Coming from a higher tax environment, Philip was fortunate that his employer did not practice tax equalization. Otherwise, he would have to pay the equivalent in Australian taxes if he had stayed at home, rather than enjoy the lower tax rates in Singapore. However, the couple realized that they had not capitalized on several opportunities to minimize their tax. They then took the following steps: -
Local tax savings
Allowances
Philip receives compensation benefits from his employer that included cash allowances. He was advised to restructure his remuneration package to reduce assessable income.
For instance, Philip and Sarah’s residence was rented in their names and Philip’s company reimbursed him the rental payments. However, such reimbursements are treated as cash allowances and are thus, fully taxable. Philip negotiated with his employer to sign the rental agreement and thus, reduced his taxable income significantly.
Residence Tax Status
Philip met the criteria and qualified for Singapore’s Not Ordinarily Resident (NOR) status, which he opted for. This allowed him to enjoy further tax concessions for five consecutive years. For instance, he will be taxed on his Singapore income on a time apportionment basis. In other words, only income related to business days in Singapore are taxed in Singapore. This worked very well for him because of his frequent business trips.
Further, his NOR status means that there is also a tax exemption on his employer’s contribution to Philip’s overseas non-mandatory pension schemes.
Tax savings back home
Since Philip’s overseas posting is over two years and he meets all the other criteria, he is considered a non-resident of Australia for income tax purposes. This means that he is taxed only on Australian-sourced income.
Cash in the bank
Philip and Sarah maintained their bank accounts in Australia and kept most of their savings there. What they didn’t realize was that the interest earned was subject to 10% withholding tax.
They were advised to open an offshore bank account in Hong Kong to reduce taxes to 0%, and if the balance was kept below HKD7.5 million, they would avoid estate duty.
Superannuation and Offshore Investment Strategies
Philip consolidated all his Superannuation into one fund, using a multi-manager strategy. This way, he enjoyed the diversification across fund managers, asset classes and securities; and at the same time, the administrative convenience of a single fund.
Philip stopped having employer superannuation contributions made, as these are not tax effective while he is a non-resident of Australia. Instead, he invested offshore at 0% tax. However, he has decided to make personal undeducted contributions as superannuation when he returns to Australia since the money can compound at a reduced tax rate.
Home in Australia
Philip and Sarah own a home in Australia and they had left it vacant after moving to Singapore. Now, they have started looking for tenants because renting their home out while away makes the interest on their mortgage deductible.
Although they will be renting their home out, they can elect that it continue to be treated as their main home for Capital Gains Tax (CGT) purposes. This means that the home remains exempt from CGT while they are away from Australia.
The exemption may be extended for 6 years if the home is rented out or for an unlimited period if it is not. However, they cannot claim the exemption against any other home during this time.
Capital Gains Tax
Also on the subject of CGT, they needed to look at any investments they owned such as shares and managed funds. When they became non-residents of Australia they had two choices, either a deemed disposal for market value or elect that their assets continue to be subject to CGT in Australia on eventual sale. Why would they elect deemed disposal? In return for paying some CGT when becoming non-residents of Australia, all future growth on the assets (until they return to Australia) will not be subject to CGT in Australia.
Retire 9 Years Earlier
The savings, tax and investment strategies will turn Philip and Sarah’s three-year expatriate contract into the equivalent of nine years of savings in Australia. If they stick with the plan, they could well retire nine years earlier.
For more information, please contact ipac at telephone number 6511 7357 or visit its website at www.ipac.com.sg
