Investment strategy needed for self funded retiree wanting expat life

Hello,

I have posted on previous forums about my current debacle since QLD government implemented the extremely high Land Tax and Absentee Surcharge on properties owned by Australian citizens who are overseas for more than 6 months of a financial year. I am now trapped in Oz for 6 months of a year sitting on my hands waiting until 6 months is up draining my income streams away from cost of living here. Catch 22 scenario. But not living the retirement life I want to live in the locations I want to be that were benefiting my poor health and improving my happiness & quality of life.

So I am looking at selling all of my assets that attract Land Tax, Absentee Surcharge, CGT at foreign resident rates, etc. Basically sick of paying so much tax that my income streams are being knocked out to being the case now where I receive barely $25,000 net p/a in total to live off. And another huge Land Tax & Absentee surcharge bill coming soon that will take almost a half of my net annual rental income.

I saw a financial adviser and went through my situation to help sort out all the mess I am in.
I have been advised a good strategy would be to sell assets, invest into a Capital Guaranteed managed fund with a return at 6.25%. I would pay income tax of course but I am assuming there will be a portion of that invested into shares which will provide franking credits (I am still waiting to see prospectus). At almost 50 years of age (medically retired) I have been advised then to invest into a Super fund around age 55 and see that out to maturity at 60 when I can draw an income stream off that.

I have had others in threads suggest investing into shares (I have a personal share portfolio so not sure I want to expose a hell of a lot more in that so as to adopt some risk mitigation) - such as global funds (still considering) or other instruments. I am trying to learn more about what is out there but there are literally thousands of different investment products that I am overwhelmed by the choice. I would like to grow capital, receive an income stream but not expose all of my investments into high risk. Also I would like to reduce my tax liabilities through proper structuring.

I would prefer to remove all of my money out of Australia quite frankly now but do not know enough about foreign investments offshore.

I would welcome some decent suggestions that I could follow up. I have been contacted by several other fund managers, share investment strategists, 'wealth builders' and find it hard to trust anyone anymore. People seem more interested in fleecing you of your money than helping you build wealth.

I would be interested in hearing from expats who are self funded retirees who have good income streams from investments that are well structured to minimise tax.

I would prefer not to hear from those who want to announce that all Australians should pay their fair share of tax crap, criticism over my choices or other troll comments. Take your narcissism and get off somewhere else please! Thanks.

 

Realistically, how much return (% after tax) do you need for your lifestyle? That will drive the type of investment. If you need 2% then you can afford to play it safe. If you need 5% or more, you cant avoid riskier stuff such as shares.

Capital guaranteed just means capital is guaranteed by an entity. But what is the entity? The federal government? Or someone $2 company?

 

It is hard to know who to trust for financial advice. The posters in this section are wary of giving “advice” as not licensed to do so but there is a lot of good info here. Are you expat long term or planning to reside in Australia eventually?

 

1. Sell property, you don't want to live in it full time and it sounds like it is losing money particularly compares with what you could be earning from a better investment .
2. Don't buy the capital guaranteed managed fund until you have done some research on things like fees etc. Put it this way, I very much doubt you would get 6.25% on your investment.
3. Read the content of the "Other Asset Classes" forum here including the old and new LIC thread, the LIC guide for beginners, Peter Thornhill and some of the posts on the boglehead forums. This will give you enough information to decide if LICs or ETFs are the right way forward. I think they would give you a much better return than what you've been advised net of fees.
4. Tax structures require tax specialists like @Terry_w . The Labour government has proposed changes around the taxing of trusts for example that you may need to factor in. Investing overseas is definitely something that needs to be carefully structured or you'll get in trouble because the government's first assumption will be that you are dodging Australian tax, regardless of whether it is true or not.
5. Most advisors are after your money as a first priority and then your returns as a secondary consideration. If you can do your own research you can save yourself a LOT of money in fees and lost opportunity. Something simple like a diversified portfolio of ETFs and LICs does not require you to do a Masters of Finance and it will almost certainly beat the products that most advisors sell you, particularly after fees. There are some good advisors out there and if you feel more comfortable with expert advice talk to @Alex Straker as a starting point.

I'm not licensed to give advice so take it with the advice of many others and form your own opinion.

 

I’d be looking at taking the funds ex Oz in your case. Otherwise you will be copping non resident withholding.... I’d need to do a lot of research first of course but I’d be looking for a low tax / non basket case jurisdiction that enables access to vanguard, DFA or similar low cost multi asset funds and a reliable banking /legal system. Then transfer funds out of here to local 3rd world bank account/s , use credit cards, PayPal etc as required.

You are going to need to do a lot of the initial research yourself in afraid, or expect people to take the ****.

 

Ok thanks for the tips. Need more than 2%. I can get more than that in term deposits. We worked out upwards of 6.5% to meet the net return that may give me a comfortable income stream (have extensively worked out my budget and how much I need to live off offshore reasonably). Waiting on the prospectus for the Capital Guaranteed fund. The entity not government.

