Malcolm Turnbull has one. James Bond has one. Jason Bourne has one. Using offshore jurisdictions to protect your wealth seems to be all the rage these days. It’s almost to the point where we’d be surprised if a millionaire didn’t have one.
Many websites claim that you do not need to be a multimillionaire to reap the benefits of an offshore bank account but before your FOMO (Fear of Missing Out) gets the better of you, read on to learn about why you should (or should not) use offshore jurisdictions.
There are 4 main reasons why people use offshore jurisdictions, which are:
Sovereign Risk
Sovereign risk refers to the risk of political instability in a country which may threaten your net wealth. For instance, assets may be seized by governments, banks could be nationalised or your country’s currency may not be recognised after political upheaval. Having offshore brokerage accounts will mean that you are able to transfer your assets over to the foreign jurisdiction away from the trouble.
Currency Risk
Closely linked to sovereign risk, this refers to where the government mis-manages monetary policy and devalues the currency, thereby eroding the value of any cash you are holding. Similarly, if you own bonds and the sovereign is unable to pay them back, it will again impact your wealth. As a result, offshore brokerage accounts allow you to hold various foreign currencies or store your wealth in universally recognised assets such as precious metals. Thus, if the AUD tanks, at least you have some Swiss francs sitting in your Swiss bank account!
Privacy
A typical offshore account structure involves setting up a legal entity in another country capable of holding assets – typically a corporation. This corporation is then owned by a trust, which further distances your personal name from the corporation. The corporation then operates bank accounts in jurisdictions such as Switzerland famous for its bank secrecy. As a result, this set up allows individuals or corporations to channel their wealth into overseas accounts thereby appearing less wealthy in their ‘home’ country.
Hiding your assets from the ATO is illegal. However hiding it from telemarketers targeting wealthy leads is another matter and Swiss bank clients have been known to do so for that reason.
Regulatory Arbitrage
If you operate a business in a highly regulated industry, you may wish to move operations offshore to a less regulated jurisdiction. The flow of money out of the highly regulated jurisdiction will place pressure on it to deregulate and attract investment. As a result, offshore bank accounts will allow your business to operate in more favourable regulatory environments.
Are you better off creating an offshore account?
Evidently, many of the reasons people use offshore accounts is unlikely to be compelling to the average Australian. Compared to the rest of the world, the probability of a sovereign risk or currency risk eventuating in Australia is too low to necessitate the use of foreign holdings. The most compelling reasons would be more favourable regulations and increased privacy – however be careful walking the tightrope between tax evasion (illegal) and tax minimisation (legal). It is highly recommended you get legal advice before setting up such accounts!
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