Stretched? Try calling Asia home
March 4, 2015
Colleen Ryan and Stephen Wyatt
As the cost of living rises in Australia, many would-be retirees are planning for a cheaper life overseas.
There are a few times in your life when you are truly free. Perhaps in your early 20s, after education and before marriage, but then life gets hold of your freedom.
A career and the pressures of raising a family normally take over. But then comes another time; a new freedom. This is when you retire — when the kids have left home and the job is over or you have simply had enough of it.
With a bit of luck, by that time you will have enough savings to live the good life for the next few decades, enough money to embrace the freedom. At least that is the dream.
But living the good life is getting harder and harder to achieve for many Australian retirees. The cost of living is just too high and too many of us are underfunded. In a low interest rate era, with $2 million on term deposit, you would be lucky to earn $60,000 a year. And not many Australian retirees have $2 million in super.
Nobody wants to think twice about having a relaxing cappuccino or a night out with a bottle of wine. But that is the reality for many Australians living on their superannuation or age pensions. That is why more and more of them are moving to cheaper countries in south-east Asia.
There are already nearly 80,000 Australians on the age pension who are living overseas and that number jumped by 30 per cent in the five years to 2012, the latest figures available. There is a genuine trend under way. And as the baby boomers age, the ranks of Australia's retired will explode. Over the next 25 years the number of Australians over 65 will triple to 8 million.
Many of them will embrace their new freedom in a new country. The cost of living across south-east Asia can be 50 to 80 per cent cheaper than Australia, with huge savings on rent, restaurants and the like.
While a cheaper, more luxurious lifestyle is the primary driver for the move offshore, the social life is also a big attraction. Jennifer, a former librarian, recently divorced, who moved to Chiang Mai, Thailand, says that her social life is the busiest it has ever been.
Chiang Mai has great weather but it also has wine clubs, book groups, travel clubs and dinner clubs. There is no shortage of Australians but there are also Americans, Scandinavians, British and Germans in the expatriate community.
Some Australians seek out adventure – like Suzy who lives in Luang Prabang, Laos, and relishes her relationship with the Laotian family who have "adopted" her.
Others seek out the weather and the beach lifestyle at a cheaper price, such as Sal and Glenn, now living in Phuket, who were sick of the cold winters in the wine-growing areas of NSW where they raised their family. Their four-bedroom home with an in-ground pool in Phuket cost slightly more than $200,000. And it is a walk to the beach.
Over the past decade, all this has become easier. Distance is less a tyranny now than ever before. Advances in communication technology, with internet banking and Skype, plus cheaper airfares, thanks to the introduction of budget airlines throughout Asia, have transformed the retirement options for baby boomers.
If you are thinking of taking the plunge, for just a six-month sabbatical, a two-year adventure, or even forever, be warned that any move overseas requires very careful planning.
Think it through
Give yourself plenty of time. There are a number of important decisions to make. And there are a number of government regulations that you should familiarise yourself with to avoid pesky problems down the road. It is far simpler to get your affairs in order before you leave Australia rather than to try to do it at a distance.
The good news for Australian retirees is that the age pension and super pensions are transportable. But there are conditions.
If you qualify for an age pension already – that is, you have met the required assets test, income test and residency test under Australia's Social Security Act – you should have few problems in transporting that pension or part pension overseas.
The real trap with pensions comes for Australians who are already living overseas when they reach the qualifying age of 65. The government will not consider you eligible for the pension. To qualify you must move back to Australia for at least two years. So if you are relying on the age pension it is best to delay your move until after you reach the eligibility age and have received at least your first pension payment.
Another trap is the impact that selling or renting the family home may have on your pension eligibility. Will you fail the asset or income tests?
Keep in mind that your principal place of residence is exempt from the assets test for an Australian pension – but only if you are actually living in it. And there is no exemption for a principal place of residence outside Australia.
Superannuation pensions are also transportable overseas. If you are over 60 and receive a tax-free pension from your superannuation savings this will also apply whether you are living in Australia or overseas. That is the good news.
There can be complications, however, if you have a self-managed super fund. These problems can be overcome but you will need professional advice to ensure that your fund remains a "complying fund" while you are living overseas. It is very likely that you will need to restructure your self-managed fund before you leave Australia to avoid the severe penalties that apply to non-complying funds. It is simple to achieve but may involve appointing additional trustees who also have a role in investment strategy.
It is also important to check that your new country of residence has a double tax agreement with Australia and will not tax your pensions. This is the case in most south-east Asian countries.
