Nick Bruining Q+A: Why there’s no special superannuation concessions for Australians overseas

Question

My 35-year-old son moved overseas to work more than five years ago.

He has married and has two children in the UK. It is highly unlikely he will ever move back to Australia.

He has nearly $90,000 tied up in a superannuation scheme here which is invested in a cash holding account within the fund.

His UK employer has a retirement pension scheme and he now contributes to that.

They hope to buy a home in the UK in the near future and would like to cash out the superannuation here to use it as a deposit.

Given that he no longer lives here, is that possible?

Answer

Australian superannuation laws don’t normally make special concessions for citizens living offshore, even if it is on a permanent basis.

The underlying principle is the possibility that he might one day return to Australia and will need his superannuation to supplement or provide a retirement income.

For that reason, if he is a permanent resident of Australia or an Australian citizen, normal superannuation access rules apply, which means he will need to reach retirement age of at least 60 before he can access the benefits. Even renouncing citizenship and becoming a citizen of another country is unlikely to work as he was a permanent resident when he left.

Only temporary residents can access superannuation when they leave and this can be subject to tax of up to 65 per cent.

Given that your son is in his mid-30s and has at least 25 years until he can access his superannuation, he should make sure the funds are appropriately invested.

While it may show short-term volatility, he should consider moving the funds into an investment option such as the growth option. Presently, the returns he receives invested in the cash option will be close to nil after factoring in tax and administration charges.

By moving to a more aggressive mix, the average returns over 25 years could be about the 7 per cent mark. The downside of this is he may experience a negative return every three years or so.

Question

I turn 75 next month and I’m hoping to reduce the 17 per cent “death tax” when my superannuation is paid to my estate.

I am looking at doing a withdrawal from my allocated pension, depositing it back into my accumulation account as an after-tax contribution and then starting a second allocated pension.

Given my age, am I restricted to one year of non-concessional contributions or am I able to bring forward three years of contributions — with three times $120,000 to equal a $360,000 contribution?

Answer

The tax you refer to is not universal and only applies to that part of your superannuation known as the “taxable” component. The exempt part is always tax-free.

When the taxable component is payable to an individual who is not a financial dependent or interdependent of the deceased, it forms part of their taxable income. With offsets, the tax is effectively reduced to 15 per cent. The additional 2 per cent is the Medicare levy component and, in some cases, could actually be higher.

It can also affect other income-tested benefits such as paid parental leave, additional superannuation contributions tax and family tax benefits.

If, however, the super death benefit is payable to the estate instead of directly to the individuals concerned, the Medicare levy is completely avoided and, therefore, the effective tax rate is the per cent on the taxable component.

In almost all cases, distributions from the estate to the beneficiaries are non-assessable. The recontribution strategy you refer to reduces the taxable component and increases the exempt part.

You can make use of the full $360,000 bring-forward concession provided you satisfy all of the conditions. This includes being under 75 years of age at the time you make the contribution, within the past three years you have not previously made a non-concessional contribution and your total superannuation balance as of June 30, 2024 is less than $1.66 million.

If you can’t answer ‘yes’ to the last two points, the amount you can contribute will be reduced.

Finally, you don’t necessarily need to operate two separate account-based pensions. The old ABP could be combined with the new super contribution and a new “consolidated” ABP commenced.

Nick Bruining is an independent financial adviser and a member of the Certified Independent Financial Advisers Association