Non-residents or not planning on retiring to Australia

For those not planning on retiring to Australia

The decision to hold Australian shares depends on where you will retire, not the country you currently live in. The idea of overweighting your home country equities is so that your assets grow along with those of the country and/or currency there in case it does better than the global economy.^[1] If you’re planning to retire outside Australia, it doesn’t make sense to tilt towards Australian shares, and you should have an entirely global portfolio (or tilted to your retirement country), so no VAS/A200/etc. and no VDHG.

The 40% portion of VAS (Australian equities index) in the Vanguard diversified funds such as VDHG are

To reduce currency risk while drawing down AUD in retirement; and
To get franking credits

Neither of those reasons makes sense for someone retiring outside Australia.

Neither the Australian dollar nor the Singapore dollar (assuming you aren’t retiring to Singapore either) have anything to do with where you will live, so investing 40% in Australian equities as VDHG does would be equivalent to having 40% of your equities in the Singapore stock market. If you think that idea seems ridiculous, how does 40% of your equities in the small concentrated Australian market make sense?

If that’s not enough to convince you, franking credits not only don’t help non-residents, but they actually work against you. Let me explain. Australian shares have roughly 4% dividends, of which about 3% is franked. The “grossed up” return of the franked dividends is 100/70 x 3% = 4.3%, so there is a benefit to Australian residents of 1.3% from franking credits. But franking credits are 40-80% priced-in, meaning if we take the centre of that estimate, when shares go ex-dividend, the value of the shares drops by 60% of that or 0.8%. So, non-residents not only don’t get the benefit of franking credits, but there is an enormous almost 1% per annum cost, which you are entirely unaware of since it happens by stealth.

How to invest if you don’t know where you’ll retire to

There’s an easy solution to this.

On the equities side, it would be a globally cap-weighted fund.
This excellent short video series is worth watching (for everyone, really).
Investing Demystified – Lars Kroijer

This article details how to get worldwide index exposure on the ASX

On the bonds side, they would be either global bonds unhedged or in USD – either US bonds or USD-hedged global bonds – with the idea that the USD is a global currency. Either would be fine. These aren’t available on the ASX, though.

Non-US investors usually want to avoid US-domiciled funds, so Ireland domiciled funds are generally the go-to funds, and there’s a wide range there, including a range of global unhedged bond funds as well as USD bond funds. The most commonly mentioned that I’ve seen for expats unsure where they will retire is AGGG (global aggregate bonds unhedged – aggregate means a mix of government bonds and corporate bonds), although I prefer only government bonds, so the equivalent that I prefer is either of these:

IGLO (global government bonds unhedged)
GOVT (US government bonds).

Any of those three bond funds should be fine.

When you eventually decide on a place to retire to, if it turns out to be a developed country, you would move your bonds into that currency for stability. If you end up retiring to a developing country, then you have a decision to make of whether to continue with global/US bonds or whether to accept the credit risk of fixed income in a developing country. Here’s an excellent article on it from the same person in the above video series, and it’s definitely worth a read.
What is the minimal risk asset? – Lars Kroijer

Avoidable US tax

Explained here in this link
Fund domicile and avoidable US taxes

Brokers

What is CHESS ASX Sponsorship

Before we begin, you need to know what CHESS Sponsorship is.

Most countries around the world have a stock exchange where people can buy and sell stocks. The ASX (Australian Stock eXchange) is the main exchange in Australia where stocks are traded.

Australia is unique in having a world class system called CHESS, which means the ASX keeps a list of who owns what shares. When shares are bought or sold, the ASX has a record of you owning those shares directly by you and in your name (via your own HIN — Holder Identification number).

The way shares are held in other countries (and for some brokerage companies in Australia) is under custodian, which means the broker appoints a separate company, a custodian, to hold the shares on your behalf. If the broker goes under, the custodian should still have your shares, but it may take you a long time to get access to those shares. In Australia, this has happened from time to time, and here is a relatively recent example from 2019. Where a broker has not followed legal procedure, the result could be worse, such as what happened with Opes Prime.

