Australian building costs moderate but expats shouldn't be taking the plunge yet - April 15, 2024
Corelogic has reported that dwelling approvals hitting a 12-year low in January, and that the growth in national construction costs continued to stabilise in the first quarter of 2024. But that is against the background of a 30-40% increase in construction costs since the Covid pandemic - so off a very high base. Does the relative "slowdown" mean that it's now time for expats to consider building in Australia – frankly no.
The reason we take that approach is encapsulated by this comment within CoreLogic's report, ".. the construction pipeline remains bloated, with ABS building activity data showing around 255,000 dwellings approved but not yet completed, which should help keep builders busy throughout 2024." Throughout Australia there is evidence of builders struggling to maintain schedules and timelines suffering enormously - with wide anecdotal evidence that quality is suffering.
By midway through this year builders should begin to see a "cliff" approaching and this should give individuals and families greater leverage both in terms of price and managing the quality of any build. We also believe it is abundantly obvious that increasing housing supply is not going to alleviate the housing crisis - measures will need to be put in place that reduce demand and that means significant and immediate restrictions on migration and international students. In reality building costs need to come down, not just plateau, in real terms - and that means less demand for trades labour.
If you still want to build it is absolutely crucial that you choose an experienced, well-qualified and financially secure builder. Ask for recent build examples and specific information regarding who provided the trade labour; carpentry, concreting, bricklaying, plumbing and electrical. Remember that contracting with a "national builder" doesn't necessarily provide you with security - you may be dealing with the franchisee - so you need to do your homework impeccably.
For background, a general comparison below of current building costs across all states and territories.
Australian Real Estate Property Prices continue to increase in March - April 2, 2024
CoreLogic’s national Home Value Index (HVI) rose 0.6% in March, up again from a similar 0.6% rise in February, with all of the capital cities recording a a lift in values over the month, except Darwin which fell -0.2% and a notable 0% rise in Melbourne.
The smaller Australian capital cities and particularly Perth have continued to outperform - leveraging their advantage in terms of lower housing prices and positive demographic shifts. The strongest gains are being experienced in the lower quartile of the market, despite the upper quartile leading the pace of capital gains for most of last year.
Note particularly that at least part of the price pressure being felt is a consequence of a lack of confidence in the residential construction industry - cost increases have have moderated but prolonged delays are rampant, quality is often questionable as builders "cut corners" and many builders are simply collapsing overnight. On the back of a migration surge Australia needs to build houses but the problems are currently almost insuperable.
Just to demonstrate just how significant the rise in values of the minor capitals has been over the last few years - see the chart illustrating median values below. This used to be a clear "two horse race" with Sydney and Melbourne significantly ahead in terms of values - it is now a "one horse race" with Sydney values far exceeding other capital cities, and Melbourne now eclipsed by Brisbane and Canberra and not far ahead of Adelaide and Perth. It is difficult to assess whether Melbourne's relative performance is structural or has been exacerbated by some recent, unfavourable tax changes.
And if you think that these sort of prolonged price increases could only happen in an economy brimming with confidence, you would be mistaken - consumer confidence survey suggest levels well below long term trends and just above the nadir of the Covid pandemic. Prices are fundamentally about migration driven demand and consumer sentiment suggests a societal divide between those experiencing the "wealth effect" of increasing asset prices, and those struggling to cope with both rising costs and evaporating rental accommodation. For this reason we believe the economy remains fragile and sensitive to internal or external shocks.
Sadly, Hong Kong is now just another Chinese city – March 25, 2024
Many long-term expatriates will have a soft spot for Hong Kong; for decades it had a unique buzz and vibrancy. Unfortunately, the PRC has not kept its commitment with respect to "one China, two systems" and the recent passage of "Article 23", expanding the national security legislation imposed by China in 2020, means that Hong Kong now needs to be considered as "just another Chinese city".
Our view is that individuals considering job offers or academic assignments in Hong Kong and China should, just as the PRC has done, put "security" first. The national security law in China and Hong Kong effectively have no limits - personal safety, private property rights and individual assets are not guaranteed - and, while individual risk profiles with differ, we see very few instances where the acceptance of a role in China and Hong Kong will be appropriate for Australian citizens and their families.
China has shown a propensity to use individuals for diplomatic leverage and experience shows that Australia and other nations have little or no leverage to assist citizens captured by the National Security system.
