Australian Superannuation Planning for Expatriates?
Did you know?
Your Australian Self-Managed Superannuation Fund may be taxed at the top marginal rate of tax on your becoming an expatriate.
The amount of money that can be invested into an Australian Superannuation Plan has been significantly reduced from 1st July 2017.
Australian Superannuation (Self-Managed Superannuation Funds)
Prior to leaving Australia, if you have established your own self-managed superannuation fund (“SMSF”), with possibly your spouse and you move overseas for an extended period, you run the risk that the superannuation fund will fail the residency test (because you are both trustees) and become non-compliant. Non-compliant SMSFs can be taxed at the highest marginal rate of tax on the market value of the taxable component assets in the fund.
In order for an SMSF to remain a Complying Australian Superannuation Fund, it will need to meet three tests at all times:
a) Established or Assets held in Australia; and
b) Central Management and Control ordinarily in Australia; and
c) Satisfy the “active member” test.
a) Established or Assets held in Australia.
If a SMSF is established in Australia it will always satisfy this test. A corporate trustee would ordinarily satisfy residency test (all members must be directors).
b) Central Management and Control ordinarily in Australia.
This test looks at where the strategic investment-related and main decisions concerning the SMSF are ordinarily made. It includes;
• Developing the investment strategy for the fund.
• Reviewing the performance and updating the investment strategy of the fund.
Note that the normal day-to-day activities of the trustees do not constitute “central management and control”.
For a SMSF, all members must be Trustees of the fund (and must be directors of a corporate trustee). This means that if the Trustees/ members move overseas for an extended period then the central management and control of the fund would no longer ordinarily be in Australia and this test would fail. The common option is for members/directors to resign as trustees/directors and appoint an Australian resident with an enduring power of attorney (and that involves handing over control to their attorney).
In a pragmatic solution to the problem of Trustee/members living offshore on a temporary basis, central management and control is deemed to be in Australia for up to two years provided the absence from Australia is only temporary. The problem for many expatriates is that where they intend to reside overseas for more than two years such that they are treated as non-residents from their departure, the absence is clearly not temporary.
Where an Australian expatriate husband and wife become non-residents, central management and control would not ordinarily be in Australia AND the deeming rule becomes problematic. Corporate trustees and attorney powers play their part in the compliance regime.
c) Satisfy the “active member” test.
If the fund has any non-resident member (for Australian tax purposes), they cannot be an active member of the fund if their balance makes up more than half of the total balance of all active members.
To satisfy this test, one of the following must apply:
• All members are Australian tax residents.
• If a member of the fund is a non-resident and an active member, their balance must be less than 50% of the total market value of the assets held by the SMSF.
If the fund stops being a complying fund because it does not satisfy the tests noted above, an amount equal to the market value of the fund’s total assets (less any non-concessional contributions the fund has received) may be included in the fund’s assessable income. This amount will be taxed at the top marginal rate.
For every year the fund remains non-complying, its assessable income is taxed at the highest marginal rate.
i) The amount of money that can be invested into an Australian Superannuation Plan has been significantly reduced from 1st July 2017.
A summary of contributions that can be made into Australian Superannuation Plans before and after 1st July, 2017 is summarized below:
Non Concessional Contributions (Investment of capital)
These are member contributions for which no personal tax deduction has been claimed. They are treated in the superfund as “tax-free components” meaning they are always tax- free on withdrawal.
Concessional Contributions (Tax Deductible Contributions)
These are employer contributions (compulsory contributions and salary sacrifice too) and member contributions for which a personal tax deduction has been claimed.
The Basics (Superannuation Contributions)
Prior to 30th June, 2017, $ 35,000 per annum and from 1st July, 2017, $ 25,000 per annum of concessional (Pre-Tax) contributions could be made to an Australian Complying Superannuation Plan. Separately, only $ 1.6 million of capital can be transferred (by “segregation”) within the complying Australian Superannuation Fund to the “pension account” and ultimately withdrawn as a pension and get the benefit of no tax on earnings and capital gains. From 1 July 2021 the pension transfer cap is $1.7 million, the concessional cap is $27,500 with non-concessional cap $110,000 (and 3-year bring-forward capped at $330,000. The age 65-year rules are now expanded to age 67 and from 1 July 2022 to (just before) age 75. Note the “work test” applies to non-concessional contributions at age 67 to just before age 75 years.
In addition “excess concessional contributions” (the contribution limits outlined above) are taxed at the individual’s marginal tax rate (ie for a non-resident that is 32.5% on the first $120,000 of taxable income) less a 15% tax offset for the tax paid by the fund trustee.
Excess non-concessional contributions made on or after 1 July 2013 may be withdrawn from the superannuation fund to avoid the extra tax on the excess contribution
The changes mean more paperwork and more planning.
Critical Features (including new taxes on “wealthy funds”)
Superannuation is complex. It is not well understood and because it has significant tax concessions it is “ring fenced” with a nasty penalty regime such as the above “two-year rule “for SMSFs”. Options for Australian expatriates in this situation include winding up the SMSF and then rolling the money into a public superannuation fund or converting the fund into an Australian Prudential Regulation Authority “APRA” Fund.
There are good opportunities to maximize your contributions offshore such as contributions to a “Foreign Superannuation Fund” with no caps on contributions. Given the complexity, get the best advice - appoint an Advisor. From 1 July 2025, the Government proposes total superannuation balances of $3 million or more will have an extra 15% on their excess earnings. The TSB does not include foreign superannuation funds.
How InterRetire Can Help You
If you’re an Australian expatriate who is considering moving back to Australia, we can help you maximise your assets, minimise your tax obligations and help you transition smoothly.
Disclaimer: This article provides general information on avoiding double taxation in Australia and should not be considered as professional tax advice. It is recommended to consult with a qualified tax advisor or accountant for personalised guidance based on your specific circumstances.
