves around superannuation structure and contributions. Often, expats have failed to build Australian superannuation while overseas and do not understand how to take advantage of tax deductions both before and after they repatriate.

Richard adds, “It is also imperative that returning expats determine whether the retirement scheme or provident fund that is part of their employment overseas is recognised by the ATO as a Foreign Superannuation Fund, as this will have significant tax consequences and affect the strategy and timing options used to bring this capital back to Australia.” 

The third potential pitfall for repatriating Australians is not proactively managing their currency in advance. 

Richard elaborates, “It is astute for those repatriating to plan ahead to reduce the risk of unfavourable currency movements. This can be achieved by building a portfolio of AUD assets over time to reduce currency risk, such as an Australian bank account, Australian property, shares, superannuation, or currency ETFs.”

Conversely, expats may need to understand that after resuming Australian tax residency, increases in the value of foreign currency are taxable with a limited exception. Therefore, if the expat has a strong view on the direction of currency, there is more than just the one way of expressing that view by holding on to foreign currency and paying tax on gains. Currency views can also be proactively expressed through Australian structures where tax can be reduced. As with all finance-centric matters, forward planning before they fly home is key.

The fourth potential pitfall Australian expats need to plan ahead for is timing the purchase of their home. 

Richard clarifies, “There is no doubt that the home buyer landscape has changed over recent years for non-residents. Nowadays, home buyers need to take into account additional stamp duty and land tax (both of which are applicable in most states), and increasingly tight bank lending rules. Given the scope of changes, and the fact that the timing of when a returning expat buys property will determine how much tax they may pay in the future, it is vital to seek tax planning advice before they return home.”

The fifth and final pitfall is wealth protection. After many years outside Australia, returning expats may now have too little or too much life insurance and are perhaps paying unnecessary premiums embedded in old superannuation accounts. Reviewing their insurance options and estate planning prior to repatriation will ensure they have access to the most current and suitable products for their circumstances.

Seeking the right advice prior to returning to Australia is essential to avoid these five costly mistakes that are made all too frequently in the rush to return home. Without astute forward planning, returning expats can lose thousands of dollars in tax and lost opportunities for optimal wealth outcomes to these mistakes, therefore it is imperative to plan ahead to ensure the repatriation experience is as smooth as possible.

END

Any advice included in this communication is general and has been prepared without taking into account your objectives, financial situation or needs. As such, you should consider its appropriateness having regards to these factors before acting on it. Any tax information refers to current laws, is not based on your unique circumstances and should not be relied on as tax advice. Before you make any decision about whether to acquire a certain financial product, you should obtain and read the relevant product disclosure statement.