When selecting a broker where you are buying shares listed on the ASX, you will likely want to look for a broker that is CHESS sponsored for peace of mind with your life savings. If you will be buying shares on other exchanges, since other exchanges don’t have CHESS sponsorship, you have no other choice than to go with the custodian model. Choosing a large, listed, well-established broker is probably your best bet in this situation.

Back to the brokers

Many Australian brokers don’t accept non-residents.

Here is what I understand at the time of writing.

Selfwealth, Stake, Vangaurd Personal Investor, and Betashares Direct do not allow non-residents.

Commsec and CMC Markets require you to close their account if you want to update to a non-Australian address.

It is likely with all of the above brokers that if you maintained an Australian address with them that they would not be aware that you ceased your residency and you could continue using their service. You would just need to make sure you did your taxes correctly, which differs for non-residents for tax purposes.

Interactive Brokers (IBKR) is one of the largest, most popular international brokers in the world. They have been around for decades and they are a publicly listed company in the US.
When you use IBKR as your broker, you can purchase from any exchange in the world.
Stocks are held under custodian to protect the shareholders if IBKR is liquidated.
Costs –

IBKR no longer has a monthly inactivity fee.
Trades on the ASX are reasonably cheap at 0.08% of trade value, minimum AUD $6 (AUD $6 for a AUD $7,500 trade).
Their currency exchange rates when buying on other exchanges are wholesale rates at 0.002% ($0.20 per $10,000 exchanged).
They have a $2 minimum for FX trades, but if you buy US stocks directly with AUD rather than converting the currency beforehand, it will auto convert without the minimum.
I haven’t seen a FX transfer fee low like this from any other brokers. Other brokers charge retail rates, generally at least 300 times this.

The low brokerage fees and virtually insignificant FX rates make IBKR the broker of choice for anyone buying shares on exchanges outside the ASX.

NAB Trade is one of the few Australian brokers that accept Australian citizens that are non-residents. However, the cost of trades are quite a bit more than IBKR. The main upside with NAB Trade is that shares bought from the ASX are CHESS sponsored rather than being held under custodian.

** Update: During the coronavirus market volatility, NAB Trade failed, and customers were unable to trade when they needed it the most. There were comments by people unable to login for 10 days which is shocking. People completely unable to trade as the market moves multiple percentage points in front of their eyes, missing out on thousands or tens of thousands of dollars or more. Many were frantically calling to place a phone trade only to find the phone lines being busy. There’s no way I would be using NAB Trade after seeing this.

Australian tax on shares for non-residents

I’m not an accountant, so please check this with an accountant, but as I understand at the time of writing, as far as tax goes for shares in companies you own less than 10% of (concerning the ATO).

CGT

None payable for both Australian and non-Australian shares provided you’re a non-resident the entire time they’re held.¹

Dividends

Non-Australian shares
None beyond what was taken out before it gets to you.
Australian shares franked dividends
None beyond what was taken out before it gets to you, but no franking credits.
Australian shares unfranked dividends
Your broker or fund should take out 30% before it gets to you, and then there is no more to pay. But if you forget to tell your broker or fund that you’re a non-resident, you need to pay this by lodging a tax return.

¹ Regarding CGT on shares where the shares were purchased while being a resident, you have two options when ceasing to be a resident.

Elect to pay CGT then (with CGT discount applicable if held over 12 months and sold while still a resident); or
Elect to defer paying CGT until you sell the shares at a later date.

Now read this carefully — it is easy to misunderstand and cost you a lot of money.
From here (Changing Residency – ATO), it states that

If you cease being an Australian resident, or cease being a resident trust for capital gains tax (CGT) purposes, you’re taken to have disposed of assets that are not taxable Australian property for their market value at the time you ceased being a resident.

