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Ashley works with clients to bring strategy, structure, clarity and confidence to their global financial lives and keep it that way. ​In 2013, Ashley founded Arete Wealth Strategists, a fee-only financial planning and investment management firm for Australian/American expatriates.
August 22, 2022

Top Financial Dos and Don'ts for Americans Living in or Moving to Australia

Living in the United States, you've gotten used to the American system for banking, taxes, and investments. So, what happens to your finances when you move to Australia? 

Moving to a different country means that you'll have to learn about a whole new set of financial systems and how to navigate them. By getting clear on your financial strategy before you take off, you can avoid many of the pitfalls that come with moving abroad.

Here we cover what to do when you're still in the U.S., once you get to Australia, and even after you've been there a while. Keep reading for the financial dos, don’ts, and maybes for Americans living in or moving to Australia.

Dos For Americans Moving to Australia

Even if you're not sure when you're making the move, or you are still considering your options, these tips can help set you up for financial success in Australia.

Do: Investing in the United States

Investments are a key part of building long-term wealth. Should you keep your investments in the United States or move them to Australia?

Every two years, the American financial services firm Morningstar releases a global fund investor experience study. The study covers around 25 nations, which are scored across four dimensions. Countries are then ranked overall as well as by each dimension. 

Why does this matter for American investors? 

The United States holds the top spot for overall experience and maintains competitive advantages in fees and disclosures. While Australia is top-ranked overall for fees and expenses, it still lags behind the United States. It’s worth noting that the study doesn’t include platform or trading fees either, which are low or non-existent in the U.S., thus only adding to the U.S.'s advantage.

Plus, Australia holds significantly fewer product offerings. There are only around 200 ETFs available in Australia, while the United States has a much larger selection—about 15 times greater than Australia. 

In general, the pros of keeping your investments in the U.S. are: 

  • Lower (or no) trading fees
  • Low (or more commonly no) investment platform fees
  • Lower management expense ratios
  • Far greater product availability

Pros on the Australian side include: 

  • Consumer-friendly sales environment

The advantage Australia holds in regards to a consumer friendly sales environment is largely due to the multitude of different financial advisors in the U.S. Not all U.S. advisors have a fiduciary standard but for those that do (e.g. Arete Wealth Strategists Australia), even this advantage Australia seemingly holds, disappears.

At the same time, Americans are advised to consider the cons of investing in Australia:

  • Higher trading costs
  • Higher average management expense ratios
  • Platform fees
  • Reduced product range
  • Separately, U.S. tax residents can’t invest in foreign mutual funds or ETFs without triggering punitive Passive Foreign Investment Company (PFIC) tax treatment

So while Australia remains a strong second place for Morningstar's global fund investor experience study, the U.S. definitely retains the edge. As such, even a returned Aussie or an American in Australia may choose to keep some or all of their funds invested in the U.S.

Do: Understand Your U.S. Retirement Plans and Taxation Rules

When it comes to moving to Australia and U.S. retirement plans, the general rule of thumb is—stick to tax-deductible retirement accounts. Post-tax accounts such as ROTHs are not viewed as favorably outside the United States. To avoid double taxation, these accounts are not recommended for those moving to Australia.

Do: If you're an American in Australia, and depending on your age and circumstances, it might make sense to keep some (or all) of your retirement account in the United States. As previously discussed, the U.S. offers a much lower cost of investing and one may avoid penalty taxes that could apply in the case of the early distributions of retirement funds.

Don't: Avoid making post-tax contributions to your U.S. retirement account if you are in Australia, or planning to move to Australia.

Don’t: If you’re an American citizen or permanent resident don’t rollover your Superannuation account from one provider to another, don’t launch a Self-managed Superannuation fund, and don’t contribute >50% of the account balance as this may trigger the unfavourable tax consequences that go with a foreign grantor trust.

Do: Consider U.S. Term Life Insurance

Australians commonly think that the best way to buy life insurance is through their Superannuation fund. The reasons for are that the premiums are deducted from one’s Super balance (which makes it feel like one is not paying for it at all), and the premiums for life insurance are tax deductible through your Super account.

However, U.S. term life insurance tends to be significantly less expensive—as much as half the cost compared to life insurance in Australia despite not being tax deductible. Plus, the benefit is received tax-free to the beneficiary in the United States. In Australia, the beneficiary is taxed. 

Do: Your U.S. Tax Returns & Informational Filings

Any U.S tax resident or anyone with connections to the United States would be well advised to understand their tax reporting requirements. As the U.S. Internal Revenue Service (IRS) has  wide-reaching and increasingly automated enforcement mechanisms, it's important to stay on top of your filings if you are a U.S. person. 

You are a U.S. person (U.S. tax resident) if you are a:

  • U.S. citizen
  • U.S. permanent resident (green card holder and you have not submitted a Form I-407 to terminate tax residency)
  • You are in the U.S. and have been there for >183 days (temporary visa) 

Even if you have not been present in the United States for decades—if you are a citizen or even a green card holder you must file a U.S. tax return. 

Do: Remember Your Informational Reportings

Leaving the United States also means you potentially have more tax forms to file. Don't forget to file your informational reports—the FBAR, FATCA, and PFIC forms (assuming you have foreign managed investments that meet the PFIC definition):

  • Form 8938 (FATCA): This is for certain foreign assets with specific reporting thresholds depending on location and tax filing status.
  • FinCEN 114 (FBAR): For foreign bank accounts with a balance greater than $10,000 USD.
  • PFIC (Filed using form 8621): For after-tax accounts that have a balance greater than $25,000 (Single) / $50,000 (MFJ) invested in managed investments (e.g. foreign-held mutual funds or ETFs) and the shareholder does not receive an excess distribution from, or recognize gain on the sale or disposition of the PFIC.

