All foreign investments or savings vehicles were once regarded as Foreign Investment Products (FIPs) or Foreign Investment Funds (FIFs), and anyone who held such investments upon repatriating to Australia was required, from that point onward, to declare them and pay tax on the gains.
Although the taxation of FIFs and FIPs was reasonable, no one likes to pay tax. The lure of international investment was therefore less appealing because Australians tend to have a strong bond to “Oz”, and – compared with expats from other countries – Australians are more likely to return home at some stage in the future.
In 2010, the ATO repealed FIF and FIP regulations and introduced the new Foreign Accumulation Fund (FAF) legislation. This new set of rules has had a profound effect on the way Australians can manage their finances when living overseas. Being treated the same way as other domestic investment schemes, international life insurance vehicles used for investment purposes offer Australian non-residents significant tax advantages, even when returning home.
The most obvious benefit of the now FAF rules is that these investments now benefit from “Gross Roll Up”, which essentially means that the tax man no longer insists on capital gains being declared and paid each year when you return to live in Australia, with gains only being taxed on sale.
But easily the biggest windfall for Australians of the new tax rules is that international insurance wrapped investment vehicles, if held for a period of 10 full years, can be encashed completely free of any income or capital gains tax. Even if you return to Australia for the last eight or nine of those tax years, after the end of year 10, you will be able take all of your principle and gains entirely tax-free.
As is always the case with major changes to tax legislation, it takes a while before the new rules are tested and then finally accepted. Now that this law has been “battle tested”, it has proven to be wildly popular for Australians currently living overseas because it opens up a whole new window of investment opportunity. Australians may now utilise the many international financial planning vehicles at their disposal with a view to creating tax-free income later in life, irrespective of whether they return to Oz at any time in the future.
It is also worth noting that the advantages of many life-insurance structures, especially the open architecture platforms available in the Isle of Man or Guernsey, are potentially far superior to the opportunities that may exist in the Australian domestic market. Most “Personal Portfolio Bond” (PPB) structures offer access to all of the world’s major stock markets, as well as almost every mutual fund or unit trust in existence.
In addition, you can choose to diversify your holdings into a myriad of hedge fund strategies and alternative investment products, structured and guaranteed products as well as exchange traded funds, direct bonds and fixed income instruments.
In other words, these PPB structures allow access to virtually every paper asset available in the world… and all of these may be held in the one structure, while still maintaining the Aussie dollar as the valuation currency for the entire portfolio.
And for those investors who wish to purchase US stocks, or who currently hold US stocks, the changes in US tax law over the past few years have led to a number of disadvantages for foreigners holding US assets in their name.
The threshold for estate tax on the assets of non-US nationals now stands at only US$60,000, with anything above $60,000 taxed at 40 per cent before being passed on to beneficiaries.
Not only does a Personal Portfolio Bond help you to avoid such punitive taxes, it also allows owners to name their beneficiaries and avoid costly and lengthy probate procedures, no matter in which jurisdiction those assets originate.
If you’d like to chat to us at Phuket Expat Finance about how we can help you grow or protect your wealth, please drop us a line at: chatwithus@phuketexpatfinance.com