An Expats Guide to Retiring Overseas and Withdrawing Superannuation
An Expats Guide to Retiring Overseas and Withdrawing Superannuation – Recently the Atlas Wealth Expat Insights Report was released which showed some tremendous fundamental information provided by the Australian Expat community and their views on retiring overseas. What is significantly surprising is that of the respondents, only 46.95% have plans to return to Australia. This means a vast majority of this percentage would envision themselves retiring overseas.
A common theme which was foregrounded in the report is that there is a high proportion of Aussie Expats choosing to retire in the South East Asia region, mainly due to the cost of living and that ones retirement fund can be stretched a lot further.
One of the most common questions that we get asked which has a limited amount of educational information is the treatment of superannuation when you are a non-resident for tax purposes. More specifically, ‘how and when can I access superannuation and is it taxed differently because I am a non-resident?’
To access superannuation you must still meet the relevant eligibility criteria as outlined below:
- When you turn 65 (even if you haven’t retired), or
- When you reach your preservation age and retire, or
- Under the transition to retirement rules, while continuing to work.
I’ll be addressing the second point today as most of the people who are retiring overseas tend to retire at their preservation age or just above this. This means that when they are withdrawing their superannuation they could be taxed on the withdrawals compared to it being tax-free.
Let me explain further…
There seems to be a consensus at present that when accessing your superannuation at preservation age but before age 60, that your non-resident marginal tax rates will apply, meaning you will pay a lot of tax to the ATO. This could not be further from the truth due to the agnostic nature of Superannuation. Super does not discriminate as to whether you are a non-resident or a resident for tax purposes.
Currently, the low rate cap is $205,000. This is your lifetime limit and is indexed each year. Someone who has met their preservation age can withdraw up to this amount before age 60 without having any tax withheld by the superannuation fund or having to pay any tax to the ATO. Now this lifetime low rate cap is only specific to the taxable component not the tax-free component of your super balance.
- The taxable component is made up of the super fund earnings and concessional contributions.
- The tax-free component is made up of the after-tax contributions or non-concessional contributions.
The ‘proportioning rule’ comes into effect when a withdrawal is made, which states that the tax-free and taxable components of the member’s super benefit are taken to be paid in the same proportion as the tax-free and taxable components of the member’s interest in the super fund.
So what does this actually mean?
It means that if you’ve got a tax free component you can withdraw more than the $205,000 lifetime low rate cap without any tax being due.
Examples of Superannuation Withdrawals When Retiring Overseas
To explain the above let’s provide some general examples.
Jane is a non-resident for tax purposes and has been residing in Thailand for the last 8 years. Jane has recently retired from her job in Bangkok and now wishes to access her super as she is retiring overseas. The only ties she keeps with Australia is extended family (cousins) and has a superannuation account held with a regular super fund. Jane was born on 5th September 1960 and therefore she met her preservation age on last year’s birthday. Jane has a superannuation balance of $475,000, which is made up of a $250,000 taxable component and a $225,000 tax-free component.
Taxable Component: $250,000/$475,000 = 52.63%
Tax Free Component: $225,000/$475,000 = 47.37%
This therefore means that 52.63% of Jane’s lump sum withdrawals will be taxable.
Example 1: Jane Withdraws $220,000 from her Superannuation account:
If Jane withdraws $220,000, then $115,786 of this lump sum withdrawal is taxable. However, as Jane has a low rate lifetime cap of $205,000, the $115,786 will fall underneath this and therefore no tax is due on the total $220,000 lump sum withdrawal. Jane has also reduced her low rate cap to $86,214. Jane’s super balance is now $255,000.
|Total Superannuation Balance||$475,000|
|Total Superannuation Balance||$255,000|
|Tax-Free Component of Lump Sum (47.37%)||$104,214|
|Taxable Component of Lump Sum (52.63%)||$115,786|
|Low Rate Cap Limit||$205,000|
|Reduction from Lump Sum Withdrawal||Less $115,786|
|Remaining Low Rate Cap||$86,214|
Superannuation is agnostic whether you are a resident or non-resident for tax purposes. Therefore Jane is not liable for any extra tax to the ATO on this lump sum.
Example 2: Jane Withdraws the Full Account Balance
If Jane withdraws $475,000, then $250,000 of this lump sum withdrawal is taxable. However, as Jane has a low rate lifetime cap of $205,000, only a partial amount of this $250,000($45,000) will be taxable and therefore tax will be withheld from the lump sum withdrawal. The tax that will be withheld by the super fund from the lump sum payment will be $7,650.
|Total Superannuation Balance||$475,000|
|Total Superannuation Balance||$0|
|Tax-Free Component of Lump Sum (47.37%)||$225,000|
|Taxable Component of Lump Sum (52.63%)||$250,000|
|Gross amount which is Taxable||$250,000|
|Reduction from Low rate cap||Less $205,000|
|Net amount which is Taxable||$45,000|
|Tax Withheld Calculation||17% X $45,000|
Atlas Wealth Management was fortunate recently to speak with a specialist from the ATO who confirmed the above taxation treatment from the super fund. If that non-resident receives no other income in the same year, then no additional tax is due to the ATO.
A common misconception is that non-resident tax rates would apply to the above withdrawal, but this is not the case due to superannuation being unbiased towards an individual’s tax residency status. The tax rate that is factored on the amount over the low rate cap is the 15% superannuation tax rate plus the 2% Medicare levy. This 17% is something which is automatically withheld by the super fund and something you’ll note on your annual PAYG summary provided by the super fund.
If you are looking to finish working in the coming years and intend on retiring overseas as a non-resident for tax purposes, it might be worth reviewing your superannuation and what you can strategically withdraw without incurring tax. Occasionally withdrawing super in a staggered approach will be the most tax efficient depending on specific criteria.
As always please seek professional financial advice before accessing your superannuation, so you are not in for any nasty tax surprises.