It is critical to get your tax affairs in order. You need to decide whether you want to be a resident or non-resident of Australia for tax purposes. You cannot choose to be one or the other. It is a matter of fact and a matter of law. It depends on your individual circumstances. Unfortunately, there are no hard and fast rules, just guidelines. At the end of the day, the taxman will decide. But you can organise your affairs to influence the taxman's ultimate judgment on your residency status.
There are advantages and disadvantages in both categories – resident and non-resident.
For example, as a non-resident, only your Australian-sourced income will be subject to Australian tax. This includes your superannuation, your pension, rental income on any real estate assets in Australia, and income from any businesses you may have in Australia. Income on bank deposits and dividends from Australian shares will not be added to your taxable income but will instead be subject to a withholding tax of 10 to 15 per cent. (If the dividends are fully franked, withholding tax will not apply.)
Capital gains tax provisions will continue to apply on any real estate assets you own in Australia but they will not apply to other investments, such as shares, for the period that you are considered to be non-resident. (This can be a boon if you consider yourself to be a clever sharemarket investor.) However, keep in mind that you will lose the tax-free threshold as a non-resident and hence pay tax from the very first dollar you earn in Australia. As the tax-free threshold now stands at more than $18,000, this can be a real consideration. Finally, if you are a non-resident for tax purposes, the chances are that you will no longer be eligible for Medicare benefits when you visit Australia.
On the other hand, if you are considered to be a resident of Australia for tax purposes, your worldwide income will be subject to Australian tax. However, you are more likely to be able to obtain Medicare benefits on visits back to Australia and you will maintain the tax-free threshold for any income earned in Australia. There can be real benefits to remaining a resident for tax purposes while overseas – particularly if most of your income is sourced in Australia anyway.
A lot of retirees who move overseas want to keep their family home in Australia but are concerned that if they rent it out while they are away they will lose the capital gains tax-free status on sale. The rules are quite clear – you can rent out your principal place of residence in Australia for up to six years while you are overseas and not affect the capital gains tax status. If you don't rent it out, it retains its capital gains tax-free status until you sell.
Healthcare is critical. Malaysia and Thailand are the standout retirement destinations for healthcare, with excellent medical facilities. This is not the case in Indonesia, Cambodia and Vietnam. It is important to have health insurance including evacuation insurance if you are living in a country with poor health services. Many retirees rely on 12-month travel insurance for health coverage but this can be a trap if you fall ill – pre-existing conditions are assessed with each and every renewal. Full international health cover is freely available and it is important to note that this is a competitive global market. Websites such as Medibroker.com provide comparisons of dozens of health insurance packages around the world.
The other piece of good news is that visas in many south-east Asian countries are very friendly to the Australian retiree. Indonesia, Malaysia, Thailand and the Philippines offer retirement visas. Malaysia and the Philippines represent the gold standard in visas. A Malaysia My Second Home visa will provide a 10-year visa. The Philippines has four different types of retirement visas, some of which offer permanent residency.
Money tips and traps
Get your finances in order before you leave. Make sure that your superannuation pension stays tax-free while you are overseas. If you have a self-managed super fund, it will need to be restructured to ensure it remains a complying fund for Australian tax. If your super is with an industry fund or a big retail fund, the pensions you pay from it will be free from Australian tax.
You can receive the age pension in Thailand, Malaysia, Vietnam or Bali just as you can in Australia. Some 80,000 Australians are already receiving their age pensions overseas. But there are some tricks to be aware of. For example, you need to be eligible for, and already receiving, the age pension before you relocate.
Take out an international health insurance policy. It is worth the expense. International health insurance can be expensive, but there are a number of different levels of cover from catastrophe insurance to the gold standard policy and prices vary widely Tell the truth to your insurer about any pre-existing illnesses. Failure to do this can lead to a denial of claims. Check if your proposed insurance company is recognised by major healthcare providers in your new country of residence.
Medicare is principally a health system for Australians who live in Australia. Non-residents are theoretically not entitled to Medicare on visits home to Australia but there is some flexibility for temporary absences, usually of up to two years. Once you have lived outside Australia for more than five years there is no flexibility – you are not entitled to Medicare on visits home .
The Family Home
Many people choose to rent out their home in Australia and rent property in their new country. This way they have the option of returning and they still have their foot in the Australian property market. But how does that affect the tax-free capital gains that you have built up in your principal place of residence? The good news is that you can rent out your principal place of residence for up to six years without affecting the tax-free capital gains when you eventually sell
Get your tax planning in order before you leave the country. A key factor to consider is whether you are to become a resident or non-resident for Australian tax purposes
Stephen Wyatt and Colleen Ryan are the authors of Sell Up, Pack Up and Take Off published by Allen & Unwin, September 2014. They are also co-founders of Planet-Boomer.com