New Australian Tax Residency Rules - are we now looking at 2025? - March 21, 2024
We are still waiting for feedback on the the Australian Treasury Consultation paper on proposed New Tax Residency rules which was open to commentary until September 22, 2023. Given that we are in late March already, and the silence continues, there must be some chance, unless announcements are made very shortly, that it will be left to the Federal Budget which is due on May 14. If so, this raises the possibility/probability of a July 1, 2025 implementation date given the lack of time for debate, parliamentary due process and a dislike of retrospective tax legislation.
RBA maintains Cash rate at 3.45% - March 19, 2024
The RBA today, as expected, decided to maintain the cash rate at 3.45%, despite a markedly slowing economy, because although inflation appears to be moderating it is still considered "high" and the RBA believes it will only return to the target range of 2% to 3% during 2025. The cash rate remains the highest since November 2011 and flags that while some longer term fixed rate mortgages may begin to moderate, variable rates will probably remain largely unchanged for some time.
UK announces changes to non-domicile tax status - March 12, 2024
The UK government announced on March 7 that it would effectively scrap the non-domiciled tax status which allows people who live in the UK, but claim permanent residency elsewhere, to effectively avoid UK tax on income and capital gains, from April 5, 2025.
From April 6, 2025 there are a substantial number of changes that will take place and effectively make it less attractive for wealthy foreigners to remain resident in the UK on a long term basis - including Australian expats. We have provided a page summarising the "non-dom" tax changes which we will update as more information becomes available.
Increases to Superannuation Contribution Caps from 1 July, 2024 - February 24, 2024
From 1 July 2024 - concessional contribution will increase from $27,500 to $30,000 and the non-concessional contribution cap - which is four times the standard concessional contribution cap - will consequently increase from $110,000 to $120,000.
The Transfer Balance Cap will remain at $1.9M.
Australian Property – a "Buying Window" approaching? – February 8, 2024
The Australian economy is slowing sharply, as a consequence of higher interest rates and cost of living pressures, and the RBA is forecasting relatively lower rates of growth during the course of 2024. If you factor in historically high levels of migration, Australia is almost certainly in a per capita GDP recession.
In isolation, without migration and the attendant accommodation pressures, the economic fundamentals would see the real estate market under significant pressure, and we have already seen some price moderation in the two major capital cities, Sydney and Melbourne.
There is however every chance that we may see a sharper reduction in growth than expected of the RBA, leading to a reduction in interest rates in the latter half of this year, if perhaps a little earlier. If those circumstances eventuate, particularly given that real estate stock in the market has increased in almost all locations, then we may see a buying window develop. We don't forecast a significant fall, migration pressures are just too high.
For expats looking to return to Australia in the medium term, it may therefore be worthwhile keeping a particular eye on the market in the interim, and note that in almost all circumstances it is possible to arrange mortgage finance of up to 80% for expats if employed, rather than self employed - with no brokerage costs attaching.
We suggest that expats only purchase established property - embarking on a new build construction while living overseas is a high risk activity, particularly given that the building industry continues to be in significant disarray in Australia. Not just in terms of pricing, but in terms of the quality of the product delivered.
Changes to Stage 3 Tax Cuts - January 25, 2024
The Labor government has just announced that there will be a "recalibration" of the already legislated Stage 3 tax cuts scheduled to take effect from July 1, 2024.
Under the announced changes the proposed tax cut for those earning more than $200,000 will be halved from around $9000 to slightly more than $4500, in favour of all taxpayers receiving a cut, including lower wage earners receiving less than $45,000 per annum.
This will inevitably prompt a furious reaction from the Opposition, focusing on the Prime Minister having broken an election promise. Politically, however, Albanese will be fully aware of the fact that many more voters will benefit from these tax changes than was previously the case, and this will relieve some pressure on the Government over cost of living issues. The chart below illustrates the practical impact of both the "old" and "new" proposals.
Time to "press the pause button" on Migration and Foreign Housing Investment? - January 22, 2024
Australia is experiencing the largest immigration surge in its history - with the country likely to have received more than 600,000 new residents during the course of 2023. This has not caused the current accommodation crisis, but it has greatly exacerbated it, and will result in increasing pressure on the government to reduce migration levels. Current Australian expats should be largely shielded from any tightening of requirements since their main interface is with partner or family visas, but there can be unintended consequences.
Experiencing almost identical circumstances, the Canadian Government passed restrictions on the purchase of any residential property by foreign citizens for a two year period with effect from January 1, 2023 and has just followed up with measures introducing a 35% reduction in international student numbers, also for a two-year period. These are blunt measures which would be clearly unattractive to both sides of politics in Australia - both major parties are "addicted" to migration because it provides a (lazy) guarantee of economic growth each and every year.
