The great news about Australian superannuation is that the pension you draw from it can be received in Bali or in Thailand or Malaysia just as it can be received in Australia.
But be careful. You need to pre-plan your move. Superannuation and pension benefits are never simple, especially if you do something different, like move overseas permanently or even just take off for a while.
One of the jewels of the Australian tax system is that a pension from your superannuation fund is tax-free once you reach the age of 60. If you are in that age category, the chances are that you will be relying partly on your super to fund your new lifestyle.
And this is where you may need some very serious pre-planning before you leave Australian shores. The last thing you need is for the Australian Tax Office to decide that your super is no longer eligible for those generous tax concessions. It could blow your budget apart.
Superannuation law can be a minefield but the real danger zone, for those relocating overseas, is restricted to those with a self-managed super fund.
If your Australian superannuation is with an industry fund, a public service fund or one of the big retail fund managers (like AMP, for example) then you don’t have much to worry about at all on the Australian taxation front.
See Key Links where we set out some of the basic super issues that the international retiree may face.
SUPERANNUATION TIPS AND TRAPS
- Tax-free pensions from your Australian superannuation fund are available for the over 60s both in Australia and overseas. But there are conditions attached.
- If your super is with a big industry fund or one the big Australian retail funds like AMP you won’t have any problems maintaining the Australian tax-free status.
- Self managed super funds (SMSF) are a different story. Pensions will be tax free in Australia as long as the self managed fund is considered to be a ‘complying fund’.
- You may need to restructure your SMSF to ensure tax-free status. This can be done but you will need to seek professional advice. And you must do this before you relocate overseas
- Check that your pension income is tax-free in your new country of residence. If there is a double tax treaty in place with Australia, you should be fine. But it pays to check thoroughly with the relevant consulate in Australia.
INDUSTRY OR RETAIL SUPER FUNDS
Any individual who holds his or her super savings in an industry or retail superannuation fund will be able to move overseas without facing any new rules on eligibility. The superannuation benefits held in one of these funds will continue to receive concessional tax treatment.
In addition, the rules that govern access to super benefits (these are called the preservation rules) apply indiscriminately to Australian citizens wherever they may live – in Australia or overseas. Moving offshore will not bring any extra headaches with the Australian Tax Office or the superannuation regulators.
Where the headaches might arise, however, is with the tax office in your new country of residence. It will all depend on the laws of the country you choose to live in and whether that country has a double tax treaty with Australia.
Most of the countries covered in this book – Indonesia, Thailand, Malaysia, Vietnam, Spain and France – have a double tax treaty with Australia.
If you plan to move to a country not on this list, it is easy to check whether there is a double tax treaty in force. The Australian Tax Office link for a list of tax treaty countries is: http://www.ato.gov.au/General/International-tax-agreements/In-detail/Tax-treaties/Countries-that-have-a-tax-treaty-with-Australia/
Cambodia, for example, does not have a double tax treaty with Australia. But the Cambodian government does not impose a tax on the offshore income of non-citizens. So it will not tax your pension income. Not all countries without a double tax treaty with Australia are so accommodating. So it is important to do your homework.
A double tax treaty effectively assigns taxing rights to one country or the other. If residing in a country without an agreement, your Australian-based income may be taxed under both Australia’s and the other countries’ taxation regime. That is precisely what you want to avoid.
There are a lot more details on residency for tax purposes in the chapter on taxation. This section deals only with the impact on superannuation benefits.
SELF-MANAGED SUPER FUNDS
There is one key phrase to remember in respect of your self managed super fund and that is: ‘complying super fund’. Tattoo it on your forehead – metaphorically speaking – because the taxation consequences of a non-complying super fund are horrendous.
A self managed super fund becomes a non-complying fund if it loses its Australian nature – that is, if it is no longer considered to be an Australian super fund by the Australian Taxation Office.
You do not want that to happen. Let me give you a taste of the consequences. Should your self-managed super fund (SMSF) become ‘non-complying’ at any point, the Australian Taxation Office can send you a tax bill that is equivalent to almost half the total assets in your fund. Say you have $1 million dollars in your fund, then that amount will be taxed at the highest marginal tax rate in the year that the fund becomes ‘non-complying’ – that is near $500,000. And that is not all. The Tax Office will also tax any earnings of the fund at the highest marginal tax rate for every year that the fund is ‘non-complying’.
And if the fund does regain its residency status and becomes an Australian fund once more, then there is another one-off penalty. This time, just to welcome you home, an amount (asset values less contributions) will be included in the fund’s assessable income in the year the fund regains its Australian residency status. This amount will be taxed at 15% if the fund regains its complying status or 45% if the fund remains non-complying for other reasons.
Bottom line? Your fund needs to be a complying fund if you are to avoid onerous penalties. To achieve this, the fund needs to be considered an Australian super fund for tax purposes.
So, what is an ‘Australian’ super fund and how do you maintain this status?
It can be done. It just requires careful planning. A good accountant will be able to organize the appropriate changes to ensure that you stay within the law. What follows is an explanation, as simple as we can make it, of the legal requirements so that you can be prepared when you discuss matters with your accountant.
There are three tests for an Australian super fund. Each and every test must be satisfied in each tax year. And each and every test must be satisfied at the same time. It is not good enough to satisfy test one in February and test two in March for example. All three tests must be satisfied on the same date.
The tests are:
- The fund was established in Australia OR any asset of the fund is situated in Australia
- The CENTRAL MANAGEMENT AND CONTROL of the fund is ORDINARILY situated in Australia
- The fund has NO ACTIVE members or, if it does have active members, then at least 50 per cent of: the total market value of the fund’s assets attributable to superannuation interests is held by active members OR The sum of the amounts that would be payable to active members if they ceased to be members is attributable to superannuation interests held by active members who are Australian tax residents.
