How Will Moving to Australia Affect My Investment Choices?

There are two main ways that an international move of this sort should affect investment choices:

1. Differences in tax policy - I don't believe in arranging investments to minimize taxes. Rather one should choose investments that maximize net worth (for a given willingness to bear risk). Taxes will affect the net worth outcome but are only one factor. Nevertheless differences in tax policy are important.

2. Differences in accessible investments - For example, as an Australian resident I will again have access to Australian IPOs and adding new investments to Australian mutual funds. I am likely to do both to some degree.

In this post I'll discuss some more about the influences of tax policy on my future investment choices:

Margin interest I'll probably increase my margin borrowing in the long-run as Australia lets you deduct margin interest at your marginal rate whether your investments made any money that year or not. In the U.S. margin interest is directly deductible against investment income. If you didn't do well that year you have to carry the expense forward to following years. So I've been a bit more cautious on using margin. Still there are often cheaper ways of getting leverage than actually using a margin loan. These included levered (geared) mutual funds, options, and futures. So I won't be overdoing it.

U.S. Dividend Paying Stocks As a U.S. resident most dividends are taxed at the Federal rate of 15%. As an Australian resident I will need to pay a 30% with-holding tax in the U.S. I can claim this as a foreign tax credit in Australia but I'll need to pay tax at my marginal rate on the dividend. That is likely to be 30% at first but could be 40% or higher if my income rises. I'll pay lower or similar rates on long-term capital gains (no U.S. with-holding). So I am more likely to choose a low or non-dividend paying U.S. stock over one that pays a high yield.

Australian Stocks Stocks that pay dividends based on Australian sourced profits are highly tax advantaged in Australia. You receive a credit for the tax paid by the company. The company tax is 30%. So if your marginal rate is 30% you pay no tax on the dividend. If your rate is above 30% you pay the difference between the two rates. Things get more interesting when you lever a portfolio. The interest is effectively deducted against the dividends and you end up with excess credits that can offset other taxes. I'll be more likely to invest in higher yielding Australian stocks either directly or through Australian mutual funds. One interesting twist is that listed investment companies (the equivalent of closed end funds) can invest outside Australia but are deemed as earning Australian profits and the dividends that they issue have franking credits attached. The leading example is Platinum Capital, which I already invest in.

From an economic perspective there really isn't any difference between investing through the listed investment company or a mutual fund which passes all earnings through pre-tax. Actually, there are advantages to the mutual fund structure as long-term capital gains are taxed at a lower rate. The LIC pays 30% tax on its profit and then distributes a dividend with a credit but no other concessional tax rate. So the total tax bill to company and investor combined is higher! With leverage though, the LIC's tax credits can offset taxes on other income the investor earns.

However, it is structured though there is double taxation of foreign dividends but not of dividends from actual economic activity in Australia.

U.S. Mutual Funds I think I can still invest in these but all distributions are subject to U.S. with-holding. I should be able to claim that tax back in Australia. There are very complex rules governing investments in foreign mutual funds. This can include paying tax on unrealized gains at the top marginal rate. Generally if you hold less than $A50k in foreign mutual funds you are exempt from the rules. Most U.S. mutual funds now also appear to be exempt. But it's not clear to me yet whether you can pay the lower long-term CGT rate on capital gains distributions from the funds. Given this, I won't be making extra investments in U.S. mutual funds in the near future. Employer sponsored retirement funds are also exempt. I plan to keep my 403b with TIAA-CREF and my employer to avoid any issues.

Individual Retirement Accounts Australia taxes non-employer sponsored foreign retirement accounts as if they had no retirement status at all. Probably next year I will close my Roth IRA. I will need to pay a 30% with-holding tax (but no penalty) on the profits for doing this. But I should be able to claim this back in Australia while if I just transfer the fund units to a non-retirement account without redeeming them paying no CGT in Australia. Actually, it could make sense to cash out the 403b once I'm a non-resident too - I'd pay a 30% withholding tax that was reclaimable in Australia and then 15-20% capital gains in Australia. We could then maybe make an aftertax contribution to an Australian superannuation fund where earnings would be taxed at 15% in perpetuity or just keep it in a non-retirement account. This will need careful analysis. One thing I would need to understand is how distributions from a 403b would be taxed in Australia. I would think that selling the units should be subject to capital gains rather than ordinary income tax rates?

Futures Trading The U.S. taxes futures trading at a concessional rate, while Australia doesn't. But it is more flexible (24/5) and cheaper than trading ETFs so I probably won't be likely to reduce my futures trading.

So the bottom line is there is a mix of things where I'll be cautious until I understand them better and others where a small change is likely to happen over time. No dramatic moves.

Please let me know if I made a mistake in anything!