Of course, migration doesn't guarantee an increase in GDP per capita, but both parties are more concerned with the ability to quote a simple total gross figure and avoid the possibility of a recession "on their watch". Corporate Australia likes migration for much the same (lazy) reasons, increasing sales and probably because it provides a dampener on real wages.
However, there is little indication that the accommodation crisis in Australia is coming to an end, and there is a growing feeling that Australia is simply hosting too many international students - undermining the quality of higher education and giving rise to Universities that now appear to be more like factories than "places of higher learning".
Consequently, a two-year interregnum on much the same basis as Canada, might provide the opportunity to better restructure both the provision of university education to international students - and any pathways that might provide to citizenship - and substantially improve the compliance mechanisms around foreign investment in residential accommodation, which are clearly wanting.
Mid-Year Economic and Fiscal Outlook (MYEFO) : Tax Changes - January 15, 2024
The MYEFO updates the economic and fiscal outlook from the 2023-24 Federal Budget. It takes into account the decisions made since the release of the Federal Budget, and revises the Budget aggregates.
The MYEFO, released in mid December 2023, contained a number of tax, superannuation and related policy announcements, some of which are of interest to expats and foreign investors, including
- increasing the foreign resident capital gains withholding (FRCGW) tax rate from 12.5 per cent to 15 per cent and reducing the withholding threshold from $750,000 to $0 from 1 January 2025.
- tripling foreign investment fees for foreign investors who apply to purchase established dwellings
- doubling vacancy fees for foreign investors who have purchased residential dwellings since 9 May 2017.
In terms of the latter two items, since the vacancy fee payable by foreign investors who do not make their Australian property available for accommodation is a function of the foreign investment fee paid - we are probably looking at an effective six fold increase in penalties payable by new investors.
In any event, compliance activity around foreign investment in Australian residential property and the policing of vacancies appears to have been non-existent to date - this should/will increase significantly with the government having budgeted for significant revenue in this area.
There may also be a significant legal problem forthcoming for both Federal and State governments. So far, the New South Wales government has taken the view that double tax treaties (DTT) between Australia and a number of countries - New Zealand, Finland, Germany, India, Japan, Switzerland, Norway and South Africa - effectively prohibits "discriminatory" stamp duty surcharges. This approach has not been adopted by other state governments, but if DTT's have precedence and the Government(s) can't discourage or control foreign residential investment through taxation, they may need to take the direct approach of simply banning foreign property buyers, like Canada. That may attract significant domestic support.
Large increase in Vacancy Fines for Foreign Investors in Australian property - December 11, 2023
We have flagged this move for a number of months elsewhere in the website but the Government has just indicated an intention to substantially increase the penalties applying to foreign investors leaving Australian properties vacant in 2024 - tripling fees for foreigners who buy existing property in Australia and doubling the charge for those who leave those dwellings vacant.
There is no draft legislation as yet, but since the vacancy charge depends on the fees paid to the FIRB for investment approval and these will triple while the vacancy charge doubles, the resultant effect could be a six fold increase in the penalties for leaving a property vacant. Compliance activities in this area will also be substantially increased with the Government providing additional funding to the ATO - the ATO having apparently only identified 23 breaches in the past financial year. This seems an extraordinarily low figure and foreign investors should presume that audit activities will be ramped up accordingly - the Government having identified the prospect of raising $500m over the next 4 years in fees.
Victorian Vacant Residential Land Tax (VRLT) Expansion - November 22, 2023
The Victorian Treasurer introduced significant property tax changes in October 2023, which look to extend the Vacant Residential Land Tax (VRLT) beyond the metropolitan Melbourne suburbs that were initially within the ambit of the tax to all vacant residential land across Victoria. The proposed annual tax is set at 1% of the capital improved value (CIV) of taxable land - which is significant.
Given the lack of accommodation across Australia, caused by a number of factors including record immigration, governments are obviously trying to ensure that they reduce the scope for accommodation to be left vacant - and of course it also opens the door for more fiscal income. We believe that there are a relatively large number of vacant properties that could be caught by these "vacancy taxes" - including the foreign owner's vacancy fee where we see little or no evidence of either foreign owners or their accountants being aware of or meeting their compliance requirements.