 

Good point thanks abut the 'advice' and not licensed. Seems plenty of savvy people here which is good. Just picking brains from the smart people! I am stuck in Australia for 6 months of a year with the QLD Land Tax & Absentee Surcharge so cannot be an expat until eventually that property is offloaded - but selling now will incur a massive capital loss and reduce my cost base and income stream capabilities. Long term I would like to permanently retire in Thailand or Vietnam (spent time in both and love the culture and people and lifestyle).

 

On the two bolded bits. All those thousands of products invest in exactly the same shares. Find an S&P 500 index fund, and MSCI World Index Fund or if you are biased to Oz, an ASX 200/300 fund and you'll eliminate all the complexity and financial sharks who want to part you from your money.

Secondly, the best place to minimise tax is and always has been Super. Can't beat a 0% tax rate in pension phase.

 

A bit confused, isn’t the surcharge only 1.5% hardly an exorbitant impost above normal Land Tax

Seeing as you are <50 what does “medically retired” mean?

 

Some things that you may not be aware of

Tax

If you fail the Australian residency test, making you a non-resident, then

1. You get taxed heavily on property as you know. No CGT discount. No tax free threshold. Higher land tax.
2. Shares are completely different.

CGT on shares

None payable to Australian government for Australian or international shares.
On international shares you are a non Australian earning from a non-Australian company and it is just passing through, so tax doesn't make sense as you would just go through the stock exchange in another country otherwise.
On Australian shares, if they charged CGT, then nobody outside of Australia would even invest in Australian companies, they would go elsewhere.
So for CGT, none is payable on shares both Australian and international.

Dividend tax on shares

On international shares, none payable, again it is seen as a non Australian investing in a non Australian company and just passing through.
I should clarify that the country where the company is from will usually be taking out some withholding tax. Eg if you invest in US shares and your resident country has a tax treaty with the US (Australia and Thailand both do), then there is 15% withholding tax. Countries vary from 15-30% with Australia being one of the highest at 30%.

On Australian shares that are franked, you pay no more tax, but get no tax credit for the 30% company tax paid the way residents do.
On Australian shares that are unfranked, 30% withholding tax is taken out.

On both of these, you may need to pay tax in your country of residence.

As I understand, Thai law which says that if you earned income sourced from outside Thailand and you did not bring the money into Thailand in the same financial year (I think financial there is Jan 1 - Dec 31), then no tax is payable on that income.

So basically, if you are a non-resident for Australian tax purposes and are a resident of Thailand, you can go ahead and pay virtually no tax on shares.


Also since these rules are law and you are not breaking any of them, there is no need to take your cash out of Australia to invest. You can just open an international brokerage account and transfer money to the broker right from your Australian bank account to invest in shares. I certainly would not bring money to Thailand above what I will use to live on under any circumstances and there is no need to.


Besides tax, you will certainly need to spend time educating yourself.
If you are 50 and your medical condition will not reduce your life expectancy, then you have another 40 years that your money will last.
If you take out all of your returns from your investments and do not grow it, then with inflation you will effectively have half in 20 years and a quarter in 40 years. You need something that grows enough to offset inflation as well as gives you some return to live off. Basically this is shares. This higher return comes with higher short term volatility (short term volatility is referred to as risk, hence the phrase high risk high return). Share prices go up and down (sometimes a lot) over short 5-10 year periods, but the idea is to mitigate these short term fluctuations with enough cash to not have to withdraw when it is down and resume when it has recovered. This is why people choose what is called an "asset allocation" of volatile/risk assets (shares) to risk free assets (fixed interest). The simplest example is 10 years of cash at 4% withdrawal rate giving you 40% in fixed interest, and the other 60% of your money to be left alone in shares to go up and down in the short term but higher over the long term to offset inflation.

Other considerations include -
How risk averse are you affects your asset allocation.
If you will not go back to Australia then an all world index for your equities is a far better choice than including a high Australian allocation since the currency you spend in is not Australian dollars.
As I mentioned previously, Expat Millionaire is an excellent resource. As is going through the threads on this forum, and boggleheads forum.
Lots more to learn, but hopefully this had some information that helps.

By the way, don't assume everything I said is 100% accurate. They are what I believe to be correct. You need to go and verify everything yourself. Talk to an accountant if necessary.

 

Lets be honest. 6%+ a year wont be risk free. The thing is, how good is that guarantee? Government is best. A big bank or company is good. Anything less than that theres risk. Also think about inflation and capital loss because anything with that return will have risk.

You may have to consider its not generating what you want, but what you can generate safely.

 

Please note my comments below, not advice and only suggestions.

It seems that the key issue is that @Sick_of_scams is primarily relying on the net rental income from a property located in Qld, Australia to provide an income stream to support living expenses whilst located in another country, but due to Qld land tax (albeit absentee land tax) the tax impost severely diminishes the net income stream and therefore an alternative investment means to derive a suitable income is being sought. There also seems to be a view that an investment with a high net yield would be the most desirable method.

