For many expats, the main reason they came abroad was to escape the Australian Tax System.
We carry the nightmares of the past for many years, and live in fear of one day having to return to Australia and be subjected once again to those horrible tax rates.
But things have changed in Australia significantly in recent years, and our nightmares may be unfounded if you take the time to check the new reality that is being experienced.
Tax Rates Keep Improving
On 1st July 2008, the top rate will lift to A$180,000pa, and the 30% bracket will go right up to A$80,000pa. These are major shifts form the old days and it is estimated that over 80% of all Australian Taxpayers will now be on the 30% or lower tax rates.
This means if you earn a dollar and pay the full tax, you are left with 70c, so perhaps the need to be overly aggressive with your tax planning is fast disappearing.
Imputation Credits From Shares
Many people do not fully appreciate how valuable receiving fully franked dividends can be when living in Australia.
Not only is it a good source of income, either when working or retired in Australia, but it comes with a substantial tax credit for the tax paid by the company. This is usually at 30%, which means if you are earning less than A$80,000pa, then the imputation credit will fully offset any tax payable.
It you have taken some level of finance when buying the shares, then you may in fact be able to offset any unused tax credits against your salary or other earnings, and if there is still a surplus the government will give you a cash refund.
Superannuation Tax Free
Effective 1st July 2007, pensions and lump sums taken from an Australian Taxed Superannuation Fund are now tax free to the recipient.
This is an easy way to ensure that you can remain tax free in your retirement on return to Australia.
You should not be too obsessed with Super as the only tax planning tool, as there are other, better ways to also ensure that you are tax free in retirement, but it certainly gives you the peace of mind to know that there is a quick fix if you want it.
As an expat, I would still be reluctant to contribute to aggressively to Australian Superannuation until you are close to heading back home, but it is something worthy of consideration.
Investment negative gearing remains attractive
Notwithstanding the reduced tax rates, borrowing to acquire capital appreciating assets, such as property or shares, remains a powerful tool to keep your tax in control when returning to Australia.
This is true because of the fact that Capital Gains are only taxed on sale, and that half of the gain is tax free for individuals once you own the asset longer then 12 months.
The key is to put the growth as the primary objective rather than the tax deduction and make sure you buy good property and shares that you have absolute confidence in their ability to continue to appreciate and warrant any holding costs.
For an expatriate remaining overseas, only property should be acquired with debt as share loan are not tax deductible until you go back to live in Australia, so careful consideration should be taken in determining the appropriateness of any loan.
Also remember you can accrue Australian property losses while living out of Australia, and these can offset salary or earnings on return.
Depending on your situation on return to Australia, you will have a different attitude to the merit of this form of tax planning. Someone retired will be more reluctant than someone on a high salary potentially subject to high tax rates.
Keep Private Living Costs to a Minimum
The main problem we all experienced living in Australia, was that our after tax income less our living expenses (particularly our home mortgage or rent) was never enough to save.
As such, the options of tax planning were beyond our reach and we were stuck paying what we had to do.
If you can save aggressively while abroad, and return to Australia as close as possible to debt free on your private residence, then this will free up cash flow to be used for more tax effective purposes.
If you can have a nil cost of the house you live in, then you need to generate less taxable income in order to fund your lifestyle, which in turn allows you to be able to happily reduce your tax but possibly generating more in Capital Gains (half tax) or other tax effective income streams.
Everyone has a different desire, budget, capital base and risk profile, however when you combine all of these traits at a level that suits your personal circumstances, you will be amazed at how low the tax on your return to Australia can be.
The key is to remember how scary it was when you were not in control, and give it proper thought during your time abroad, a time of great opportunity and possibility.