The Victorian Government has just announced today (28/11/23) that it had made other changes to the above Bill to secure Parliamentary support from the Greens to pass the Bill. Importantly, this included an increase to the VRLT rate for repeat and consecutive payers of the tax, from 1 per cent of capital improved value in the first year, to 2 per cent in the second year and 3 per cent in any further consecutive year beyond that. We will make more details available once the proposed legislative amendments are issued.
Australian House Price Forecasts - Crystal Ball Needed - October 27, 2023
You would think that very few organisations would be in a better position to forecast movements in Australian real estate prices than one of the four major banks. The fact that "grandstand seats" - and particularly access to finance approvals - still means woefully inaccurate forecasting, says a lot for the complexity of the market at the moment - just have a look at the recent changes in forecasts by the NAB Bank in the table below.
There are numerous competing factors - rising interest rates, record levels of migration, heightened building costs and builder bankruptcies leading to reduced levels of confidence and building starts despite the demand/supply gap, increasing Chinese participation in the residential market and a shortage of building trades combined with significant stock shortages in some markets - as individuals don't want to sell in the absence of having arranged accommodation elsewhere.
For what it's worth, our view on the ground is that something feels like is "going to break" - perhaps courtesy of another interest rate rise in early November. Certainly, record migration rates are a government "own goal" and either the government will need to move to manage this better, which means significant reductions in the short term, or they are going to pay at the next election. Strangely, this would be at the hands of LNP, who are the real architects of the migration boom, courtesy of past "policies".
The net effect of all this activity is to effectively disenfranchise Australia's younger generation - and that's not tolerable, economically or politically. Consequently, we think there some chance of policies being introduced in the short term which parallel those now in place in Canada - restricting the foreign purchase of residential property for two years.
Superannuation : Tax on Funds over $3M - October 12, 2023
In the early part of 2023, the government flagged an intention to introduce a new tax on superannuation funds where the balance exceeded $3 million. There is reasonably widespread support for limiting the balances in superannuation funds which are subject to tax relief - consistent with the view that super should be used for retirement rather than tax planning.
If legislation is passed it would introduce a new tax, known as a ‘division 296 tax’, with effect from July 1, 2025 which would give rise to an extra 15% tax on the earnings of super accounts over $3 million, proportionate to how much of their balances were over that threshold.
What is controversial about the proposals is that 1) it involves taxing unrealised gains within superannuation, and there is no intention at the moment to legislate any indexation of the $3 million amount - with the result that the number of funds caught within the ceiling will increase inevitably over time - and, 2) the relative complexity of the proposals.
What superannuation doesn't need, even though this is confined to a relatively small group of people who are probably already receiving professional tax advice, is added complexity - but it seems to be coming and expats with substantial super balances need to talk to their advisors about their options.
NSW State 2023-2024 Budget - Little of Impact to Expats - September 19, 2023
The NSW State Budget, brought down earlier this week, contained little of interest or impact to expats. It did offer an expanded first home buyers assistance scheme - with a stamp duty exemption for homes valued under $800,000 and a concessional rate for purchases between $800,000 and $1 million. This package targets 84 percent of first home buyers and is estimated to cost $691 million. However, the residence requirements typically disqualify expats unless they are permanently returning from overseas.
In an unrelated announcement, the Victorian government has indicated that it begin charging a 7.5% levy on revenue collected by short-stay accommodation providers such as Airbnb and Stayz from January 1, 2025, as part of a raft of housing measures.
Voting in the Voice Referendum - August 30, 2023
The Voice Referendum will be held on Saturday, October 14. Australian expatriates looking to vote should refer to the AEC page on Overseas Voting for further information.
New Tax Residency Rules - Consultation Paper - August 23, 2023
The Australian Treasury has now released a Consultation paper on proposed New Tax Residency rules with feedback required by September 22, 2023. Our initial reactions to the Consultation paper are as follows.
In general, we continue to believe that while there were obvious issues attaching to the determination of tax residency in Australia, they did not require wholesale change, and our concern is that the proposed changes were driven more by desire to cast the revenue net wider than they were about simplicity, clarity and reform. Although the original Board of Taxation (BoT) working group indicated that they had canvassed widely with a variety of stakeholders, the working group was dominated by tax professionals from the large accounting firms and representatives of Treasury and the ATO. This group is inherently likely to be more sensitive to the views of the ATO and large business groups than to individual expatriates.
It is also hard to accept protestations that the rules will be "revenue neutral", when statements have been made that the intention is to make "tax residency more adhesive".
