Managing Concentrated Shareholdings as an Australian living overseas
Key points
Concentrated employer shareholdings can create significant investment risk, particularly when your employment income and investment wealth are tied to the same company.
For Australian expats, managing employer shares involves more than deciding whether to sell or hold, with tax residency, currency exposure, future vesting and broader wealth all needing to be considered.
A broader financial planning strategy can help put concentrated shareholdings into context, considering your investments, superannuation, employment, tax position and longer-term plans to return to Australia.
For Australian professionals living and working overseas, equity-based compensation can become a significant component of overall wealth. Restricted Stock Units (RSUs), stock options, employee share purchase plans and other forms of employer equity can provide substantial opportunities for wealth creation, particularly for professionals working in technology, finance, law and other high-income industries.
However, when a large proportion of your wealth is held in shares of the company you work for, you can also become exposed to significant concentration risk.
Managing concentrated shareholdings as an Australian living overseas requires more than simply deciding whether to sell or retain your shares. Your employment, investment portfolio, tax position, currency exposure and future plans may all be interconnected.
For Australian expats, these considerations can become even more complex because your financial affairs may span multiple countries and tax systems.
What is a concentrated shareholding?
A concentrated shareholding occurs when a significant proportion of your overall wealth is invested in one company or security.
This commonly occurs when an Australian expat receives shares through their employer. Over several years, the value of vested RSUs, stock options or purchased shares can accumulate, potentially resulting in hundreds of thousands or even millions of dollars being invested in a single company.
The issue is not necessarily that the company is a poor investment. Rather, your financial position may become heavily dependent on the performance of one investment.
This can create a particularly important risk for employees because their salary, career prospects and investment portfolio may all be linked to the same company.
If the company experiences a significant decline in value, you could potentially face a reduction in employment income at the same time as your investment portfolio falls.
Managing concentrated shareholdings as an Australian living overseas
There is no universal percentage at which a shareholding becomes "too concentrated". The appropriate level depends on your broader financial position, investment objectives, risk tolerance, time horizon and future plans.
However, there are several important questions Australian expats should consider when reviewing a concentrated position.
1. Understand how the shares were acquired
The first step is understanding exactly what you own.
An employee may hold a combination of vested RSUs, unvested RSUs, stock options and shares acquired through an employee share purchase plan. Each can have different taxation, vesting and liquidity characteristics.
Runway Wealth Management has previously explored these issues in our articles on RSUs for Australian Expats, Stock Options for Australian Expats and ESPPs for Australian Expats. Understanding the structure of your equity compensation is important before making decisions about selling, retaining or diversifying your position.
2. Consider the concentration of your overall wealth
Looking at the shareholding in isolation can make it difficult to determine whether the position is appropriate.
Instead, consider it alongside your other assets.
For example, an Australian expat may have:
$1 million in employer shares;
$300,000 in superannuation;
$250,000 in other investments;
$200,000 in cash;
Australian property;
overseas retirement savings;
future equity expected to vest.
The $1 million shareholding may represent a much larger proportion of their investable wealth than initially assumed.
It is therefore important to consider the employer shares as part of the broader financial plan rather than treating them as a standalone investment.
3. Separate your employment from your investment decisions
One of the most difficult aspects of managing employer shares is the emotional connection to the company.
You may have helped build the business, believe strongly in its future or feel that selling the shares means giving up future growth.
However, there is an important distinction between believing in your employer and determining how much of your personal wealth should remain invested in that employer.
Once shares have vested, they are effectively an investment decision.
A useful question is:
If you received the current value of your shares as cash today, would you choose to invest all of it back into your employer?
If the answer is no, that may be an indication that the existing concentration deserves further consideration.
4. Understand the tax implications before selling
Tax can be one of the most important considerations when managing a concentrated shareholding.
For Australian expatriates, the tax treatment of shares can depend on factors including your Australian tax residency, the country in which you are living, when the shares were acquired, how they were acquired and the nature of the income or gain.
As discussed in our article How are Australian Expats Taxed on Shares while Living Overseas, becoming a non-resident for Australian tax purposes can change the treatment of certain investments and capital gains.
Your host country's tax rules may also apply.
This means selling a significant shareholding without first understanding the tax consequences can produce an unexpected liability.
Before implementing a large sale, it can be worthwhile modelling the potential tax consequences and considering whether sales should occur progressively rather than all at once.
