Many expatriates leave Australia to escape the high personal income tax, burden of a private mortgage on their home and poor ability to save up for our future.
The lure of expatriate life can become too tempting and the opportunity it creates to change our future fortunes can never be doubted.
Ironically, because we have all been so scarred by the taxation system, we turn away rather than investigate the new opportunities that expatriate life can create for tax planning on our return to Australia.
Many seek to aggressively pay of their existing mortgages with their new found savings in a hope to be debt free on their return to Australia, so as to erase the terrible memory of living all those years in Australia paying off that dreadful mortgage.
As an expatriate, the best policy is usually to slow down the repayment of your loan for a number of important reasons.
1. Keep the money for your eventual home. Paying off the current loan may mean that you have to borrow later if you decide to buy a different property to live in.
2. It may not be the most financially effective decision. Issues such as exchange rates, alternative returns and overall liquidity may in fact mean that pure debt reduction is not the most astute option.
3. Many investment options whilst abroad are completely free of tax in many jurisdictions for expatriates, so perhaps it is better having your capital earn tax free returns rather than just reduce the loan and save the interest cost.
4. Debt can be a major benefit when collecting rental income in combating against Australian income tax during the time of rental and more importantly also on your eventual return to Australia.
It is undeniable that when living in a house in Australia, being debt free is the absolute best option. However, this only applies once you have moved into the house, not before.
As an expatriate renting out a property in Australia all interest expense on borrowed money used to purchase the income producing property is allowed as a full deduction each year against any rental income.
Under Australian Taxation Laws, every expense incurred as a landlord can also offset any Income Tax, or in some cases the future Capital Gains Tax. This also includes travel expenses associated with the inspection of your property.
In addition, The Australian Government allows substantial depreciation allowances on the construction cost of the property and the internal fittings.
When combining the interest, ownership costs and tax incentives, it is normal for no Income Tax to be due and a surplus of tax credits available to carry forward indefinitely and offset future income or capital gains.
This includes salary when you return to Australia, and thus if you plan correctly it is possible to build up sufficient rental property losses to ensure that you do not need to pay tax on your return to Australia for many years.
Off course, the important aspect is to have a good property so that you are also having appreciation in value to compensate for the holding costs as well as make sure that you are building up enough cash savings to reduce or eliminate the mortgage on your eventual return to Australia.
Imagine that, no tax on your income, no mortgage to pay! Do you think you would have come abroad had you had that situation in Australia?
Perhaps not.
Everyone’s situation is different, but the important thing is to always consider your options, and take advantage of the privilege of your expatriate life for as long as it may last.