However, a short number of specific comments:
- The Consultation paper, consistent with the original BoT proposal, includes an "overseas employment rule", indicating that an employment offer for a period "of more than two years" would be adequate to break tax residency once other requirements aresatisfied. In practice, a rule based on an employment contract of "two or more years" would be (much) preferable. Importantly, however, we also presume - although there is no direct statement to this effect - that this means we would no longer have a situation where it is impossible to break tax residency if a spouse remains behind in Australia. This is a piece of Victoriana that should have been changed long ago and indirectly it may provide some further options in terms of addressing the discriminatory approach to the taxation of expatriate main residences.
- The continued maintenance of the maximum 45 day period and expats can be resident in Australia before being considered tax resident is a disappointing response. It will be difficult to manage in cases where expats have regional responsibilities, school-aged children or elderly parents based in Australia, and in practice will mean that family holidays and visits will perhaps need to take place overseas rather than in Australia.
- There is still no mention is made of transitional provisions. As we have stated elsewhere, individual expatriates should be able to rely upon professional advice provided in relation to residency under the current rules and be effectively grandfathered. It would be naïve in the extreme to assume that the new rules will not require judicial interpretation - we are jettisoning years of legal precedent - no matter how well drafted. Consequently, we would expect a heightened level of uncertainty around tax residency for several years as a consequence.
New Tax Residency Rules – Consultation Initiated – August 1, 2023
As we mention elsewhere in the website, it became apparent during the first six months of this year that the new tax residency rules which had been promulgated could not be implemented, at earliest, before July 1, 2024.
Consistent with that being a potential implementation date, the Australian Treasury released a Consultation paper on new Tax Residency rules in late July 2023, asking for feedback on the Board of Taxation's proposed changes by September 22.
A first review of the Consultation paper suggests that there have been no fundamental changes made to the Board of Taxation's initial recommendations - including the contentious 45 day threshold, summarised as follows:
"Under the Board’s proposed model, the secondary tests would require an individual to be physically present in Australia for a minimum of 45 days in an income year before commencing residency, or a maximum of 45 days in an income year before ceasing residency."
The Consultation paper tries to address concerns around the 45 day threshold, indicating; "Under the Board’s model, an individual would not become a tax resident merely by being physically present in Australia for 45 days. The individual would also have to meet at least two of the four factors outlined in The Factor Test below."
The four factors proposed by the Board are: the right to reside permanently in Australia, close family ties in Australia, access to Australian accommodation, and Australian economic interests.
We will shortly address the consultation paper in more detail within the pages of the website dedicated to the new tax residency rules.
Australian Super Funds - Full Year Performance - July 18, 2023
For expats wondering how their super funds are performing, the chart below illustrate the Top 10 best performing balanced Super Funds over the financial year ending June 30, 2023, according to SuperRatings.
As you can see, some funds have returned exceptional results over the 12 month period to June 30, 2023 - with the top performing fund delivering growth of 13.3%. The full set of data is not currently available so we don't know about performance across the board just yet. It seems however that some of the larger funds, such as AustralianSuper, may be suffering from poor results in their commercial property portfolios. There is also discussion raging around the reporting of results for unlisted assets and perhaps the notion of whether their performance adequately compensates for the relative lack of transparency in terms of valuations.
Australian House Prices – Looking for Direction? – June 16, 2023
You would have thought that if anyone had the data, experience and highly paid help to assess where Australian house prices were headed in the coming months, it would be the big four Australian banks. However, there is an astonishing degree of variability in their predictions across the major capital city markets for the rest of 2023, much less 2024.
Compare the tables below - even for the remainder 2023 we have the banks predicting a movement in Melbourne prices of between +2% and -6%, and in 2024 a range of between +8% and -1% for Adelaide. The lack of agreement amongst the banks, who presumably work on models that are basically the same, suggests a very significant divergence in terms of the extent and impact of interest rate rises, and variables such as the amount of stock. Our view is that participation in this market, on the buy side, involves quite considerable risks and waiting at least 3 to 6 months for any recessionary impact is desirable.
Australian Property Prices - "into the looking glass" - June 5, 2023
Australian home values have increased over the last two months, against the background of sharp interest rate increases and tightening credit, driven largely by shortages of stock and increased immigration. Whether the momentum can be sustained is debatable, with the possibility that it will spur further interest rate increases by the Reserve Bank at its next meeting, on Tuesday, June 6.
