Should Australian Expatriates pay off their Australian Home Loans or Invest?

Most Australians, like our parents are set on paying off our Investment Home Loans as soon as possible. The problem however is that in some cases paying off our home loans or owning our properties outright whilst living offshore may not be the best thing for us from a financial perspective.

The purpose of the two examples below is to help Australian Expatriates understand the benefits of leverage and the implications of paying off our investment home loans.

Example A

• John is an Australian Expatriate currently residing in Singapore. (Non-Resident for Tax purposes)
• In 2018 John purchased an investment property located in Melbourne for $1,000,000.
• John did not take a loan on his property and purchased the property outright.
• John as a foreign investor for tax purposes must pay 32.5% tax on his surplus rental income.
• Over the next 10 years John’s property grew at an average rate of 6% p.a.
• Johns property after 10 years (2028) of growth is now worth $1,790,000 AUD
• After 10 years of ownership (2028) John decides to sell his property at market price for $1,790,000
• John does not receive the CGT 50% discount as he resided in Singapore for the entire 10 years.
• Johns Capital Gains Tax bill comes to $337,500.
• John makes a total Net Profit of $452,500

Summary

Purchase Price                 $1,000,000

Deposit                               $1,000,000

Mortgage                           Nil

Assumed Growth Rate   6% p.a

Sale Price                           $1,790,000

Total Gain                          $790,000

CGT                                      $337,500

Total Net Profit                $452,500

Example B

• John is an Australian Expatriate currently residing in Singapore. (Non-Resident for Tax purposes)
• In 2018 John purchased an investment property located in Melbourne for $1,000,000.
• John made an initial deposit of $500,000 and took out a loan for the outstanding $500,000.
• Rather than paying off his entire mortgage John decides to invest his remaining $500,000 into an offshore tax-free investment portfolio that also returns an average rate of 6% p.a.
• Johns investment property is neutrally geared (Rental income = Mortgage Interest Rate) and because of this does not pay any tax on Rental income.
• Over the next 10 years John’s property and investment portfolio grew at a healthy and average rate of 6% p.a.
• After 10 years of ownership (2028) Johns investment property is now worth $1,790,000 AUD
• After 10 years of ownership (2028) Johns Offshore Investment Portfolio is now worth $895,000 AUD
• In the 10^th year John decides to sells his property at market price for $1,790,000
• John does not receive the 50% discount on CGT as he resided in Singapore for the entire 10 years.
• Johns Capital Gains Tax bill comes to $337,500.
• John investment property provides a Net After Tax Profit of $452,500
• Meanwhile John also decides to sell his $500,000 Investment Portfolio 10 years later for $895,000 and makes a tax free profit of $395,000.
• John makes a Total Net Profit of $847,500

Summary

Property

Purchase Price                 $1,000,000

Deposit                                $500,000

Mortgage                            $500,000

Assumed Growth Rate  6% p.a

Sale Price                           $1,790,000

Total Gain                          $790,000

CGT                                       $337,500

Net Profit                           $452,500

Offshore Investment Portfolio

Purchase Price                  $500,000

Deposit                                 $500,000

Assumed Growth Rate   6% p.a

Sale Price                            $895,000

Total Gain                          $395,000

CGT                                       Nil

Net Profit                           $395,000

Total Net Gain                  $847,500

Conclusion

John made an additional $395,000 in Capital Gains by using strategy B. John understood that paying off his home loan my not be the best thing for him from a financial perspective. Instead John decides to neutrally gear his Mortgages while using his additional funds for offshore tax free investments. 

It is important to note that this calculation has not taken Land Tax, Agent Fees, Withholding’s Tax, Rental Income and other factors into consideration. It is also important to note that the investment strategy used by any investor should be determined by the investors goals and objectives. As such the example above may not be suited to you. In each case we recommend that you speak with an Australian Specialist before making any investment decision.

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Nothing on this website should be considered financial advice of any kind. Please consult your professional adviser before making any investment decision. Any content on this site relating to tax matters is for general information only, may not be up to date, and should not be considered tax advice of any kind.