Australian expat seeking low-maintenance portfolio?

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Topic Author
futurefocus
Posts: 4
Joined: Wed May 12, 2021 1:12 am

Australian expat seeking low-maintenance portfolio?

Post by futurefocus »

Hello all,

I've been browsing these forums for months, and have been so grateful for all of the advice and lessons shared. I'm hoping someone more knowledgable than I can show me the way forward for my situation, which is a little nuanced.

I'm a 31-year-old that relocated from Australia to the UAE ~5 years ago. Upon my departure – and on advice from my accountant – I wanted to get certainty around my tax residency status. After filing a case with the ATO and laying out my circumstances, I was ruled a non-tax resident of Australia.

Because of my financial ignorance, I've spent these past few years without a dollar invested in the market. I'm hoping to change that imminently. Naturally, living and working in a tax-free environment, as a non-tax resident of Australia, is a substantial investment opportunity, as I could invest back in Australia without CGT, through a platform like NABTrade.

However, just as I was about to begin an investment journey, I've received a job offer in the UK, and will be relocating there imminently (I am in the tech sector). I've since confirmed with a UK-based accountant that, while in the UK, I will be considered a non-domiciled UK resident, and therefore only taxed on UK-sourced income. That means that dividends, capital gains – whatever I do around the world – will be irrelevant to my British taxes, so long as the money doesn't touch my UK bank account.

I have successfully opened a NABTrade account (I'm well-aware of the platform's flaws and poor customer service, but for my set-and-forget purposes, and for the opportunity to have CHESS-sponsored trading, I'm OK with it). I anticipate that it's more likely than not that I will one-day return to Australia.

As terrifying as it is, I'm looking to lump-sum invest my $200,000 AUD in savings (rather than DCA) and get my investment journey started in earnest.

__

These are my questions, and I'd so appreciate any guidance.
  • 1. Ideally, I would have liked to invest in a Vanguard Lifestrategy Fund. I know they're imperfect, but I am a first-time investor who is also rather emotional with cash. I'd be happy with an 80% perfect solution, rather than being frozen by fear. Unfortunately, I'm unable to open a Vanguard Australia account as a non-resident. As such, considering my access to NABTrade, I'm considering allocating 100% of my funds to VDHG: a publicly listed ETF that contains 40% Australian equities, 18% Global equities AUD-hedged and 42% Global equities. Is this an apt comparison to a Lifestrategy Fund? My biggest reservation with VDHG is how much Aussie equities are in there. I don't see a whole heap of aggressive innovation or growth in the country, but I may not be seeing things clearly.

    2. If I invested in VDHG – or a similar Australian-traded ETF – would there be any meaningful ramifications as a non-tax resident of Australia? I'm still confused about whether I'll be heavily penalised by dividends and so on. And what about the US/int'l shares that are packaged within the ETF – does that have any consequences?

    3. Does the above plan make sense for an expat first-time investor looking to overcome analysis paralysis, and just get on with life? I don't need this to be perfect, just 80% of the way there, know what I mean? I'm fortunate enough to be able to pile on ~$10,000 in savings each month, and my eventual goal would be to FATFire after accumulating $6-10M, and live of a ~4% withdrawal a year.
Please forgive the word vomit. Grateful for any help this community could offer.
andrew99999
Posts: 838
Joined: Fri Jul 13, 2018 8:14 pm

Re: Australian expat seeking low-maintenance portfolio?

Post by andrew99999 »

Good work on getting your act together to start investing.

VDHG is effectively the same thing as Vanguard Lifestrategy Fund High Growth fund.
VDGR is effectively the same thing as Vanguard Lifestrategy Fund Growth fund.
By the same, I mean identical. They hold identical funds internally.

I agree that VDHG has a lot of Australian shares. You could potentially spit it with VGS or even just go for a global index VGS/VGE and optionally VISM).

I doubt there are any issues with using Aus domiciled funds if you are a non-resident the entire time, but I am not an accountant (although I have spoken to one).

CGT
• None payable for both Australian and non-Australian shares provided you're a non-resident the entire time they're held.1
Dividends
• Non-Australian shares - None beyond what was taken out before it gets to you.
• Australian shares franked dividends - None beyond what was taken out before it gets to you, but no franking credits.
• Australian shares unfranked dividends - Your broker or fund should take out 30% before it gets to you, and then there is no more to pay. But if you forget to tell your broker or fund that you're a non-resident, you need to pay this by lodging a tax return.