Nevertheless, what is interesting is that while almost all real estate markets in Australia peaked during Covid, most are still well short of a return to those peak values, see the table below. However, some of the more affordable markets, such as Adelaide, Perth and Darwin, have in large part not yet surrendered the peak values achieved during Covid. For example, Adelaide saw prices peak 44.7% - the largest amount across all major capital cities - but so far the market is only down 2.4% against peak values, compared to Sydney at 13.8%.
Vicorian State Budget - Substantial Land Tax Increases - May 23, 2023
The Victorian State Treasurer has just unveiled a "COVID Debt Levy" which is intended to raise $8.6 billion over the next four years and will remain in place until 2033.
An important aspect of this levy includes a reduction in the threshold for Victoria's land tax - which doesn't apply to main residences - from $300,000 to $50,000. An annual charge of $500 will apply to affected properties valued between $50,000 and $100,000 as part of the 10-year levy, and a charge of $975 for property landholdings worth between $100,000 and $300,000. In tandem, land tax rates for properties above $300,000 will rise by $975 plus 0.1 per cent of the land's value, and the absentee owner surcharge rate will increase from 2 per cent to 4 per cent.
Additionally, the government announced it will remove the payroll tax exemption for the top 15 per cent of non-government schools by fee level. Budget papers suggest about 110 schools will be affected, involving $134.8M, when it comes into effect in 2024/25. School fees will inevitably be under pressure.
American Express withdrawing from Australian FX services - May 22, 2023
We understand that Amex is currently “decommissioning” its foreign exchange and International Payments offering in Australia and Singapore - in fact Amex will no longer provide foreign exchange services for the majority of its customers outside of the United States by the end of 2023.
Amex has indicated that it will individually contact customers to discuss the local implication of the changes and provide support in terms of transitioning to alternative providers. Fortunately, the market is very competitive and well serviced, so we don't anticipate significant problems for individuals and businesses, except in terms of transitioning to new processes and systems. Alternatives include OFX, an Australian business quoted on the ASX, with whom we have had a very long-standing relationship and whom we do not hesitate to recommend.
Federal Budget a non-event for Expats - May 11, 2023
The Australian government's recent Budget announcements featured no changes of significant relevance to expatriates. This included no mention at all of any pending changes in relation to how tax residency may be determined - confirming our view that the earliest that these changes could come into effect would be July 1, 2024.
Expats should note however that the budget contained confirmation that the government will proceed with its previously announced measure to reduce the tax concessions available to individuals with a total superannuation balance exceeding $3 million, from 1 July 2025. There is no indication that the $3 million cap will be indexed, and consequently this may have implications for expats looking to retire back into Australia in the longer term in terms of their investment profile.
Kiwis in Australia - A new fast track to citizenship – April 21, 2023
The Australian government has just announced that with effect from July 1, 2023, New Zealanders resident in Australia - current special category visa holders - will have easier access to Australian citizenship provided they meet a four year residency threshold and other normal eligibility requirements. They will not be required to first become permanent residents.
The government also flagged aligning voting entitlements between the two countries – Australians living in New Zealand already have restricted voting rights after one year of residency, but only New Zealanders with dual citizenship can vote in Australian elections.
Singapore Announces Closure of CPF Accounts for Non-Citizens/Permanent Residents - April 12, 2023
The Singapore government has announced that it will require members of the Central Provident Fund (CPF) who are neither citizens or permanent residents to close their accounts by March 31, 2024.
Note that the CPF is not regarded as a foreign superannuation fund (FSF) for Australian tax purposes, and therefore the entire amount of the fund exceeding employer and employee contributions may be subject to tax at Australian marginal rates on withdrawal. For individuals tax resident in Australia the required withdrawal may therefore give rise to tax implications, and it may be appropriate to seek tax advice in terms of the extent of any tax exposure and whether this can be reduced by timing withdrawals over the next year and making concessional superannuation contributions.
Note from a practical perspective that Singapore government intends to notify impacted individuals individually, based on the contact details held by the CPF - we expect these will often be out of date. Therefore, it may be years before certain individuals become aware of the fact that their CPF balances are not earning any investment income - so, we would encourage expats to communicate these changes to any friends or colleagues that may be affected.
Australian Visas - "Some Improvement, but work still to be done" - March 25, 2023
The Australian Department of Home Affairs is trumpeting an improvement in visa processing times, but the improvements have largely been in the issuance of temporary visas - see the table below. In terms of the admittedly more complex permanent visa applications, skilled permit applicants are still facing processing times of up to 6 months, while some partner visas extend out to 8 months.
