ETF LICs vs VAS - Taxation for non resident

Montenegro will probably join the EU in a few years - exit taxes are popular in the EU, so expect changes.

Doesn't matter what you own and where you own it, the Australian CGT situation will be the same when you cease being a tax resident.

Also keep in mind that the rules regarding Australian tax residency will soon change. It will be a lot harder to loose tax residency in future.

 

I thought that Australia cannot tax my Irish domiciled ETFs if I live overseas in Montenegro and non of those shares are Australian.

 

if you bought them after becoming a non-resident that could be the case, but not before

 

Ok. So I buy my Irish domiciled ETFs when living in Australia. Then after a year living in Montenegro (foreign resident) the ATO will be after my:
1. Irish domiciled ETF dividends.
2. Irish domiciled ETF CGT.- ( tax percentage unclear - not eligible for the 50% discount)

Both dividends and sold shares will be going into a Montenegrin bank account. I guess that doesn't matter as every year I'll have to submit an Australian tax return. Right?

Taxable Australian property

"If you stop being an Australian resident, you are taken to have disposed of each of your assets that are not taxable Australian property for their market value at the time you stopped being a resident. You have the option of disregarding capital gains and losses at that time. If you do this, your assets will be taken to be taxable Australian property. For example, if you disregard the capital gain or loss on Australian shares you own, those shares would become taxable Australian property."

 

If you become a non-resident that will trigger CGT and after that you won't have to pay tax in Australia on the capital gains or dividends.

 

Hi mate, would that mean it is better for me to hold VWRL, because Australia will withhold 30% tax on dividends from VGS (as VGS shares are not franked) whereas there is no dividend tax in Ireland on VWRL?

 

Hi Terry. I would appreciate your thoughts on this. I believe I have 3 options before I move overseas:

1. Sell all my shares (LICs, VGS, VWRL) just before moving overseas, pay CGT and re-buy them as Montenegrin resident for tax purposes? This way I won't need to pay any further CGT tax to Australia. 2. Defer payment of CGT however once I decide to sell shares overseas (to live off them), I won't have 50% discount on CGT and no tax free threshold (up to 18k).
3.Never sell Australian franked portion of portfolio (lic's) and use the aussie dividends for income. Defer CGT and therefore never pay any CGT.

Overall I believe option 1 is most favourable. Could you please let me know your thoughts?

 

I won't comment on that. You would want to know the capital gains since purchase, the dividends, the expected growth, when you would sell, when you would die, estate planning for Australia and the foreign jurisdiction issues etc etc.

 

Do you provide this advice as part of your services?

 

no, your should seek out an accountant probably.

 

I've faced the similar situation, so here are my thoughts (not advice):
Option 1: The cleanest option. Sell everything, pay the CGT, and leave Australia on a cash only basis. View it as an opportunity to re-build your portfolio to suit you new situation in a new country.
Option 2: Bad option. You are locking in the obligation to pay at least 30% on any future capital gains.
Option 3: You never know when your circumstances change. You could need the capital in your old age. See option 2.

 

Does it make any sense to hold VGS in Australia as a non-resident? The broker will probably withhold 30% on distributions in the absence of a tax agreement. Then you will have to move the distributions AUD -> EUR every quarter. Then doing the tax returns becomes difficult: the Australian tax year is different to the calendar year commonly used in Europe, the tax reporting from the ASX is optimised for Australian taxpayers, so even having the correct information at the correct tax return deadline becomes an issue.

VWRL is listed in several exchanges, on Xetra it is VGWL. As you will be living in a Euro country, it would make sense to buy on a Euro exchange. VWRL and VGS are similar but not the same - look at the underlying holdings of each. Have you considered Accumulating vs. Distributing ETFs? The equivalent Accumulating ETF to VGWL is VWCE. As you will be living in a country with a flat rate CGT Accumulating might suit you better: just take out what you need when you need it.

