Superannuation guide for non-residents for tax purposes

Zurich's Alena Miles outlines potential superannuation strategies for non-residents.

The transitory nature of employment in today’s global society means that an increasing number of advisers are dealing with non-resident clients. This article examines contributions and access to superannuation for non-residents.

Who are non-residents for tax purposes?

An individual who meets at least one of the following tests is an Australian resident for tax purposes:

• residence test — the person lives in Australia;
• domicile test — the person’s domicile or permanent place of abode is in Australia;
• 183 day test — the person has been in Australia for at least half of the financial year;
• superannuation test — the person is a member of Commonwealth Super Scheme or Public Sector Super Scheme, or is a spouse or child (under 16) of a member of these schemes.

If none of the tests are satisfied, the individual is treated as a non-resident for tax purposes.

This distinction is very important because under Australian tax law, the assessable income of a resident includes income derived from all sources, both domestic and foreign, during a financial year. In contrast, non-residents are generally only assessed on income earned from sources within Australia.

There are certain exceptions to this rule (eg, capital gains on assets that are taxable Australian property).

Superannuation contribution rules

In regards to contribution rules, the Superannuation (Industry Supervision) Regulations 1994 do not differentiate between residents and non-residents.

This means a super fund can accept contributions from a non-resident who satisfies the relevant contribution criteria (eg, under age 65, or over 65 and meets the work test).

Since 1 July 2007, the trustee of a superannuation fund can only accept member contributions (ie, any contributions other than employer contributions) if the member has quoted their tax file number (TFN).

In some cases trustees will not permit a person to become a member of the fund unless a TFN is quoted. The Australian Prudential Regulation Authority (APRA) treats the transfer of overseas superannuation into Australia as a member contribution, not a rollover.

Therefore, newly arrived clients should apply for a TFN and quote it to their superannuation fund before transferring superannuation benefits from other jurisdictions.

A non-resident may also be entitled to claim a deduction for personal superannuation contributions if they are an eligible person. An individual is an eligible person if they:

• are not an employee for Superannuation Guarantee purposes; or
• satisfy the 10 per cent test.

A taxpayer satisfies the 10 per cent test if the total of their assessable income (ie, income assessable in Australia) attributable to employment, reportable fringe benefits and reportable employer superannuation contributions (RESCs) represents less than 10 per cent of the total of their assessable income, reportable fringe benefits and RESCs.

Deductions for expenses from certain sources (including for personal deductible contributions) cannot create a tax loss.

A non-resident’s income from interest, dividends and royalties is subject to withholding tax. This income is excluded from the non-resident’s assessable income under Australian tax law and therefore cannot be offset by a deduction.

Therefore, a non-resident would need assessable income under Australian tax law (eg, rental income from an Australian property) to claim a deduction for the personal contribution into super.

Example 1

Peter, aged 32, lives and works in the UK and is a non-resident for Australian tax purposes. Peter owns an investment property in Australia, which generates rental income of $25,000 per annum.

A non-resident’s overseas employment income is not assessed in Australia; therefore, as Peter earns no employment income in Australia, he will satisfy the 10 per cent test for the financial year.

Peter contributes $15,000 to superannuation and claims a tax deduction of $15,000 in his Australian tax return. This reduces Peter’s assessable income to $10,000.

Without claiming the deduction Peter pays $7,250 in income tax. By claiming the deduction the total tax paid is $5,150 (ie, $2,900 in income tax and $2,250 in contributions tax).

This represents a tax saving of $2,100.

Superannuation payment rules

Unlike the contribution rules, the payment rules do distinguish between residents and non-residents. But instead of the tax residency issues, the adviser needs to consider immigration issues — specifically, whether the client is a temporary resident.

Superannuation payment for temporary residents

A temporary resident is an individual who:

• holds a temporary visa granted under the Migration Act 1958; or
• is not, and whose spouse is not, an Australian citizen, an Australian permanent resident or a protected special category visa holder.