Nevertheless, it appears that some progress has been made, and hopefully this will also apply to the processing of Australian passports, which have the dubious distinction of being the most expensive in the world.
A reminder to Foreign owners of Australian property: Vacancy Fee and Register of Foreign Ownership - March 8, 2023
As we mention elsewhere on the site, a vacancy fee is payable by certain foreign owners (not Australian citizens or permanent residents) of Australian residential property if their property is not "residentially occupied or genuinely available on the rental market" for at least 183 days in a 12 month period. The vacancy fee applies to foreign persons who made a foreign investment application to purchase residential property on or after on May 9, 2017 and requires them to lodge an annual vacancy fee return.
For the purpose of the vacancy fee, a residential property is considered, "residentially occupied, or genuinely available on the rental market", if:
- the property owner, or a relative of the owner, genuinely occupied the property as a place of residence; or
- the property was genuinely occupied as a place of residence subject to a lease or licence with a term of at least 30 days; or
- the property was made genuinely available as a place of residence on the rental market, with a contract term of at least 30 days.
Note that properties made available for short-term leases of less than 30 days (including via web-based vacation rental sites such as Airbnb) do not meet the above criteria.
There are a number of situations where a foreign person may be exempt from being liable for a vacancy fee, including where legal ownership of the property has changed during the year, the property has been undergoing substantial repairs or renovation or the property is part of an estate being administered. Additionally, should a property cease to be owned by a foreign person during the course of a vacancy the vacancy fee obligation will cease to apply.
As regards the amount of the fee, it will generally be equivalent to the residential land application fee that was paid by the foreign person at the time the application for FIRB approval to purchase the property was made. The current minimum (July 2022) fee is $13,200 for applications involving the purchase of property valued at $1million or less.
We believe there may be a significant under-reporting in this area and that there may be a large number of non-compliant foreign owners who risk substantial penalties. The expectation is that the accommodation/housing crisis will drive authorities to more effectively identify unoccupied properties in the short to medium term and upgrade compliance activities - experience overseas have shown that is relatively easy to identify unoccupied properties.
Compliance activities should also be improved as a result of the (long overdue) introduction of a new Register of Foreign Ownership of Australian assets, to be administered by the ATO, on July 1, 2023.
Super: Changing taxation of Large Funds - February 28, 2023
The government wants to legislate an objective for superannuation, and the proposed wording is:
"To preserve savings to deliver income for a dignified retirement, alongside government support, in an equitable and sustainable way"
Adopting this objective has a number of consequences, and the most consequential is probably an attempt to disallow early access to superannuation for house purchases, as proposed by a number of Liberal politicians. We find it hard to believe that they want to "fan the flames" of an already overpriced property market, but that's their position.
In any event, one subsidiary result of the focus on superannuation funds, has been an announcement today by the Treasurer that from 2025-2026 the concessional tax rate applying to future earnings on super funds with balances over $3 million would be 30% - which is double the current concessional rate of 15%. Fewer than 1% of all current superannuation accounts have more than $3 million in them so the impact will be narrow in terms of the number of individuals impacted. However, the Treasurer has indicated that it is not the government's intention to index the amount, so the impact will widen over time.
The two-year intervening period seems long, extending into the next parliament, but fund administrators have argued that many of these funds have illiquid investments that will take some time to manage appropriately.
Australian Director IDs - November 28, 2022
There are a number of Australian expatriates overseas who will need to apply for an Australian director ID. You require an ID if you are the director of:
- a company registered with ASIC or the office of indigenous corporations
- A corporate trustee - perhaps of a self managed superannuation fund
- a registered Australian body, including incorporated associations registered with ASIC, and
- a charity or not for profit that is a company or aboriginal and Torres straight Islander Corporation
Following the above, there are large numbers of qualifying Australians who need to apply for IDs, and this needs to be done before November 30, otherwise substantial penalties may apply.
In practice, many individuals have yet to make the required application. In fact, the media is currently reporting that, "almost a million Aussies could face a $13,200 fine from the Australian Taxation Office (ATO) for forgetting – or avoiding – a straightforward act."
If the numbers are indeed so substantial, we believe that it is almost unavoidable that the application deadline will be pushed back - but you can't rely upon this happening, and any expats who are qualifying directors need to make applications as soon as practicable to ABRS.