By the way, very few brokers in Australia will allow non-residents. I use NabTrade which is one of the few that does. However you are limited to ASX only, no international as a non-resident.

 

That's brilliant information mate, thank you so much!

Does it matter if the fund trades in Euro or Pounds? My understanding is that the currency of the underlying assets is important, but not the currency of trading. Unless you are talking purely from practical perspective e.g. I wouldn't need to do any conversions myself?

Would I pay any tax on Irish domiciled ETF to Australia if I purchased the ETF while in Australia? My understanding is that I wouldn't as I only pay tax on Australia sourced income.

You sat accumulating ETF may be better. Again, is this only from the perspective of convenience? I thought doing tax return is easier for the distributing ETFs?

 

My suggestion is to keep it simple - you don't need to introduce another currency GBP into your life. Live in Euros, trade in Euros, receive distributions in Euros. Depending on the broker, you may be locked into using their exchange rate, which may not be very competitive. Every time you change a currency you loose something...

 

As an Australian tax resident you have to declare all world wide income. If you have a distributing ETF in Ireland, the distributions are part of your reportable income in Australia. If you have an Accumulating ETF, it's even more complicated as you have to report the theoretical distributions (which have been automatically re-invested) as income and pay tax on that.

 

It's also better from a tax perspective: with a distributing ETF you will pay tax on the distribution. You then re-invest what's left back into the same ETF. With accumulating the full amount is invested back. You need to check how your country's tax system handles accumulating ETFs - this may not be the case. Distributing only makes sense if you are going to spend the money on something else.

 

Sorry mate, what I meant is - when I leave Australia, do I pay any tax in Australia on dividends from Irish domiciled ETFs (if I purchased those ETFs while I was in Australia)?

 

I wouldn't think so - but do your own checks.

By the way, when are you planning to make the move?

In the meantime, here's the best site I've found for browsing ETFs from a european perspective:
ETF portfolios made simple | justETF

 

Thanks mate, I'll take a look!

We are planning to leave in 5-10 years, depending on how our investments perform. So still a fair few years to go but I am keen to learn about taxation now so I can invest in optimized products now (tax wise).

What is your asset allocation if you don't mind? I'm currently 100% lic's but from now on I'll probably invest only in world index, so eventually it'll be 50% Australia 50% world. I'm thinking of avoiding European ETFs as it would be just another home country bias and I personally feel those ETFs will underperform.

Another concern I have is that I wouldn't own directly international shares which makes me a bit hesitant to buy them (as opposed to aussie shares). The broker will be a legal owner and I will be a beneficiary owner. I am thinking of using Interactive Brokers for international shares. What is your take on this risk and which broker do you use?

 

Thinking about it again, I believe the following option may be the best. There is a chance that I won't like life overseas and that I may want to move back to Australia and continue working here (as my investments probably won't allow for a comfortable FIRE in Australia, or I just may be bored not working), in which case I will live off salary and dividends and won't need to sell shares yet. I guess I will know that after spending 2 years overseas.

Hence I'm thinking of this option. Once I move overseas, defer CGT payment. Then in 2 years:

1. If I decide to stay in MNE, sell all my shares and pay CGT, build new portfolio. In this case I believe I would pay 50% discounted CGT on the portfolio growth incurred during my time in Australia and would pay full CGT on the portfolio growth over the 2 years I was in Montenegro. Is this correct?
2. If I decide to move back to Australia after spending 2 yrs in overseas, I would have kept all my shares and after 12 mnths of being in Australia I would become Australian resident for tax purposes. Once I decide to sell shares, I would pay 50% discounted CGT on the growth of my portfolio that happened while I was in Australia and I would pay full CGT on the growth of my portfolio that occured over the 2 years while I was overseas. Is this correct mate?

If the above is all correct, than I think it makes sense to follow this strategy to avoid the risk of me selling all the shares and paying CGT when I move overseas and actually end up returning to Australia. This is because the full portfolio (without selling anything) would compound faster.