Before 1 April 2009, a temporary resident permanently leaving Australia could apply to their superannuation fund for release of benefits under the permanently departing Australia condition of release.

The superannuation fund would then withhold a Departing Australia Superannuation Payment (DASP) tax of 30 per cent on the taxable (taxed) component.

In order to avoid a DASP tax, temporary residents could choose to leave their benefits in the fund until another condition of release (retirement, attaining age 65) was met.

Temporary resident accessing funds after turning age 60 could access the benefits as a tax-free lump sum or a tax-free income stream in Australia.

After 1 April 2009, there are two major changes to the superannuation rules for temporary residents. Both changes generally make investing in superannuation in Australia less attractive for temporary residents.

Superannuation accounts of former holders of a temporary visas, where at least six months have passed since the visas ceased to be in effect and the visa holders have left Australia, are now treated as unclaimed superannuation money.

Superannuation providers that hold such unclaimed money now receive notification to pay these amounts to the ATO. Departed temporary visa holders can recover any amounts paid to the ATO as unclaimed superannuation at any time (subject to DASP tax).

This process does not apply to the individuals who:

• are holders of a temporary visa;
• are citizens or permanent residents of Australian or New Zealand; or
• have made a valid application for a permanent visas that have not been finally determined under the Migration Act 1958.

The second major reform limits the conditions of release under which temporary residents can access superannuation. After 1 April 2009, temporary residents can only access their superannuation benefits under the following conditions of release:

• death;
• terminal medical condition;
• permanent incapacity;
• temporary incapacity;
• permanently departing Australia;
• an unclaimed money payment; or
• the superannuation provider receives a Release authority for excess contributions.

Departing Australia superannuation payments (DASP)

A DASP is a lump sum payment from a super fund. Unlike other types of member benefits paid from a superannuation fund, a DASP is not included in the member’s assessable income, but is subject to the final withholding tax rates.

The payment is only available if certain conditions are satisfied. A DASP can only be received by a person who:

• entered Australia on an eligible temporary resident visa (listed in Superannuation Industry (Supervision) Regulations Sch 1AB), other than a visa held by a New Zealand citizen;
• has a visa that has expired or been cancelled; and
• has permanently departed Australia.

Example 2

Jenny, 55, has been working in Australia for ten years on an eligible work visa. Jenny’s visa has ceased and she decides to return to the US.

Jenny wishes to access her accumulated benefits of $250,000 in an Australian super fund.

The benefits are comprised of a $10,000 tax-free component and a $240,000 taxable component. Jenny wishes to cash out her entire superannuation benefit in Australia as a lump sum benefit payment.

After 1 April 2009, temporary residents cannot withdraw their benefits under the retirement condition of release. Jenny can access the benefits under permanently departing Australia condition of release.

The super fund will withhold tax of $84,000 (35 per cent of the taxable component) and pay Jenny a net amount of $166,000.

Superannuation payment for non-resident for tax purposes but not a temporary resident

A non-resident (who is not a temporary resident) is subject to the same conditions of release as a resident. If a non-resident cashes out a lump sum from an Australian superannuation fund, the benefit payment is deemed to be sourced in Australia.

The taxable components of the payment will be included in the non-resident’s assessable income for that year and taxed at normal benefit payment rates.

Just as there is nothing in SIS to prevent a non-resident contributing to a super fund (however a TFN is required for personal contributions), there is nothing to prevent a non-resident from commencing a pension or annuity from a super fund (provided they satisfy a condition of release).

If a double tax agreement (DTA) exists between Australia and the country of which the individual is a tax resident, the terms of the agreement will dictate the relevant tax treatment.

DTAs attempt to prevent double taxation by allocating taxing rights over income classes covered under the agreement. 

Conclusion

Understanding superannuation issues for non-resident clients is becoming increasingly important in today’s global economy.

However, as each country’s taxation and superannuation rules are different, it is important that advisers work together with a tax specialist to provide comprehensive and precise advice for their clients.

Alena Miles is a technical analyst, technical services, at Zurich.