Australian Federal Budget: Items of Relevance to Expats - October 26, 2022
There were a few, if any, measures announced in the most recent Federal Budget of direct relevance to Australian expatriates. This was a conservative, domestically focussed Budget concerned to ensure that it did not add to inflationary pressures and that Australia is well-placed to manage through what appears to be a difficult two year horizon.
However, we would make a few comments regarding what was said, and not said, in the Budget:
- There was no mention of any introduction of new tax residency rules. As we mention above, this is a very domestic Budget, and therefore while there is some possibility that there is a technical group still working on the introduction of the new tax residency rules by June 30, 2023 the fact that there was no mention in the Budget means that the introduction of new residency rules may have receded to 2024, or later. It wouldn't appear to be a priority of the current Government, and there probably isn't "enough money" in the new measures to justify a high prioritisation.
- The Government indicated that it would defer the start date of a number of legacy tax and superannuation measures to allow sufficient time for policies to be legislated. These measures include, "the 2021–22 Budget measure that proposed relaxing residency requirements for SMSFs". Again, consistent with the above, the Government is signalling that it doesn't believe this is a priority matter.
- Not of direct relevance to expatriates, but possibly to those with partners who are neither Australian citizens or permanent residents, the Government indicated that following a doubling of FIRB fees for residential land and property purchases in July, that penalties for non-compliance would also double with effect from January 1, 2023.
Housing Demand in Australia - September 15, 2022
Australian expatriates returning home, and expatriates on assignment to Australia, need to be very aware that Australia, like many countries across the world, is facing a significant housing shortage and care needs to be taken to ensure that you have arranged accommodation well in advance of any arrival.
The table below illustrates that Australia is experiencing .." the lowest national rental vacancy rate since 2006 and is at unprecedented levels both in duration and scope when considering the sustained lack of rental properties over the past six months as well as the geographical extent of the crisis whereby all cities and regions are experiencing rental accommodation shortfalls."*
What has been evident over the last few months has been a particular tightening in Sydney and Melbourne - not yet down to the levels being experienced in the other capital cities - but a clear trend is apparent.
Government flags some potential flexibility on new tax residency rules - August 27, 2022
Assistant Treasurer Stephen Jones reportedly told an Australian Chamber of Commerce event in Singapore in the week beginning August 22 that the new tax residency rules were in the Government's "in-tray" ahead of the October Budget and the 45 day limit was "being looked into". At least some attempt at communication and dialogue from the incoming Labor government, in very stark contrast to the previous LNP administration.
Any additional flexibility would be good news to many Australian expats working and living in countries with which Australia does not have a double tax agreement, such as Hong Kong. See our page devoted to the proposed new tax residency rules for more background and detail.
Foreign Transfers – Supporting Documentation – September 24, 2021
Whenever we have discussed making foreign currency transfers into or out of Australia we have focused on the need for all individuals and entities to maintain appropriate documentation regarding the source of those funds. That is against the background of regular approaches being made to individuals by the ATO, often based on Austrac information and sometimes months or years after the transfer, seeking to confirm the source of funds.
That position now needs to be stressed further given a recent Taxpayer Alert (TA 2021/2) - Disguising undeclared foreign income as gifts or loans from related overseas entities. The main ATO focus is on the following behaviour:
"....the arrangements with which this Alert is concerned are ones where taxpayers are aware of their residency status, as well as the tax implications that flow from it, but attempt to avoid or evade tax on their foreign assessable income by concealing the character of funds upon their repatriation to Australia by disguising the funds received as a gift, or a loan, from a related overseas entity."
The alert specifically mentions that "genuine" gifts or loans are not the ATO's focus and indicates that they generally have the following characteristics:
- the characterisation of the transaction as a gift or loan is supported by appropriate documentation
- the parties' behaviour is consistent with that characterisation, and
- the monies provided are sourced from funds genuinely independent of the taxpayer.
In terms of what supporting documentation is required for a gift or loan, the ATO indicates as follows::
"Appropriate documentation for a genuine gift will depend on the size of the gift and whether the nature of the relationship is one where gifts might be made in the ordinary course of that relationship. For larger gifts or where there is an atypical relationship between the donor and donee, this might require a contemporaneous Deed of Gift. We would also expect there to be evidence showing the donor's capacity to make the gift from their own resources as well as financial records reflecting the donor's transfer.
Appropriate documentation for a genuine loan would typically include a properly documented loan agreement that evidences the parties to the loan, its terms and relevant conditions. We would also expect there to be financial records showing the advance of funds and repayments of principal and interest."