BUT!
Suppose you elect to defer the gain until you dispose of the shares. In that case, you’ll be taxed in Australia on the whole of the gain (i.e. including the period you’re a non-resident) because section 104-165(3) of the ITAA1997 deems the shares you have deferred the gain on to be considered as Taxable Australia Property (TAP); the consequence is that non-residents are subject to tax on their Taxable Australian Property so that the shares stay within the Australian tax net.
The way you ‘elect’ to pay your CGT is to pay it via a tax return. If you don’t do this, it defaults to option #2 as being deferred. More info here.
This article also makes the important point that if you defer and then sell it as a non-resident, you also miss out on the CGT discount (and the tax-free threshold due to paying non-resident income tax rates). At the time of writing, I believe you still get the 50% CGT discount calculated on a pro-rata basis. So with 700 days in Australia and 100 days out of Australia, the 50% CGT discount would be reduced to (700/800) or 43.75%. You would then pay tax based on higher non-resident marginal tax rates which does not include the tax-free threshold.
An exception to all of this is when the individual is a resident of either the UK or the US. The double tax treaty with those countries provides that if you choose not to pay Australian CGT when you cease to be an Australian tax resident, then you only pay CGT in the country you’re residing in when you sell the asset. I.e. if you live in the UK, you only pay UK tax on the sale.

** You still need to check the tax laws of wherever you’re a resident. This is only the Australian side of things.
** You need to be sure that you’re a non-resident. Speak to an accountant to be sure. This is not something you want to get wrong.

If you have more information, I’d love to integrate it into this page for others. Please let me know using the contact link at the top of the page.

Accessing your super when leaving Australia

1. Citizens — you’re out of luck ^[1]

If you are a citizen, you can only access your funds for the same reasons as someone who still resides in Australia, which means reaching preservation age (which is now effectively 60 for everyone) or extenuating circumstances such as incapacitation, financial hardship, terminal illness, etc. This is to prevent people from taking what should be retirement savings and spending it frivolously and then returning.

Don’t forget that even if you cannot access it, it is still your money, and it will still grow if you make sure the money is invested there. Superannuation is an investment vehicle, meaning it is a structure that holds investments. So, be sure to do the following:

Make sure it is in invested appropriately, which means being in a low-cost super fund with low-cost investments
Make suer it is invested in the right amount of growth assets appropriate for your risk tolerance
Turn off your insurance if it no longer suitable for your situation (f the insurance does not cover non-residents) to avoid these costs eating into your returns.

^[1] If you are a New Zealand citizen leaving Australia permanently, you can apply to transfer your super to a Kiwi Saver scheme under the Trans-Tasman Retirement Savings Portability Scheme.

2. Permanent residents – you may be able to access your super

Permanent residents are in the same situation as citizens in that they are unable to access their super until they reach preservation age (which is now effectively 60 for everyone).

However, there is a comment on the ATO Community website stating the following (note that DASP stands for Departing Australia Superannuation Payment):

We can confirm that it’s possible to apply for a DASP as a former temporary and permanent resident.
As for how to become a former permanent visa holder, we suggest you get in touch with the Department of Home Affairs.

A permanent resident has a permanent right to residency in Australia. It is the visa (the Resident Return Visa) that expires, not the permanent residency. So, even if you have left, you remain a permanent resident. But from the above comment, you may be able to cancel your permanent residency and access your super. ATO Community website representatives cannot be relied upon as a definitive source of information, and I have seen incorrect information from there before, but if you have left permanently, it may be worth looking into this.

Most importantly, however, is that even if you can access your super before preservation age, a significant portion of your super will be lost in tax. In the tax table shown here, most people’s super will be entirely “Taxable component – taxed element” (you can see that on your super statement). For working holiday makers, that means 65% lost in tax, and for everyone else, 35% lost in tax. This is a strong argument for just leaving it in super to compound and grow in a low tax environment until you reach preservation age.

3. Temporary residents — you can access it (with a significant tax hit)

If you were a temporary resident (not a permanent resident or Australian citizen), you’re able to access your super once your visa has lapsed and you’ve departed Australia.

To get the funds, you need to make a request to the ATO unless it has been only a short time, and you may be able to make the request directly from your super fund.

If a temporary resident does not apply to get their super within six months of having left Australia and with the visa ceased to be in effect, the super fund will transfer the super money to the ATO as unclaimed super money, where it will be earning no investment returns, so it doesn’t make sense to leave it there.

For more information, you can search Departing Australia Superannuation Payment (DASP)

In the tax table shown there, it will be “Taxable component – taxed element” for almost everyone, and for working holiday makers, that means 65% tax. Everyone else is taxed at 35%.