If you are required to file these forms and fail to do so, you risk costly penalties. 

Don'ts For Americans Moving to Australia

When it comes to finances, the things you shouldn't do can be just as important as the things you should do. 

Here are a few financial don'ts for Americans living in or moving to Australia.

Don’t: Cash Out Retirement Plan Prior to Retirement Age

Oftentimes, those leaving the United States wish to permanently remove all ties to the country. 

However, this is seldom a good idea when it comes to your retirement savings. As an American citizen or Permanent Resident, if you cash out your retirement account before age 59 ½ you face a penalty tax of 10%. In addition, you will be subject to income taxes on the distribution. 

Due to progressive income tax rates, you could face a large tax bill if you take a lump sum distribution from your retirement account. Spreading your retirement distributions over many years can help to reduce the overall tax burden.

Don't: Contribute to ROTHs, 529s or HSA’s

ROTH IRA, ROTH 401(k), and 529 accounts are great accounts for U.S. retirement planning. In these accounts, you make post-tax contributions, and you can realize tax-free account growth and distribution. However, if you are thinking of leaving the United States, contributing to ROTH, 529s and HSA’s with after-tax funds, could lead to double taxation.

This is because the ATO does not recognize the special tax treatment of ROTH accounts. Instead, the ATO sees it as a foreign trust, and considers the growth taxable. Thus, the tax advantage in the United States is no longer available in Australia.

One can see how this would be a problem, as the entire point of a ROTH account is the tax-free growth. 

Don't: Consider Short-Term Real Estate Investments in either the U.S. or Australia

Buying U.S. or Australian real estate with a short-term holding period (less than five years) might also not be a great financial move for Americans moving abroad.

There are several reasons to avoid short-term real estate:

  • Transaction costs: Transaction costs such as agent commission, closing costs, and other fees in American real estate are amongst the highest in the world (often over 6%). 
  • Property taxes: American real estate often has property taxes of 1-1.75%—much higher than in Australia but Australia charges a transaction tax known as ‘stamp duty’ which averages around 5.5% of the purchase price for property over $500K. There’s an additional stamp duty of 7 - 8% for non-resident real-estate purchases.
  • Capital gains tax: If you have a capital gain on your U.S. real estate investment, you will want to live at the property and have it as your primary residence for >2 of the past 5 years to get the full capital gains exemption ($250,000 for Individuals, $500K Married Filing Jointly). 
  • Other expenses: Homeowners association fees, homeowners insurance, maintenance, and repairs can all add up.

While the financing of the property and the repayment schedule could vary the timeframe a little, we take the view that a holding period of 5 - 8 years is sufficient to recoup most of these costs and make buying preferable over renting.

Maybes For Americans Moving to Australia

If there's one thing we know about finances, it's that there is no one-size-fits-all solution. 

Financial planning requires nuance, particularly for cross-border citizens and expatriates. While some decisions are clearer cut (e.g. don't forget to file your U.S. tax return), others require more analysis.

Your situation will dictate whether the following considerations are dos or don'ts for you.

Maybe: Renting out your Real Estate

Real estate is a potential source of stability and growth in your portfolio. But while real estate investment property can provide positive cash flow, there remain several considerations to take into account. 

As mentioned above, costs that need to be considered include property management, any Home Owners Association (HOA) fees (or Body Corporate as it's called in Australia) insurance, vacancy rates, maintenance, repairs, property tax and accruals for paint and carpet. There are additional tax filings you will need to make and you may find dealing with property management issues across different time zones an additional inconvenience. 

Remember that your time is also worth money. If you are spending a significant amount of time managing your property and you'd rather be doing something else—it may not be worth the hassle.

Maybe: Deferred Income Annuities

Annuities can vary significantly from one company and annuity design to another, however academics are generally very positive about a particular design of annuity called the Deferred Income Annuity (aka ‘Longevity insurance’). 

They work this way:

  • You contribute a sum of money to an insurance company.
  • You wait a period of time (at least two years).
  • Then you will receive an income stream for life.

Typically, this is not something you would consider until your later years (after age 70). The yields on these products are enhanced by ‘mortality credits’. Mortality credits represent a refund of premium returned to the investor pool by deceased annuitants. The annuity will pay an increasing yield for as long as the annuitant lives thanks to the mortality credits.

Consult with your Australian tax attorney to find out how your annuity will be taxed if you've moved to Australia. 

Maybe: Cash-Value Life Insurance

Cash-value life insurance is a type of permanent life insurance. Permanent life insurance lasts throughout the lifetime of the holder assuming the premium is paid. 

The cash value component is a savings account that grows over time and can be accessed by the policyholder through loans or withdrawals. This type of life insurance is generally much more expensive than term life insurance.

For U.S. persons, cash-value life insurance is a maybe but only for those who are very high income earners. For them, the tax-free growth can be sufficient to overcome the costs.

While these policies can make sense, we consider it one of the last places to go for tax-free growth.

Helping Set You Up For Financial Success In Australia

Moving from the United States to Australia can be an exciting but daunting time in your life. It's important to do your homework and understand the financial considerations involved. But with careful planning, you can avoid many of the pitfalls and maximize your financial success.

We help bring strategy and clarity to Americans moving to Australia. From investment management to retirement, to tax and estate planning—we can help ensure you make the most of this exciting new chapter in your life. Visit our website to find out more or click here to schedule your consultation.

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