David, a 60-year-old retired executive, recently faced the challenge of repatriating to Australia in early 2025 after a successful international career based predominantly in Hong Kong.

Having accumulated substantial wealth, David's primary concern was ensuring a smooth transition for his family and maintaining financial stability on his return to Australia after 15 years working for a prominent Hong Kong company.

Based on advice, David has a two-part retirement strategy using both foreign superannuation and local Australian superannuation planning.

Foreign Superannuation

On David’s retirement from the Hong Kong company in 2024, he received a substantial payout of A$5 million.

David has contributed this amount to a personal foreign superannuation plan, appointing an international investment manager establishing a portfolio comprising private equity, managed funds and index fund investments.

David would like to withdraw a pension of $A 250,000 per annum from his foreign superannuation plan in early 2025.

Financial Strategy

David's plan to optimize his financial benefits upon repatriation are as follows:

Member Contribution: A$5 million
Annual Pension: A$250,000
Life Expectancy: 22.5 years (Male aged 60 years, per Australian Life Table)

Tax calculation on pension withdrawal as an Australian tax resident.

Assessable Income $ 250,000

Deductible amount (Lump sum divided by life expectancy: $A 5 million/ 22.5 years) Amount $ 222,222

Taxable Income $A 27,778

Tax Payable $ 888.04 _ (First $18,200 tax-free and 16% tax to $45,000 plus Medicare levy FY ending June 30, 2025)

Key Considerations

1.Contribution Treatment: Contributions to a foreign superannuation plan while non-resident have no Australian tax consequences. For example, contributing A$5 million or valued at $ 5 million at date of Australian tax residence represent the cost base of the foreign superannuation plan for calculating future Australian tax liability on withdrawals.
2.Plan Treatment During Lifetime: As an Australian tax resident, David is taxed on worldwide income and gains. However, the foreign superannuation plan's growth could remain tax-deferred or tax-free, depending on his circumstances.

Pension Withdrawals: Regular pension withdrawals are taxable at marginal rates, with a capital deduction reducing taxable income (outlined above).

Australian Superannuation

As a returning Australian tax resident, David would like to maximise his Australian superannuation plan contributions complimenting his Foreign Superannuation Plan pension plan strategy.

What are the Australian superannuation basics?

There are two types of contribution being concessional and non-concessional and while as members, individuals are subject to the capping rules (see below), the member can make contributions at any time to just before their 75th birthday.

Note that although "work test" rules have recently been relaxed, you cannot make concessional contributions unless you are "working" between age 67 and 75.

So, what is the "work test" and what is a concessional contribution?

The "work test" simply means you must be gainfully employed for at least 40 hours work in any 30-day period during the year of income in which you make that concessional contribution.

There is also the somewhat curious "work-test exemption" where you satisfy the "work test" in the prior year to which you made the contribution; your total superannuation balance is less than $300,000 and you did not use the "work test exemption" in a previous year (I wonder who thought up this little gem?)

Concessional contributions are tax-deductible and typically it is the employer who on behalf of the employee makes compulsory and salary sacrifice contributions to the employee's nominated Australian superannuation fund.

While there is no limit on the amount of tax deductions for which an employer may claim, the rule applicable to individuals making personal contributions does have a limitation in that the amount of the allowable tax deduction cannot add to or create a tax loss.

The obvious sources of taxable income for an Australian expat would be rental profits or net capital gains on disposal of taxable Australian property.

I might add the availability of "catch-up concessional contribution rules'' (where the member balance as at previous 30 June is less than $500,000) is a favourite topic for expat tax advisers although that nasty little division 293 tax can put somewhat of a damper on this topic for capital gains in excess of A$250,000.

Non-concessional contributions are personal contributions and are not tax-deductible.

So, what are the capping rules for individuals in respect of contributions made to any and all of their member accounts in complying Australian superannuation funds for the year ending 30 June 2025?

The concessional cap for tax deductible contributions (employer and/or the member) is $30,000 (indexed from $27,500 from 1 July 2024).

The non-concessional cap for non-tax-deductible personal contributions made by the member is $120,000 (indexed from $110,000 from 1 July 2024). There is also the 3-year bring-forward rule allowing a contribution of up to $360,000 (utilising 3-years of the cap rule).

What happens if you exceed the caps in a year of income?

When the member's concessional cap is exceeded, the excess is treated as an “excess concessional contribution” and taxed at the individual’s marginal Australian tax rate (i.e. 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.

*Note the marginal tax rates have been reduced from 1 July 2024.

There is a further rule where "excess concessional contributions" are also treated as "excess non-concessional contributions”, and this can lead to awkward results where the member has also utilised the 3-year bring-forward rule.

While this predicament had dire consequences during the early, bad years of the capping regime way back to 2007, sanity finally prevailed over fiscal policy and the "additional tax of up to 93%" has been ameliorated by the modern-day rule from 1 July 2013 allowing the member to withdraw the excess non-concessional contribution from their member account plus a deemed amount of interest thereon (and just pay tax on the "earnings").

The Pension Cap Transfer rules are indexed from 1 July 2024 to $1.9 million so that retirees can transfer entitlements (by “segregation”) within the complying Australian Superannuation Fund into the “pension account” with the benefits taken as a tax-free income stream (i.e. pension) potentially from age 60 years.

The significance of segregating the Pension Account is that "pension earnings" are tax-free while earnings from the balance left over in the accumulation account continue to be taxed at 15%.

Comment

Australian expats and their spouse can make sizable contributions towards their respective Pension Cap of $1.9 million by each making non-concessional contributions of $120,000 per person pre-1 July 2025. From 1 July 2025 the opportunity should be seized for additional contributions using the “3-year bring-forward rule” capped at $360,000 per person. And repeat this funding strategy again in 4 years’ time.

Over a 4-year period, an expat and their spouse could conceivably contribute $120,000 each in year ending 30 June 2025, a further $360,000 each in year ending 30 July 2026 (triggering bring-forward rule and no further contributions in 2027 and 2027-28) and followed by another $360,000 each in year ending 30 June 2029. That's $880,000 in 4 years which with earnings puts them halfway to the Pension Cap.

Conclusion

On return to Australia, David will have a tax efficient income of $A250,000 from his foreign superannuation plan and will at the same time maximise his Australian Superannuation plan contributions to offer another tax-free income stream when David is no longer working (within rules above) in Australia.

As always, you should seek professional superannuation advice at all times from suitably qualified persons.

If you are an Australian expat planning your repatriation, here are 3 ways I assist you;

Download my checklist on the 7 key areas for Australian expatriates to start exploring with their advisor.
Repatriation Ready Round Table 11th September 2024-Tax Insights for Australians Returning to Australia
Book a private conversation with me at your convenience.

Expat case study-How David maximised his after tax income from Foreign & Australian Superannuation on his return to Australia.