Yes, your plan makes sense, and a good plan. I would reconsider the high Australian equities component either by splitting half with VGS or else going for an all-global portfolio, otherwise it seems good to me.
Peter G
Posts: 87
Joined: Sat Apr 30, 2016 8:14 pm

Re: Australian expat seeking low-maintenance portfolio?

Post by Peter G »

futurefocus wrote: Thu May 13, 2021 2:35 am
a non-domiciled UK resident, and therefore only taxed on UK-sourced income. That means that dividends, capital gains – whatever I do around the world – will be irrelevant to my British taxes, so long as the money doesn't touch my UK bank account.
Quoting from here: https://www.gov.uk/tax-foreign-income/n ... -residents
'Tax if you’re non-domiciled
You do not pay UK tax on your foreign income or gains if both the following apply:

they’re less than £2,000 in the tax year
you do not bring them into the UK, for example by transferring them to a UK bank account'

It seems you will not meet the first test. Reading on:
'If your income is £2,000 or more
You must report foreign income or gains of £2,000 or more, or any money that you bring to the UK, in a Self Assessment tax return.
You can either:

pay UK tax on them - you may be able to claim it back
claim the ‘remittance basis’
Claiming the remittance basis means you only pay UK tax on the income or gains you bring to the UK, but you:

lose tax-free allowances for Income Tax and Capital Gains Tax (some ‘dual residents’ may keep them)'
It reads as though your investment returns outside Britain might be relevant to your British taxes.
Topic Author
futurefocus
Posts: 4
Joined: Wed May 12, 2021 1:12 am

Re: Australian expat seeking low-maintenance portfolio?

Post by futurefocus »

andrew99999 wrote: Thu May 13, 2021 3:59 am Good work on getting your act together to start investing.

I agree that VDHG has a lot of Australian shares. You could potentially spit it with VGS or even just go for a global index VGS/VGE and optionally VISM).

CGT
• None payable for both Australian and non-Australian shares provided you're a non-resident the entire time they're held.1
Dividends
• Non-Australian shares - None beyond what was taken out before it gets to you.
• Australian shares franked dividends - None beyond what was taken out before it gets to you, but no franking credits.
• Australian shares unfranked dividends - Your broker or fund should take out 30% before it gets to you, and then there is no more to pay. But if you forget to tell your broker or fund that you're a non-resident, you need to pay this by lodging a tax return.

Yes, your plan makes sense, and a good plan. I would reconsider the high Australian equities component either by splitting half with VGS or else going for an all-global portfolio, otherwise it seems good to me.
I'm grateful for the clarification on this, thank you! By splitting with VGS, do you mean purchasing both VDHG and then a smaller portion of VGS (say 20%) to rebalance the overall portfolio to be more global/US? That sounds interesting.

And regarding the franked/unfranked dividends, other than missing out on the chance to build franking credits, there's nothing particularly inefficient about this plan that you see?

Peter G wrote: Thu May 13, 2021 4:02 am It seems you will not meet the first test. Reading on:
'If your income is £2,000 or more
You must report foreign income or gains of £2,000 or more, or any money that you bring to the UK, in a Self Assessment tax return.
You can either:

pay UK tax on them - you may be able to claim it back
claim the ‘remittance basis’
Claiming the remittance basis means you only pay UK tax on the income or gains you bring to the UK, but you:

lose tax-free allowances for Income Tax and Capital Gains Tax (some ‘dual residents’ may keep them)'
It reads as though your investment returns outside Britain might be relevant to your British taxes.
Thank you for pointing out this wrinkle! I appreciate it. I'll have zero tax-free income tax allowance in the UK, owing to my tax bracket. Good to know on the CGT allowance. I do plan on investing in Vanguard via the tax-free ISA allowance in the UK too.

It sounds as though my tax circumstances will change substantially once I am considered domiciled, although that's seven years away. It sounds like I'll have to report those dividends, though – I'll be flagging with a UK accountant, so thank you again.
Jaymover
Posts: 79
Joined: Wed May 12, 2021 8:19 pm

Re: Australian expat seeking low-maintenance portfolio?

Post by Jaymover »

Why not roll your own VDHG and then rebalance yourself about once a year? I rolled my own and for some reason have been beating the VDHG despite not rebalancing much (they do it 3x per year). Buy

VAS
VGS
VISM
VGE

VBND
VAF

In the same percentages as on the VDHG website or VDGR.