(That sounds complicated, and we will deal with it in more detail below, but it applies if either you are still contributing to your super fund or an employer is contributing on your behalf OR there are other members of the fund still in Australia and still making super contributions.)
Let us take these tests one by one.
The first test – that either the fund was established in Australia or any asset of the fund is situated in Australia. This is the easiest test of all. Most funds for our purposes would have been established in Australia, in any case. But, if not, it is still easy to meet the test – any asset of the fund must be in Australia and this can be just a simple bank deposit. If any shares in Australian companies are held by the fund, this would also qualify, as would Australian-based property.
The second test is the hard one. The crucial words are ‘central management and control’. Many people make the mistake of interpreting this to mean the administration of the fund – filing returns, keeping the books, keeping an eye on rollover dates for bank deposits, buying and selling shares. If administration of the fund was enough to satisfy the central management and control test, then it would be a simple matter of appointing an Australian-based accounting firm or super fund management company to handle your self managed super fund for an annual fee. But this is not what the taxman has in mind – he is very specific about exactly what central management and control means.
Central management and control, according to the tax office, describes the strategic and high-level decision-making processes and activities of a fund. This includes formulating or varying the investment strategy for a fund, reviewing performance of a fund’s investments and determining how the assets of a fund should be used to fund member benefits. Administrative and general day-to-day activities do not constitute central management and control.
The issue is who has the central management and control function? This is usually the individual trustees of the fund or the directors of the corporate trustee. Once again, it is easy to fall into a trap here. It seems easy enough, if you are moving overseas, to appoint someone else as trustee of the fund – a relative or close friend or even an accountant. This is not enough. If you still make the final decision on investments of the fund and payments from the fund, then it is you who exercises central management and control. And if you are living overseas, then the chances are that your fund is non-complying. The onus of proof is on you. This means that you have to prove it to the Tax Office that central management and control is ordinarily exercised in Australia – it is not a matter of whether you are caught out or not. The Tax Office has to be convinced.
So what can you do to satisfy the Tax Office? There are a few options.
The simplest option is to change the nature of your fund. How do you this?
A fund has the option to relinquish, or give up, its status as a self managed super fund and arrange for an Australian resident commercial organisation to act as a professional trustee (for example, Australian Executor Trustees Limited). When this occurs the fund becomes a small fund regulated by APRA. It is no longer a self-managed super fund. This solves the residency problem. Your fund remains an Australian super fund regardless of which country you are living in at the time. It can be an expensive option however and it will result in a loss of investment flexibility.
A second option is to genuinely give up central management and control of the fund by either resigning as a trustee and appointing a trusted adviser or relative, who is a resident of Australia, to make the high level strategic decisions for your super fund. Alternatively, you could grant an enduring power of attorney to this trusted adviser or relative. This can be risky and it is an option that few of us would consider. But it is an option. And if you choose this option, make sure the necessary arrangements are in place before you leave Australia. Also make sure that the person you have granted authority to genuinely exercises central management and control and does not ask for your approval on investment decisions.
A third option is to investigate whether you fall under the tax office exemption for ‘temporary’ non-residents. If your departure from Australia is considered to be temporary then the tax office will consider that central management and control of the fund is still ordinarily exercised in Australia – even during your absence. The definition of ‘temporary’ is important. The tax office has said that an absence of up to two years will be considered temporary if there is evidence of an intention to return to Australia. In deciding whether you have a genuine intention to return, the tax office will take into account contracts of employment, whether you have kept a house in Australia, whether you have retained private health insurance in Australia, details of any previous absences from the country and details regarding changes to personal bank accounts, credit cards, private health insurance, and club memberships. And an absence of more than two years can still be considered ‘temporary’ as long as the tax office is satisfied as to your intention to return at a specific time.
For someone who has decided to relocate overseas during their retirement, it could prove almost impossible to convince the tax office that he or she fits into the temporary category for exemption.
There is one last option that can make it possible to ensure that your self managed super fund retains its Australian status. And this is probably the most attractive option of all.
The tax office has determined that where there is an equal number of trustees or directors of a corporate trustee located in Australia and overseas, who all actively participate in the central management and control from these locations, the central management and control of a fund will ordinarily be in Australia. With the ability for a fund to have up to four members, a couple moving overseas could elect for two new members/trustees (for example, children or relatives) to join the fund. For this solution to be effective, the new trustees must equally participate in the central management and control of the fund.
Now we come to test three – assuming you have satisfied the first two tests of central management and control of the fund ordinarily exercised in Australia AND the fund has either been set up in Australia or holds assets in Australia. The third test is the active member test.
This test will not be a problem if you don’t want to make any further contributions to your super fund. If you have retired, your contributions have probably stopped in any case. But you must also take into account whether you ever want to roll over super balances from another fund into your self managed fund, or whether you want to contribute from your personal savings under the $150,000 a year rule for non-concessional contributions.
The most important fact to keep in mind is that once you are considered a non-resident for Australian tax purposes you cannot make contributions to your self managed super fund unless more than 50 per cent of the assets of the fund are attributable to active resident members. For example, if you have four members of your fund, two of whom are still resident in Australia and still making contributions to the fund, then you have to ensure that their interests (i.e the proportion of the fund they are entitled to) account for more than 50 per cent of the fund’s assets at all times.
This assessment should be undertaken carefully and a buffer allowed to ensure there is no inadvertent breach.
If your self managed super fund has only non-resident members – say, you and your partner – then you cannot make any contributions to the fund while you are a non-resident if you are to satisfy the active member rule.