5. Consider currency exposure
Currency is another consideration for Australian expatriates.
If your employer shares are denominated in US dollars, for example, your investment return is influenced by both the performance of the underlying company and movements in the AUD/USD exchange rate.
This may be particularly relevant if your longer-term financial goals are denominated in Australian dollars.
An Australian expat planning to return home may ultimately need to convert a substantial portion of their overseas wealth back into AUD. The investment strategy therefore needs to consider not only the underlying asset but also the currency in which the asset is held.
Our broader content on currency exchange for Australian expats explores some of these considerations in more detail.
Case study: $1 million in employer shares
Consider an Australian professional living in the United States who has accumulated $1 million worth of shares in their employer through a combination of RSUs and shares acquired after vesting.
They also have $300,000 in superannuation, $200,000 in diversified investments and $100,000 in cash.
At first glance, the $1 million shareholding may appear to be a significant wealth creation opportunity. However, the employer shares represent a substantial proportion of their total investable assets.
There are several risks to consider.
Their employment income is linked to the same company as their investment portfolio. A decline in the company's share price could therefore affect both their employment position and investment wealth.
There may also be significant unrealised capital gains, meaning selling the entire position immediately could create a substantial tax liability.
Rather than making a binary decision to "hold" or "sell", a broader financial planning strategy could consider:
How much of the shareholding they actually need to retain;
Their future vesting schedule;
Their employment and career plans;
Their expected future income;
The tax consequences of selling;
Their Australian and US tax positions;
Their broader investment portfolio;
Their expected timeframe for returning to Australia;
Their longer-term retirement and wealth creation objectives.
The appropriate strategy will depend on the individual's circumstances. The key point is that managing concentrated shareholdings as an Australian living overseas should form part of an integrated financial plan rather than being considered purely as an investment decision.
What happens if you are planning to return to Australia?
A future return to Australia can add another layer of complexity.
Australian expats returning home may need to reconsider the tax treatment of overseas investments once Australian tax residency recommences. As discussed in our article What happens to your overseas assets when returning to Australia from a tax perspective, becoming an Australian tax resident again can bring worldwide income and certain investment gains back into the Australian tax framework.
This is particularly relevant where an expat has accumulated substantial overseas shares during their time abroad.
The timing of transactions around a return to Australia may therefore warrant careful consideration, particularly where there are significant unrealised gains.
Planning before returning can provide greater clarity around the potential tax and investment consequences.
Should you sell your employer shares?
There is no single answer.
For some Australian expats, retaining a meaningful holding may be appropriate. For others, gradually reducing the position and diversifying into a broader portfolio may better align with their long-term objectives.
The important consideration is understanding what the concentration means within the context of your entire financial position.
A disciplined approach may involve establishing a target level of exposure, considering future vesting, and having a clear framework for what happens when additional shares are received.
This can help remove some of the emotion from future decisions and prevent the concentration from continuing to grow simply because new shares are regularly being awarded.
A broader approach to managing wealth overseas
Employer shares are often only one part of an Australian expat's financial position.
Superannuation, overseas retirement accounts, Australian property, foreign investments, cash holdings, currency exposure and future plans to return to Australia can all interact with the decision about how much employer stock to retain.
This is why managing concentrated shareholdings as an Australian living overseas is not simply an exercise in deciding when to sell shares. It is about understanding how a concentrated investment fits within your broader wealth strategy.
At Runway Wealth Management, we specialise in financial advice for Australians living and working overseas. Our approach is Australian-centric, while considering the overseas environment in which you live and work.
For Australian expatriates with significant employer equity, we can help bring together the investment, retirement, tax and broader financial planning considerations so that decisions around concentrated shareholdings are made within the context of your overall financial position.
Runway Wealth Management is the trusted Financial Adviser to the Australian Expat community. Our tailored advice is backed by expertise, education and experience, which allows us to be at the forefront of Australian Expat Financial Planning.
If you would like to speak to one of our Expat Financial Advisers about this blog or if you have other queries, we would be more than happy to speak with you. Feel free to send us an enquiry through the ‘Contact Us’ tab provided in the link below:
General Advice Disclaimer: The information contained herein is of a general nature only and does not constitute personal advice. You should not act on any recommendation without considering your personal needs, circumstances, and objectives. We recommend you obtain professional financial advice specific to your circumstances.
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