Executives moving to Australia may be caught out by changes to superannuation rules that could mean a bigger tax hit down the track. While the changes were introduced back in 2008, many temporary residents remain unaware of their potential impact.
What they may not know is that if they came into the country on a temporary resident’s visa and contributed to an Australian super fund before 2008, they might not be able to access their super benefit tax-free after the age of 60.
Broadly, a temporary resident is a holder of a temporary visa granted under the Migration Act 1958, who is not, and whose spouse is not, an Australian resident. Visa holders who travel to Australia to work and holiday will hold temporary visas.
As long as they are employed in Australia, their employer will generally contribute to a super account in accordance with the compulsory super rules.
According to the Department of Immigration, 306,030 temporary visas were granted in 2009-10, including 190,633 under the international relations stream.
Before changes made in 2008, super held by temporary residents was treated in much the same way as that held by non-residents. That is, super accumulated while working for an Australian company could be cashed once they left Australia and their visas ceased.
Temporary residents who satisfied an ordinary condition of release, such as retirement or reaching preservation age, could also receive their super subject to the usual concessional rates of tax.
Since the changes, however, this ordinary condition of release option is no longer available to temporary residents.
Around the same time, tax rules for temporary residents leaving the country also changed. Under what are known as the departing Australia superannuation payments (DASP) rules which apply when a temporary resident leaves the country and their visa is cancelled, withholding tax has to be paid.
The laws changed the cashing rules for temporary residents in a way that makes the Australian super system unattractive and tax-inefficient for thousands of people, says DBA Lawyers principal Dan Butler.
“The contribution rules remain the same and temporary residents can make contributions to Australian superannuation funds but, to get the money out, someone has to leave and they will have to pay about half of it in tax,” he says.
A further change to the DASP rules broadly states that once at least six months have passed since someone left Australia or their temporary visa was cancelled or expired, the Australian Taxation Office can request their super be cashed in favour of the ATO as unclaimed money.
“We understand that the ATO monitors immigration and other data, and notifies relevant superannuation funds when payments must be made. The individual can then claim their super from the ATO after deduction of withholding tax,” says Butler.
The withholding tax rates are zero for the tax-free component but can reach as high as 45 per cent on taxable parts of a super benefit.
A common way for non-residents to accumulate money in the Australian super system is for family members to make contributions for them.
Where they work overseas for an Australian company, their employer can contribute to a super fund for them in Australia.
So even if a non-resident travels to Australia for a holiday on a temporary visa, all of their prior Australian superannuation balance can become subject to DASP.
“Some people may end up paying substantially more tax as a result of the new DASP rules,” says Butler.
“As the world becomes more global, advisers should notify their non-resident clients who intend to travel to Australia and have a superannuation balance here that they are at risk.”
The changes to the way their super can be released means they could end up paying a much higher rate of tax than they would have previously.
He cites an example where Jane, who is a temporary resident of Australia, has $300,000 in an Australian superannuation fund comprised entirely of a taxable component. On July 3, 2007, Jane turned 61 and retired.
Before the change in the rules, retirement would have been an appropriate condition of release for Jane. Jane would have been able to withdraw her super entirely tax free as she was older than 60.
Assuming the new rules have come into effect and Jane seeks to withdraw her benefit after mid-2009, retirement is no longer an available condition of release.
Accordingly, she is only able to access her super through DASP. She does and the resulting tax liability based on the current withholding tax rates is $105,000 ($300,000 x 35 per cent).
Thus Jane suffers a $105,000 increase in tax due to a difference in timing and being caught by DASP even though she is older than 60.
“These changes apply to former, current and future temporary residents and it is here that unfairness can result as the new law has retroactive impact on catching prior super balances,” says Butler.