An offshore bank account is a personal or business account held in a country outside of Australia. The benefits of offshore banking can include more privacy, easier access to foreign currencies or financial products not available in Australia, and potential tax minimisation opportunities.
The downside is that managing it all can be complicated. Offshore accounts are not illegal, but failing to properly declare overseas income is. Tax specialists and other financial advisers can help you utilise your offshore account, and navigate tax law, but other tools are also useful.
International financial institutions can help facilitate overseas banking.
Multi-currency bank accounts can be an effective way to hold multiple currencies.
International currency transfers are a preferable way to send money overseas and convert currency, with lower rates than bank transfers.
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How can I compare offshore accounts?
Comparing offshore accounts requires that you take certain factors into consideration that you don’t need to consider with your standard bank account:
Tax environment. An offshore bank account is usually set up in a country that has a lower tax rate on investment income than in Australia, or on any interest earned through the account.
Confidentiality. One of the biggest advantages offered by an offshore bank account is its privacy policies and unwillingness to divulge details of their clients to third parties.
Accessibility. With an offshore account you are going to want easy accessibility to the funds it holds to make quick investment decisions. Not all accounts will allow for easy access to various investment products, such as forex, so you first need to consider where you will be making most of your investments.
Savings account. An offshore account should work as a savings account, paying you interest on the balance. Check to see what the interest rates offered are.
Multi-currency availability. When you bank with an offshore account, you are going to want to make sure that it has the capability to deal with multiple currencies.
It can also be helpful to compare countries themselves when deciding on an overseas investment location. When you open a high interest savings account in Australia, you might be looking at interest rates of about 3% to 4%. You can get considerably higher returns overseas, but also additional risk. For example, you might open an account in Venezuela for interest rates of 16.00%, which sounds good until you consider the inflation (over 159% in December 2016) and general instability. You may be getting high interest rates, but your investment might still be losing value every day due to inflation, and whichever bank you deposit with might not exist a few years from now.
Getting a return on investment means looking at more than just interest rates. Consider the inflation, the country’s current political climate and what kind of risk level you’re interested in. Your overseas account will also be using the local currency there, and it’s also worth considering the foreign exchange fees which may apply when you want to convert your funds back into Australian dollars.
Interest rates. Higher interest earned is generally preferable. These are the kinds of interest rates you can get with accounts in each country.
Inflation. Lower inflation can mean higher value returns, and high inflation may detracts from the value of your investment.
S&P rating. The Standard & Poor’s long term credit rating for each country is a reflection of the country’s current economic climate and financial stability. AAA grades are the highest rating, indicating a very stable economy, BBB grades are riskier, and anything below that may be regarded as fairly speculative and high risk.
The information in the table below was taken from various sources and is intended to be used for comparison purposes. While care has been taken to keep information accurate, it may not be up to date at the time of reading and you should not base investment decisions on this alone. Note that interest rates, inflation and credit ratings will change over time, and can also change abruptly.
World interest rates
Compare interest rates, inflation and credit rating in Australia’s 20 most popular overseas investment destinations, and in Australia.
Typical interest rates
Inflation in December 2016
S&P credit rating
AA3 Moody’s Credit Rating
Papua New Guinea
How else can I benefit from offshore accounts?
Your key consideration may be tax minimisation strategies, rather than straightforward interest earned. However, your interest can still be considerable, and it may be worth comparing the returns available from overseas term deposits and interest-earning savings accounts. Offshore accounts will often have different rates than what is available in Australia, and these will change over time.
Depending on your needs, you can also benefit greatly from easier access to foreign currencies. If you make a lot of overseas transactions, being able to avoid currency exchange fees is as good as money in your pocket, and holding an interest-earning offshore account, in a currency that suits your needs, may be preferable even if the interest is lower than what you might get in Australia.
Overseas term deposits in particular may deliver higher returns than anything you can get here at a given time. Planning ahead and taking advantage of an opportunity when available may be the most valuable way to invest your money. For example, a company with a 5-year plan to do business in South Africa might open a South African Rand (ZAR) 5-year term deposit account, to simultaneously earn interest and prepare their overseas finances.
Offshore accounts for tax minimisation
Offshore account tax minimisation is often the result of having different tax rates in Australia and elsewhere. You will need to pay tax in line with the local laws in the country of your offshore account, and may need to pay tax on that income in Australia as well, including capital gains tax on investments, and tax on interest earned from overseas savings accounts. Differences in Australian and overseas tax laws mean it may not be a direct "translation", and you may experience effects such as ending up in a different tax bracket.
It's a good idea to use financial advisers, particularly tax specialists, to help you. In particular, an expert may be able to ensure that you aren't breaking any laws.What are the pros and cons to having an offshore account?
Lowered taxes. This is one of the main appeals to investors who are looking for an account to work their investments from.
Foreign investments and products. An offshore account can provide a range of investment and other banking products that are not available in Australia including: bonds, stocks brokerage, foreign exchange, investment funds, equity-linked products, mortgages and lending and insurance.
Online accessibility. With an offshore account you typically have access to the following online: savings account, multi currency account, term deposit and global fund transfers.
Hard to apply. Due to local restrictions and requirements, it may be hard to apply for an offshore account.
Fees. You could be charged higher fees for the advantage of having your money in an offshore account.
Acquisition. Obtaining an offshore account will not be as easy as setting up an investment account in Australia. You might need to provide identification documents that have been verified using an Australian apostille's stamp.
There are some risks to the investor who is keeping their money in offshore accounts. Be aware of the following before considering this type of account to handle your finances:
Regulations. There are laws in place for Australians who hold funds in an offshore account. You should familiarise yourself with those rules and regulations before opening an account.
Security. Your deposits are not necessarily protected the way they would be with the Australian Government Guarantee scheme.
Accessibility. The cost of opening and maintaining an offshore account can be costly, prohibiting those with lesser incomes from establishing one. There are some simple savings accounts available for Australians offshore, but they do not provide the same types of advantages as an offshore account for investment purposes.
Frequently asked questions
How do you open an offshore bank account?
Each bank will have their own account opening process. With most you are going to need to provide the following documents" National ID, passport, a bank statement from which the funds will be withdrawn and a statement about the source of those funds and the purpose for setting up the account.
Will I be able to make direct investments from my offshore account?
Direct investments should be one of the features for an offshore account. The types offered by each bank will differ, making that a good point of comparison for you to start with.
How will I make deposits into my offshore account?
This will require an international money transfer. You can expect to pay transfer fees to send money and to receive money back into your Australian account.
Shirley Liu is Finder's global program manager. She was previously the publisher for banking and investments and has also written comparisons for energy, money transfers, Uber Eats and many other topics. Shirley has a Master of Commerce and a Bachelor of Media, Journalism and Communications from the University of New South Wales. She is passionate about helping people find the best deal for their needs.
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