The suggestions include taking a portfolio approach to the situation as follows:

1) Sell existing property / buy property with less land content. For the property with the land tax impost, the key to this dilemma is "land". It would be possible to sell that property and buy another property (or two) which has lower land content (i.e. apartment / unit / townhouse) suitable for the purposes of deriving income (e.g. unit in a smaller block of units with no lift / pool in a reasonable location etc). This could also provide long term capital growth opportunities if the intention is to keep the property for the long term for rental purposes. Apart from Qld, could also purchase property in another state which does not have such absentee land tax provisions.

2) Superannuation. It would seem appropriate that a solution featuring superannuation would be feasible, especially with the benefit of obtaining a tax free income stream in the pension phase.

3) Other Australian sharemarket investments / ETFs outside Superannuation. The benefits and tax implications of such (minimum tax) has been outlined by @Anthony Brew above.

4) Offshore Investments. Highly recommend that you check-out, Andrew Hallam – Millionaire Teacher – Millionaire Expat. Also highly recommend to purchase / download Andrew's book, he explains an effective offshore investment strategy using offshore brokers with only using three ETF funds. Be wary of any offshore independent financial advisor, they are generally 'rip-off' merchants that will put you into expensive structures. Andrew Hallam's advice is essential for anybody wishing to be an expat.

5) Cash. Have some cash say for 2 or 3 years living expense and drip-feed this to yourself.

6) Develop your portfolio strategy. It is not necessary to have an investment with a "high yield" to provide an income stream. What is important is to have a well structured portfolio that mitigates risk, provides reasonable returns, and has longevity. Some of the advice the people like Andrew Hallam indicate are:
i. You have sufficient cash to last you 2 to 3 years.
ii. You are invested in low cost index funds covering the world, your country of origin, equities and bonds. You draw down the capital from when this is needed and allow time for appreciation (the so-called 4% rule).
In addition, you could:
iii. Stage your investments until access to other investments come into fruition (e.g. when you can access your superannuation, or allow shares/ETFs outside of super to continue to grow and build up their income stream).
iv. You may also retain a property in Australia providing modest rental returns, but long term growth. (This may mean selling the one you got and buying something else that has little land tax).

If not already done, would be worth reading "Motivated Money" by Peter Thornhill, Andrew Hallam's Millionaire Expat: How To Build Wealth Living Overseas.

And also seek professional advice in Australia regarding superannuation, selling existing property and potentially buying another one with less land component, and shares/ETFs outside of superannuation. If offshore, Australian Property Tax and Finance Information maybe able to help you.

Having said all the above, there's probably a realization and a mindset shift that the property you have been hanging on to, you may need to let that one go.

 

I don't know anything about tax laws for expats but...how much will you gain (net) by selling your properties?

Is there an IP amongst what you own that would be a suitable PPOR should you have to return and live in Oz?

An no, I would absolutely not be investing in a 6.25% Capital Guaranteed fund.

 

Thanks for the advice. I have spoken to a few expats in the past years that use Singapore and Hong Kong banks so maybe that's an option. A bank like HSBC maybe. Will need to look into this a lot more.

 

I will lose from selling. PPOR in NSW I cannot live in long term as without rental income I do not have enough to live off. Better for me to rent in Oz.
Not recommend the 6.25% Cap G fund? Too low? Or risky?

 

The Land Tax & Absentee Surcharge is a combined tax for absentees. Firstly the threshold for absentees is reduced from land value at $600,000 to $350,000 and tax at corporate land tax rate. Not the 'normal' rate. Then the 1.5% Absentee surcharge is added on top. The land values in QLD are assessed annually and over the last three years have jumped quite a bit, making the LT&AS spike upwards drastically. It is definitely an impost and has also hit many unintended absentees as well such as old age retires who have taken long holidays overseas and returned to find such bills shock like $20,000 tax bills (they obviously own large plots of land in QLD). I had almost a $5,000 bill and next one is $6,600. The predicted following bill if I was still and absentee is looking like over $8,000.

Yes Medically retired - Total Permanent Disability. I was discharged from my occupation with TPD. Workers Comp and 7 years of legal battles with insurance company before final settlement.

 

Too risky - I'd rather theLIC's that everyone talks about on this forum...but its only returning 4% net. So you'd probably need circa $1m in cash I reckon.

 

You might need to read the fine prints for what ‘guaranted’ means as I don’t believe for that return, the capital can be guaranted. Sounds a bit like 2 year rental guaranteed which means the price is inflated and the property might not get the same rental after the guaranted period ends.

 

Capital guaranteed ; returns are guaranteed, unless X or Y happens. We may need to freeze redemptions for 5+ years too.

Basically a garbage product imho.

 

What could happen if the income drops - perhaps to nil and you need to exit the product? The guarantee may not apply unless you stick it out to the end.