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The Dunedin product, who played his youth career at Southern United, rejoins the club after spending two seasons with Willem II in the top Dutch league.
Prior to that McGarry spent four seasons with the Phoenix from 2014 to 2018.
In that time he made two first-team appearances, while playing 52 times for the club’s reserve team in the New Zealand national premiership.
The defender said it was a great opportunity to return.
"The potential to come back to the Phoenix was on the cards with Libby [Cacace] leaving," he said.
"So when the opportunity came up, I kind of grabbed it with both hands.
"It’s a good opportunity to come back and get some experience with a good side that I watched a lot of last season.
"I know a lot of the players on the squad — obviously [Alex] Rufer, [Louis] Fenton and [Oliver] Sail from when I was last there, and I’ve played with others in the national squad — so it’s going to be easy to get along with the squad."
McGarry spoke with coach Ufuk Talay recently about his expectations for next season and where he sees himself fitting into the squad.
"Ufuk outlined to me the style of play, what he wants from players, including myself, and made it clear that he sees me in that attacking left back role which is where I want to play.
"I’m really looking forward to it and can’t wait to get started.
"It’s a big year for me. I’m 22 years old and I really want to come in and show what I can do."
Talay said McGarry would get every opportunity to impact on the squad in the A League season.
"We welcome James back to the team and we’re confident he’ll be able to contribute next season.
"We’re already aware of his ability and his two seasons with Willem II have only helped to grow him as a player and a defender.”
■ All Whites midfielder Clayton Lewis has signed a one-year contract with the club, RNZ reports.
Lewis (23) joins the Phoenix after playing last season with Auckland City in the National Premiership.
David Ball has also extended his contract.