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Pensions for Expats in Australia

Submitted: August 2013

The Australian pension system is dualistic, although it is called the “three pillar retirement income system” in Australian public policy.

Australia has a tax-efficient contribution-based private system, which is supplemented by means-tested old-age benefits paid by the Government. However, the private system is divided into two pillars: mandatory employer contributions and voluntary individual contributions.

Because of the mandatory contributions pillar, the Australian pension system is in effect primarily contribution-based. There is no contribution-based state pension in Australia.

Superannuation

Superannuation system in Australia

Australian private pension schemes are called “superannuation funds” or “retirement savings accounts” (RSA). By law, most Australian employers are required to pay contributions to a superannuation fund on behalf of their employees. This extra money the employer’s 9.25% “super guarantee contribution”.

Your contributions to a compliant superannuation fund may be deducted from your taxable income and the capital can grow with reduced taxation (up to 15%). Superannuation payouts are normally tax-free if you are aged 60 or over (“preservation age”). Different rules may apply if you retire before the preservation age.

Superannuation benefits can only be drawn in the event of:

  • Death
  • Long-term disability, and
  • Permanent retirement from the workforce.

Instead of being subject to income tax, your deducted contributions are subject to contributions tax at a reduced 15% rate. If you are a low-income individual, you may be eligible for co-contributions and/or low-income super contributions. Broadly speaking, these additional payments from the Government are designed to make sure that your qualifying pension contributions are not subject to a higher effective tax rate than your salary. However, you are unlikely to qualify if you are on a temporary visa.

To qualify for tax deductibility, your overall contributions (including employer super guarantees) may not exceed the lower of AUD25,000 per year (AUD35,000 if you are aged 59 or over). In addition, your total contributions (including non-qualifying contributions paid from your after-tax income) must not exceed AUD150,000 per year.

It is very common for senior employees to set up a salary sacrifice scheme with large employer contributions, as it may be strongly tax-efficient. If you think you should pay extra into your superannuation fund, you should do so through the salary sacrifice route rather than on your own. Failure to do so may result in your contributions not being deductible, unless you are not an employee.

To determine the most efficient option in your individual case, you should seek professional advice.

Superannuation practical tips

First and foremost, you should view superannuation as a complex financial product on which you are charged fees to get the superannuation industry running.

These fees may vary greatly from one superannuation product to another. Typically, “MySuper” accounts are subject to lower fees, as they don’t include services that you might never need.

Your employer must pay your superannuation contributions to a default superannuation product if you haven’t already chosen one upon starting employment. From 1 January 2014, this default superannuation must be a MySuper account.

From a practical point of view, you should:

  • compare superannuation products
  • check if DIY investing is available on your superannuation, if you want to manage your investment for yourself
  • feel free to consider switching
  • consolidate your superannuation arrangements
  • not panic if your fund manager underperforms for a particular year – you need it to deliver adequate returns over the long term.

Be also wary of superannuation scams, as expatriates are easy targets for fraudsters. You should be particularly cautious if you receive unsolicited emails saying that you can withdraw your superannuation early.

Expatriates and unclaimed superannuation

If you have worked in Australia, you should check with your Australian employer how much superannuation rights you have accrued whilst you were in Australia. Failure to do so is like leaving money on a dormant bank account in your name.

Employer contributions to superannuation funds are on top of your wage, but part of your earned income. Many expatriates actually just take their paycheques and totally miss out on superannuation, so they eventually fail to claim their money.

Age pension

As the Australian tax system encourages you to save for retirement, benefits for the elderly are primarily contribution-based. However, low-income individuals above pension age may be eligible for Age pension, which is means-tested.

The age requirements for Age pension are currently 65 for men and 64.5 for women, rising gradually to 67 by 1 July 2023 for both genders.

Under Age pension, the Government tops up your pension if your income and your assets do not exceed a specified amount. If you have worked in a foreign country, you are expected to claim your foreign pensions first. They would then be taken into account for the Age pension income test.

Entitlement is based on social citizenship and it does not depend on any previous contributions of yours. Instead, the Australian Government takes into account the number of years for which you have been subject to the Australian tax system. This is because Age pension is taxpayer-financed.

You qualify for Age pension if:

  • You have been resident in Australia for the last 10 continuous years, or
  • You must have been resident in Australia for more than 10 years, with at least five years of continuous residence.

A bilateral social security agreement may help you qualify for the residence test. A list of these agreements is available here.

Additional benefits are also available for low-income pensioners. These include, but are not limited to:

  • Rent assistance
  • Digital TV switchover
  • Clean energy supplement
  • Low income healthcare card
  • Pension bonus scheme, and
  • Pension supplement.

International matters

Expatriates and Age pension

Expatriates may sometimes be strongly discriminated against by domestic pension rules.

Under current law, you need at least 10 qualifying years of residence before being able to claim Age pension in Australia. Tighter rules apply for Australians living abroad if they wish to claim Australian Age pension by virtue of their past contributions to the Australian tax system.

Your home country may have a social security agreement with Australia. In theory, treaty non-discrimination rules may “totalise” your qualifying years into one single pool, which is then taken into account by each contracting state to calculate your pension payouts.

You might wish to check how your applicable social security agreement protects you from discrimination. A list of social security agreements concluded by Australia is available here.

Diplomatic matters

Don’t take things for granted if you come from a country with which Australia has a social security agreement.

Australian Age pension is means-tested, taxpayer-funded, and eligibility is residence-based (see above). Conversely, most foreign state pensions are contribution-based, where eligibility is determined by your contribution years. Because of these fundamental differences, social security agreements are subject to tough negotiations, and major disagreements may arise. The now ended UK-Australia agreement is a good example of this.

Social security agreements must be used with absolute care, and professional advice might be helpful.

International superannuation planning

Superannuation is a tax-efficient product in Australia. Therefore, it is heavily regulated in order to avoid any undue tax base erosion. The same fundamental principle is likely to apply to foreign equivalents. Thus, you should check:

  • how your foreign pension arrangements (payouts and capital growth) are taxed whilst you are in Australia, and
  • how your Australian superannuation may be taxed in your home country.

If you are close to or already in retirement, you are very likely to be better off drawing on your foreign pension before taking up residence in Australia. This may be subject to restrictions in your home country, however.

If you are a working age individual, the capital growth of your foreign pension pot may be taxed in your hands on an accruals basis, and your contributions to the foreign scheme would not be deductible. Retaining your foreign pension arrangements may nonetheless be the most practical option if you don’t intend to stay in Australia.

If you intend to eventually leave Australia, you can still resort to salary sacrifice arrangements and rely on the Australian superannuation system over the long term if you think it is worthwhile. You would normally be able to access your superannuation benefits upon becoming non-resident. Be aware that these are subject to withholding tax, however. There is normally no withholding tax on your after-tax contributions but you potentially face a withholding tax of up to 45% on your deducted contributions.

Cross-border superannuation planning is always on a case-by-case basis. It is strongly recommended to use specialist advice regarding this matter.

 

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