You could then dial down the VAS percentage and up the VGS bit. Can also go ethical options eg VESG instead of VGS.

The beauty of it is that you can let the allocations drift up a bit and therefore not trigger any capital gains tax implications, deferring that for another year that suits. You would still have tax on the distributions and no imputation credits I guess.
andrew99999
Posts: 838
Joined: Fri Jul 13, 2018 8:14 pm

Re: Australian expat seeking low-maintenance portfolio?

Post by andrew99999 »

futurefocus wrote: Thu May 13, 2021 5:06 am I'm grateful for the clarification on this, thank you! By splitting with VGS, do you mean purchasing both VDHG and then a smaller portion of VGS (say 20%) to rebalance the overall portfolio to be more global/US? That sounds interesting.
Yes. If you wanted to halve the Australian and AUD-hedged global shares, you could go half-half.
futurefocus wrote: Thu May 13, 2021 5:06 am And regarding the franked/unfranked dividends, other than missing out on the chance to build franking credits, there's nothing particularly inefficient about this plan that you see?
Franking credits not only don't help non-residents, but they actually work against you.

Australian shares have roughly 4% dividends, of which about 3% is franked. The "grossed up" return of the franked dividends is 100/70 x 3% = 4.3%, so there is a benefit to Australian residents of 1.3% from franking credits. But franking credits are 40-80% priced-in, meaning if we take the centre of that estimate, when shares go ex-dividend, the value of the shares drops by 60% of that or 0.8%. So, non-residents not only don't get the benefit of franking credits, but there is an almost 1% per annum cost, which you are entirely unaware of since it happens by stealth.
Jaymover
Posts: 79
Joined: Wed May 12, 2021 8:19 pm

Re: Australian expat seeking low-maintenance portfolio?

Post by Jaymover »

Also, if you are too scared to lump some you can slowly tip it in, buying $20K lumps of VGS, VGAD etc each month until you have spent all your $200K.

Not a bad time to dollar cost average, market is a bit toppy and people are talking about a correction. However 60% of the time tipping it all in is the way to go (however I tipped all my savings in one go in November 2019 but dollar cost averaging would have been good for me in glorious hindsight).

Oh yes VGAD is the other component of the VDHG which is international shares hedged to the aussie dollar. You do want some Australian exposure, unless you never want to come home.
Topic Author
futurefocus
Posts: 4
Joined: Wed May 12, 2021 1:12 am

Re: Australian expat seeking low-maintenance portfolio?

Post by futurefocus »

Jaymover wrote: Thu May 13, 2021 5:18 am Why not roll your own VDHG and then rebalance yourself about once a year? I rolled my own and for some reason have been beating the VDHG despite not rebalancing much (they do it 3x per year). Buy

VAS
VGS
VISM
VGE

VBND
VAF

In the same percentages as on the VDHG website or VDGR.

You could then dial down the VAS percentage and up the VGS bit. Can also go ethical options eg VESG instead of VGS.

The beauty of it is that you can let the allocations drift up a bit and therefore not trigger any capital gains tax implications, deferring that for another year that suits. You would still have tax on the distributions and no imputation credits I guess.
I admire people like you going DIY. I, unfortunately, feel like a bit of a coward with cash. I think the less efficient, less flexible route might lower my chances of screwing things up for myself. Maybe I'll gain courage once I'm a little further in the journey?
andrew99999 wrote: Thu May 13, 2021 5:32 am
Franking credits not only don't help non-residents, but they actually work against you.

Australian shares have roughly 4% dividends, of which about 3% is franked. The "grossed up" return of the franked dividends is 100/70 x 3% = 4.3%, so there is a benefit to Australian residents of 1.3% from franking credits. But franking credits are 40-80% priced-in, meaning if we take the centre of that estimate, when shares go ex-dividend, the value of the shares drops by 60% of that or 0.8%. So, non-residents not only don't get the benefit of franking credits, but there is an almost 1% per annum cost, which you are entirely unaware of since it happens by stealth.
Stealth drag. That's a bummer. But if I'm wanting to invest in an ETF as a non-resident, there's no real way to avoid this, right? There aren't any broad global ETFs on the ASX that don't pay out dividends that result in this?
TedSwippet
Posts: 3677
Joined: Mon Jun 04, 2007 4:19 pm
Location: UK

Re: Australian expat seeking low-maintenance portfolio?

