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There are lots of rules that apply to your super if you’re going overseas for work or play for an extended period. If you are a member of an SMSF, it’s essential you understand the restrictions that apply to the fund under these circumstances or you could potentially face a serious reduction in your wealth. The rules are less intricate if you are in a retail fund. But there are complexities if you earn retirement savings overseas and want to repatriate them.
If you have a MySuper, retail or industry super fund and are an Australian citizen or permanent resident, the rules for super remain the same independent of how long you leave Australia.
“It is worth telling your super fund if you plan to leave to ensure there are no restrictions for non-residents remaining in the fund and to prevent a transfer to unclaimed super,” says Daniel Rickard, a financial adviser at Financial Professionals.
If you have a super account and are a temporary resident leaving Australia, you may be entitled to claim a Departing Australian Superannuation Payment (DASP). These rules allow some people to access their super if they are leaving Australia for good.
Special rules for DIY funds
Specific rules apply if you have an SMSF and leave the country for any extended period. These rules are onerous and can result in funds losing their favourable tax status. So it’s important to ensure the trustees understand these rules, and their actions ensure the fund operates in line with them, before members leave the country to avoid serious negative consequences.
To demonstrate how the rules work, let’s assume a husband and wife manage an SMSF together and head overseas indefinitely and become non-residents for tax purposes. There are options available to them around what to do with the SMSF. But they need to ensure they meet three tests that govern the residency rules around SMSFs.
These rules must ensure the fund:
- Is established in, and its assets are held in, Australia.
- Has its central management and control ordinarily in Australia.
- Has a majority of active assets held by Australian residents.
“Test one is easily satisfied, as all SMSFs are established in Australia. But test two is harder to satisfy,” says James Ridley, Asia Pacific managing director, Atlas Wealth Management.
“Central management and control, or CMC, needs to be maintained by a normal Australian tax resident at all times,” he says.
CMC includes the strategic and high-level decision making processes that relate to the SMSF, such as formulating and maintaining the investment strategy, which aligns with members’ best interests. “CMC rules may be breached if the SMSF’s members are non-residents for tax purposes,” says Ridley.
Members can, however, be temporarily absent from Australia for short periods of up to two years and still return as non-residents to make important decisions about the SMSF. This is known as the temporary absence rule. “But make no mistake, this is running a fine line and there are plenty of cautionary tales in which the ATO has elected that CMC was still breached,” he adds.
There are options SMSF members can consider if they are going overseas and still want to operate their fund inside the rules. One is to establish an enduring power of attorney to look after the SMSF. Another is to turn the SMSF into a small APRA fund.
You may earn pension money while you are abroad if you’re going overseas for any extended period for work. This can be another tricky hurdle for investors to jump. Some countries will allow you to withdraw the funds on departure if you’re leaving permanently.
“Take care to understand how much tax you may pay on this as every country has a different tax treatment for its pension scheme,” says Ridley.
For example, let’s say you are working in the US and have a 401k. This is a tax-deferred vehicle in which no tax has been paid to the Inland Revenue Service (IRS) on the funds in this account. So, when you withdraw the full amount, it is likely to be treated as ordinary income. If withdrawing these funds early, you will also incur a 10 per cent penalty tax on top of the marginal tax rate that applies.
Another option is to keep these assets overseas and start drawing down on them when you retire. But this will also have tax consequences, says Ridley. “This income is likely to be assessable in the Australian Taxation Office’s eyes. Most accountants will treat this as foreign-sourced income with a foreign tax credit being used for tax paid to the other taxation authority. Some accountants will also go down the path of obtaining a private ruling on the pension so they have a clear direction from the ATO on their view of the tax treatment.”
Doing the right thing by your retirement savings when you’re overseas
As investors are subject to the same super rules when they are overseas as when they are living in Australia, SMSFs notwithstanding, it’s important to continue to maintain a focus on this important source of wealth in retirement while abroad. This starts with keeping your details current so your super fund can keep you up-to-date with relevant changes. Also consider whether now’s the right time to consolidate any super funds you have, if you have multiple funds.
You may still be able to continue to contribute to your super fund while you are overseas, ensuring you remain within the contribution limits. In fact, if you are working for an Australian employer, it may still be required to continue adding to your super while you are working overseas.
“Even while you are overseas, regularly review your fund, the fees you are paying and the investment options available to you,” Rickard says.
If you already qualify to receive a pension payment from your super fund, the same rules apply to it no matter if you are based here or abroad. “But the tax treatment of this pension will depend on the country in which you reside,” he adds. This is separate to any aged pension to which you are entitled, and different rules apply.
If you are entitled to a foreign pension, it’s likely to be taxable in Australia, independent of whether tax was withheld from your payment by the country from which it came.
As this shows, the regulations around super are many and varied if you are going overseas for either a short or a long time. It pays to get financial advice if you are going overseas to ensure you remain within the rules.