Should I Top Up My Superannuation As An Expat
Superannuation, or super as it’s commonly referred to, is Australia’s retirement savings system allowing both employers and individuals in Australia to contribute to their retirement investments.
In this article, we’re going to explore what superannuation is, and whether, as an Australian expat living and working abroad, you should consider contributing to your superannuation fund. We’ll also cover some case studies to highlight when you may wish to consider contributing to your superannuation fund.
Before we dive into the scenarios, let’s explore a brief history of the superannuation system in Australia.
Back in the 1980’s, the system was largely limited to public servants in Australia, however, in 1992 the Superannuation Guarantee (SG) system was introduced which made it mandatory for employers to contribute 3% to the super funds of their staff. Even back in 1992, the superannuation system was estimated to be worth approximately $148bn.
In 1999, following the Wallis Financial System Inquiry, Self-Managed Superannuation Funds (SMSFs) were allowed with the key goal of allowing small businesses and self-employed individuals to contribute to their own retirement savings. SMSFs are a complex area of advice for Australian expats, which we won’t dive into in this article, however, you can find out more here.
Fast forward to today, and the superannuation system in Australia is estimated to be worth over $3 trillion and is rated as one of the most efficient retirement savings and investment systems globally. For anyone considering retirement in Australia, even if only part of the year, superannuation should be a key consideration.
Let’s explore how much can be contributed to your superannuation fund.
The contribution limits each financial year, which runs from 1 July to 30 June each year, changes every now and then. Under the current rules, individuals are able to contribute up to $27,500 per financial year as a concessional contribution (pre-tax dollars) and up to $110,000 per financial year as a non-concessional contribution (post-tax dollars).
Further to this, under the carry-forward provisions, since the 2018-19 financial year, you have been able to utilise your unused concessional contributions for your super and make up for the amount not contributed already. This may mean that you can salary sacrifice above the $27,500 annual threshold on a regular basis, or even make a voluntary lump-sum contribution. It’s important to consider whether there are any tax savings to be utilised here also.
Another key factor of the contribution limits is that the non-concessional contributions also allow for the ‘bring-forward’ provision, which allows an individual to bring forward the next two years, allowing for a one-off contribution of up to $330,000 providing the superannuation requirements are met. For a couple, this could be a highly effective way of quickly boosting your superannuation balance.
Let’s explore some common scenarios when Australian expats may wish to top up their Australian superannuation fund.
Far too many Australian expats lose sight, or simply stop paying as much attention to, their Australian super when they move abroad. Given that their employer in most cases won’t be contributing to their super fund while they’re working abroad, they tend to disregard it as an unimportant part of their overall financial strategy, which could mean missing out on potential current and future benefits.
Here are some common scenarios whereby an Australian expat may wish to contribute to their superannuation fund:
- You’re approaching retirement and plan to retire in Australia
If you’re getting close to age 60, and plan to retire at this age, or even if you’re older than this, providing that you meet a condition of release, you could convert your superannuation, up to the Total Superannuation Balance, to an Account Based Pension and start drawing a tax-free income. The current limit for the pension account is $1.7M and minimum drawdowns have to adhere to each financial year. For example, you may have a superannuation balance of $1.5M, which can be rolled over into an account-based pension, and your minimum drawdown maybe 4%, which would require you to draw $60,000 each financial year as tax-free income.
Let’s assume that Bill is a single Australian expat living and working in Hong Kong, and is currently 56 years of age. He’s planning to return to Australia in 5 years time, at the age of 61, and retire permanently in Australia. Bill may want to give some serious thought to topping up his superannuation balance aggressively over the next 5 years, to boost his tax-free income when he does return to Australia, particularly if Bill only has a relatively low superannuation balance.
- You have taxable Australian income, e.g. rental income
If you have a positively geared property or property portfolio in Australia, then chances are you’re being hit with a tax bill of 32.5% on the first $90,000, which only increases from there. Unfortunately, as Australian expats, there is no tax-free threshold that applies, which can create quite a large tax bill. One option that you have to consider offsetting this tax bill is to make a concessional contribution to your superannuation fund, ensuring to stick within the contribution limit, and claiming a tax deduction on your contribution to offset the tax liability on your rental income.
Let’s consider Susan, an Australian expat living and working in London, with two investment properties in Sydney and Melbourne, that are both rented out. She is generating a positive net income (taxable income) in Australia of $26,000 per year, which would result in a tax bill of $8,450. Instead, Susan seeks advice from her tax adviser, who suggests that she contributes $26,000 to her superannuation fund and claims a tax deduction. Now, Susan will only pay the 15% contributions tax, of $3,900, and her taxable income in Australia is reduced to nil.
- You are a tax resident with a Capital Gains Tax Rate > 15%
Inside your superannuation fund in Australia, there is a Capital Gains Tax rate of 15% that applies to assets that are held for less than 12 months, and this is reduced to 10% for those assets that are held for more than 12 months. If you’re simply in a standard superannuation fund that holds a managed fund or two, you may have very little control over these tax bills, and may not even be aware that they’re being incurred. However, if you’re living in a country where there is a Capital Gains Tax (CGT) rate of more than 15%, investing via your superannuation fund may be a highly efficient way to save for your retirement, given the tax savings and future tax benefits in drawing down an income.
Let’s consider Amanda, who is living and working in Paris. Depending on the holding period involved, Amanda’s CGT rate is likely to be higher than she can achieve inside her superannuation fund. Rather than holding a share portfolio in her own name, therefore, to save for her retirement while she’s living and working in France, given that she plans to retire in Australia, she decides to accumulate her retirement savings inside her superannuation fund instead.
Here are three relatively simple scenarios in which Australian expats could consider contributing to their superannuation fund as an Australian expat. If you have any questions about your own superannuation fund or want to discover whether you should be making contributions, or even what impact this could have on your tax residency, reach out to our team to book a complimentary discussion to explore your options.
Ally Wealth Management is the trusted ally in finance for Australians at home and across the globe. As both Australian expats and residents, the founders of Ally have a unique understanding of the common personal financial challenges faced.
Book your complimentary appointment with our team at Ally Wealth Management to discuss how we can help you to achieve your financial goals.
Ally Wealth Management Pty Ltd is a Corporate Authorised Representative of Sentry Advice Pty Ltd ABN 77 103 642 888. Sentry Advice holds an Australian Financial Services Licence (AFSL) No. 227 748.
General Advice Warning: The information contained herein is of a general nature only and does not constitute personal advice. You should not act on any recommendation without considering your personal needs, circumstances, and objectives. We recommend you obtain professional financial advice specific to your circumstances.