Post by TedSwippet »

futurefocus wrote: Thu May 13, 2021 5:06 am It sounds as though my tax circumstances will change substantially once I am considered domiciled, although that's seven years away. It sounds like I'll have to report those dividends, though – I'll be flagging with a UK accountant, so thank you again.
Just an added note on this. The UK takes a slightly dim view of investments in 'offshore' funds and ETFs. Where a fund is not UK domiciled and does not have UK 'reporting status', capital gains are taxed as if income. Almost always undesirable.

The list of 'reporting status' funds is here. It is lengthy (a good thing), but poorly organised and sorted (a not-so-good thing):

Approved offshore reporting funds - GOV.UK

If your AUS domiciled funds are not listed, then being a UK 'non-dom' may (might?, should?) protect you from this, at least up to a point. My worry would be that once UK domiciled, a bunch of historic capital gains might suddenly become subject to it. The UK does not 'step up' the basis of anything bought before becoming a UK tax resident, so it can tax gains that might have accrued years or decades before even setting foot in the UK.

A standard UK immigration plan might include sell-and-repurchase to wash away any unrealised gains before coming to the UK, especially if moving from a low or no-tax country (the UAE), but that could be hard when taken in conjunction with UK 'non-dom' rules. Not sure -- 'non-dom' is not my area. However, something to watch out for and check very carefully with your UK accountant before making any actual moves, then.
andrew99999
Posts: 838
Joined: Fri Jul 13, 2018 8:14 pm

Re: Australian expat seeking low-maintenance portfolio?

Post by andrew99999 »

futurefocus wrote: Thu May 13, 2021 5:42 am Stealth drag. That's a bummer. But if I'm wanting to invest in an ETF as a non-resident, there's no real way to avoid this, right? There aren't any broad global ETFs on the ASX that don't pay out dividends that result in this?
You can avoid it by avoiding Australian shares.
For instance, VGS/VISM/VGE in proportions of about 75/15/10 would give you a global index and there are no franking credit drag to you as a non-resident.

If you feel like Australian shares are worth the drag, then it may be reasonable, but it's a(nother) reason not to overdo the Australian equities component.
andrew99999
Posts: 838
Joined: Fri Jul 13, 2018 8:14 pm

Re: Australian expat seeking low-maintenance portfolio?

Post by andrew99999 »

Jaymover wrote: Thu May 13, 2021 5:33 am Also, if you are too scared to lump some you can slowly tip it in, buying $20K lumps of VGS, VGAD etc each month until you have spent all your $200K.
Absolutely agree with this. Don't feel like you have to invest it all immediately. There's nothing wrong with moving in at a rate that you are comfortable with.

The point is to get it invested, and if it takes some time to feel more comfortable, so be it.
Topic Author
futurefocus
Posts: 4
Joined: Wed May 12, 2021 1:12 am

Re: Australian expat seeking low-maintenance portfolio?

Post by futurefocus »

andrew99999 wrote: Thu May 13, 2021 10:15 pm
futurefocus wrote: Thu May 13, 2021 5:42 am Stealth drag. That's a bummer. But if I'm wanting to invest in an ETF as a non-resident, there's no real way to avoid this, right? There aren't any broad global ETFs on the ASX that don't pay out dividends that result in this?
You can avoid it by avoiding Australian shares.
For instance, VGS/VISM/VGE in proportions of about 75/15/10 would give you a global index and there are no franking credit drag to you as a non-resident.

If you feel like Australian shares are worth the drag, then it may be reasonable, but it's a(nother) reason not to overdo the Australian equities component.
This makes sense. One last question: as it's Australian-domiciled, would I need to fill out a W8 for an ETF like VGS? Are there considerations there too? Thank you for your patience and your help.
andrew99999
Posts: 838
Joined: Fri Jul 13, 2018 8:14 pm

Re: Australian expat seeking low-maintenance portfolio?

Post by andrew99999 »

futurefocus wrote: Fri May 14, 2021 3:55 am One last question: as it's Australian-domiciled, would I need to fill out a W8 for an ETF like VGS? Are there considerations there too?
Nope. No W8BEN form for Australian domiciled funds.
If you are definitely not a resident of Australia, then I see no issues with Australian-domiciled ETFs like VGS.
You would have to make sure you are ok in the country you are a resident of.
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