Australia typically taxes individuals on their worldwide investment income and/or capital gains as part of the income tax system. If, for example, you hold an ETF investment and sell it for profit having owned it for a few years, as an Australia resident you will pay tax on that gain at your marginal Australian Income Tax rate, which can be as high as 45%. A 50% CGT reduction can be available for assets held for more than a year. Similarly, if you own an investment which produces an income, such as by way of dividend or interest, you will be taxed on that income in the year received.
If you move to Australia, you become liable to tax on income and gains on investment that accrue subsequent to your arrival. In effect, once resident in Australia you are treated as having bought the investment at on the day you arrive in Australia at its value on that date. This is a more fair system than, for example, the UK, which would simply tax you on the full gain on an investment since purchase if sold it whilst tax resident therein.
This is how holdings in Interactive Brokers, for example, would be treated.
Aussie-Super
In the case of assets held within an Aussie Super, capital gains are taxed within the fund at a rate of 10%, whilst income is taxed within the fund at 15%. Only once reaching retirement does the Super policy actually become tax efficient as regards non-concessional contributions (concessional contributions have the immediate tax benefit of reducing your income tax burden in the year of contribution). .
Concessional Contributions = These are pre-tax contributions from you or contributions to your fund by your employer. You employer must pay 11% of salary into your Super. You can pay additional concessional contributions as long as the total (including employer contributions) does not go over the current annual limit of $27,500. You save tax at your marginal rate by making such contributions, and instead pay a 15% contribution tax.
Non-Concessional Contributions = These are post-tax payments. Unlike with the concessional contributions, there is no tax charged on these payments (as you already paid tax at your marginal rate)
Typically, it makes sense to maximise concessional contributions, which as a non-resident means using your Australian rental income to contribute at least the amount of rental income which is subject to tax after accounting for deductions. Making non-concessional contributions to Super as a non-resident makes far less sense, as you are getting no immediate tax benefit for doing so, and are subjecting to ongoing taxation whilst the Super grows (and there is a better alternative – see below).
Non-Australian Insurance Bond
An insurance bond is an investment vehicle which is structured as an insurance policy for UK and Australian tax planning purposes. Though structured as insurance, they do not actually provide, nor charge for, insurance benefits (they typically pay out 101% of your investment value on death to enable themselves to be recognised as insurance), and are best thought of as simply a policy which holds your chosen investments. I have attached a brochure of one such product just in case you wish to take a look
Insurance bonds come is two main forms, one being for lump-sums of cash that are ready for investment (or indeed for existing investments such a shares which can be transferred in), and the other for savings regularly into from monthly income.
As regards investments, the lump-sum versions facilitate investment into anything we wish (other than property), and I typically favour using ETFs and similar low cost mutual funds. The monthly contribution versions, of which there are a few iterations to select from, have set fund ranges that can be used.
If investments are held via an insurance bond, income generated therein is not subject to income tax. Furthermore, gains produced via the sale of investments within the insurance bond are also free of any tax consequence (assuming the proceeds remain within the policy). In other words, your investments can grow completely tax free, which is not possible via any other structure.
Only once you draw cash out of the offshore insurance bond could tax potentially be payable.
If you have held the policy for 10 years however, there is no tax to pay in Australia on anything withdrawn.
This provides you with the unique opportunity to be enjoying income and capital gains without ever having to pay tax thereon. To avoid restarting this 10-year clock, it is important to avoid contributing more than 125% into the plan when compared to the previous year. See for example (note that some ATO link require you to be accessing them from an Australian IP address – I can view them using a VPN set to Australia; let me know if you prefer to email you extracts from these pages)
https://www.ato.gov.au/law/view/view.htm?docid=EV/1051811048828&PiT=99991231235958
https://www.ato.gov.au/law/view/view.htm?docid=EV/1051374891318&PiT=99991231235958
https://taxstore.com.au/news/life-policy-bonuses-and-tax
This 10 year rule, as you can see from the links above, applies to onshore Australian policies also. The reason that the rule exists is in relation to Australian issued policies, which themselves pay tax on an ongoing basis (and so the exemption after year 10 seeks to make investment therein more fair to the taxpayer. In the case of offshore policies, the policyholder benefits from the rule without suffering the ongoing tax that the rule seeks to redress.
This can be even more tax-efficient than Australian Superannuation, which produce tax free income in retirement BUT are taxed on an ongoing basis until you reach retirement (your Supers are currently paying tax at 15% on income generated and 10% on capital gains).
That is not to say that Superannuation should not be utilized. The income tax break given in Australia with respect to concessional contributions, when coupled with the tax breaks in retirement, mean that you should typically make use of Super policies when saving for retirement from Australian sourced income.
For example, whilst non-resident in Australia it typically makes sense to make concessional contributions from the rental income enjoyed from Australian property. You are currently liable to pay tax at a rate of 32.5% on your Australian rental income. The full surplus rental income amount could (if not being done already) be used to make concessional contributions for both of you, lowering the applicable tax rate thereon from 32.5% to 15%. Note also that there is some scope to carry forward the unused balance of your annual concessional contribution allowance (see https://www.ato.gov.au/Rates/Key-superannuation-rates-and-thresholds/?page=3), which could be useful once your move back to Australia and have additional income that can be utilised.
Typically it is a combination of concessional Super contributions and offshore insurance bond which will ensure maximum tax efficiency in Australia. Whilst non-resident, concessional contributions using your rental income should be made in respect of income on which you are paying tax, whilst everything over and above that amount should be invested into the offshore bond. Once resident it would make sense to contribute the maximum $27.5k per year concessional amount each into a Super whilst continuing to invest any additional investment amounts into the offshore bond. This maximises immediate income tax relief and then also maximises tax free investment growth. On retirement, both pots can be drawn down tax free (or earlier than that if desired in the case of the offshore bond)
* Potentially reduced via CGT discounting method (to 50% of marginal rate if 100% of ownership period is as an Australian resident)
** Assuming withdrawal in retirement/after reaching preservation age
*** Assuming that the policy has been open for 10 years or more, and the aforementioned contribution rule (never paying more than 125% of previous policy year contributions into the plan)
To give a brief and simplified example of the potential tax savings enjoyed in using an insurance bonds vs investing directly via, for example, a brokerage platform, if you invested A$500k today, returned to Australia after 2 years and then sold the investments in 20 years time (2039), the tax saving would, assuming annualised growth of 6%, amount to more than A$235,000.
To weigh against that tax saving would be any additional cost of an insurance bond in comparison to the alternatives. Costs of all such products can vary, so we suggest that you speak to us to assist in esrtablishing which route forward will serve your future in the best way.
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