Offshore nest eggs require careful handling

Moving overseas, or returning to Australia after a stint abroad, is not just a lifestyle or career decision. It also has far-reaching financial implications that are invariably overlooked until years later.

While these often involve what to do with retirement money overseas or the tax implications of selling assets owned while away, often a more pressing question is when to bring back savings accrued abroad to get the best exchange rate here.

A reader, Andrew, tells me he moved back to Australia from the United States at the end of 2010 and, because the Australian dollar was almost at parity with the US dollar, left $US100,000 of savings in a US account. Almost four years later, the money is still there and he’s wondering when to bring it back to maximise his buying power here.

As luck would have it, this week the Aussie dollar hit a four-year low. While Andrew was concerned he’d left his savings overseas for too long, OzForex’s Jim Vrondas says he’ll get a much better deal. “It’s better for him as the US dollar has moved in his favour,” says Vrondas, chief currency and payment strategist at the online foreign exchange company.

When I spoke to Vrondas mid-week, the rate via OzForex was 0.8793 – meaning Andrew would get $113,727. Just a day later it was 0.8610, giving him just $2417 more. The usual $US15 ($17.50) transfer fee would not apply, says Vrondas, as the amount is more than $US10,000. He may incur a fee from his US bank in transferring the money to OzForex.

But what if Andrew wants to hang out for further weakening of the Aussie dollar?

WATCH THE MARKET

Vrondas suggests a “limit order”. “If he doesn’t want [to convert his funds] at today’s rate but would be interested at 0.85, he can ask us to watch the market for him,” Vrondas explains. “If the rate gets there, day or night, we would convert at that rate and he would then transfer the US dollars to us knowing exactly how many Australian dollars he would receive.”

Andrew’s US account is with Citibank, so what about opening a Citibank account here to make use of no outgoing international transfer fees between Citibank accounts? The problem is there are limits on how much he can send at a time – $US10,000 a week, for example, on many standard accounts (but $US50,000 a week on a Citigold account). This option may be useful for those wanting to “drip-feed” money back to Australia.

Citibank says Andrew could use an online wire transfer where the limits are higher – $US50,000 per transfer or day on most accounts, but no limits for Citigold. If Andrew had transferred his $US100,000 on Wednesday, the Citibank rate was 0.8925, so he would have got $112,045.

A survey of international money transfers in October by research house Canstar awarded Citibank and HSBC five stars for their competitive exchange rates and fees. But it appears Andrew would be better off with OzForex in this instance.

Like many Australians returning home, Andrew has a retirement savings plan – 401(k) – in the US and is not sure what to do about it. He’s heard there is a six-month window to bring it back.

That’s right, says technical expert Colin Lewis of ipac Securities, but it does not apply to him. “Unlike the UK and Denmark, most countries (including the US, Singapore and Hong Kong) require pension benefits to be cashed out and not transferred,” he says. Cashing out the investments may mean the money being taxed in the foreign country.

TAX CONCESSIONS

UK and Denmark expats can make transfers to super funds in Australia. If they do so within six months of arriving in Australia, it is tax-free. After that, the capital growth since becoming a resident is either ordinary income taxed at normal marginal tax rates, or may be elected to be treated as a taxable super contribution where 15 per cent tax is paid, says Lewis.

Say when you arrive in (or return to) Australia, your super is worth $100,000. Three years later, it’s grown to $150,000. The $50,000 growth is taxable.

Wherever you have come from, remember not to breach super caps. These deposits – other than the growth component after six months (in our example $50,000) – are viewed as “non-concessional” or after-tax contributions capped at $180,000 a year. The growth component can be treated as a taxable contribution and taxed accordingly, but is not counted against the “concessional” cap.

Executives on the top marginal tax rate coming from the UK and Denmark and transferring a benefit after six months have a choice of paying 49 per cent (including the Medicare levy and Deficit levy) if the growth is treated as ordinary income, or 15 per cent tax if treated as a super contribution.

So in our example, it’s a choice of either personally paying tax of $24,500 if the growth of $50,000 is ordinary income, or your super fund paying $7500 tax if it’s elected to be treated as a taxable super contribution.

But Andrew will have no choice and the growth in his 401(k) benefit (ie. anything in excess of his employer and personal contributions) is taxed as normal income. He may get an offset for tax paid in the US.