A guide to superannuation and temporary residents

An increasing number of people travel to Australia as non-residents, accumulating some savings in the Australian superannuation system. Daniel Butler and Tina Conitsiotis focus on how the changes to legislation in late 2008 can result in substantial tax to temporary residents, and what financial advisers need to be aware of to overcome these issues.

Offering the promise of a safe and a prosperous country, Australia has attracted people from all over the world.

Many visit Australia on temporary resident visas and are likely to generate some savings in the Australian superannuation system, whether prior to their visit here or during their stay in Australia.

For non-residents who do not intend to visit Australia, having savings in the Australian superannuation system generally poses little problem (provided the fund is not a SMSFs due to the residency requirements for small funds).

However, for former, current and future temporary residents, the Australian superannuation system is generally not attractive and can be tax inefficient. The above situation is a result of changes to the legislation that occurred in late 2008.

Temporary resident versus non-resident

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We begin by briefly outlining the distinction between a non-resident and a temporary resident. Broadly, a temporary resident is a holder of a temporary visa granted under the Migration Act 1958 (Cth) who is not, and whose spouse is not, an Australian resident (refer to s 995-1 of the Income Tax Assessment Act 1997 (Cth)).

The definition of a temporary resident is very broad and will include visa-holders who travel to Australia for both work and holiday purposes.

For completeness we note that the changes do not apply to a holder of a Subclass 405 (Investor Retirement) visa or a Subclass 410 (Retirement) visa as described in Schedule 2 to the Migration Regulations 1994 (Cth).

Temporary residents are treated differently to non-residents for superannuation purposes. Broadly, non-residents can contribute to the Australian super system and are subject to the same conditions of release (eg, attaining age 65 or retirement) as Australian residents.

However, this changes when a non-resident becomes a temporary resident.

Temporary residents and superannuation

Prior to the changes in late 2008, temporary residents were treated in much the same way as non-residents.

Further, they generally had the ability to request that their super be cashed once they had left Australia and their visa had ceased to be in effect. Such payments were referred to as Departing Australia Superannuation Payments ('DASP').

DASP were subject to withholding tax, whereas payments made in accordance with the ordinary conditions of release were taxed in the usual manner.

However, the new laws introduced from 18 December 2008 changed the cashing rules for temporary residents.

The contribution rules remain the same and temporary residents can make contributions to Australian superannuation funds. (Indeed, a temporary resident who works in Australia is broadly subject to the ordinary superannuation guarantee rules.)

The main changes effected by the new rules were to limit the conditions of release available to temporary residents and vary the rules surrounding DASP.

Conditions of release

We firstly consider the changes to the conditions of release for temporary residents. These are now limited to:

•  temporary or permanent incapacity;
•  terminal illness;
•  death; or
•  DASP.

The effect of the above is that the other conditions of release that ordinarily apply to Australian residents and non-residents (eg, retirement, attaining preservation age, etc), do not apply to temporary residents.

DASP

The new DASP rules broadly provide that, where it has been at least six months since the latter of the following occurred:

•  the individual departed Australia; and 
•  the individual's temporary visa was cancelled or expired;
• the Australian Taxation Office (ATO) can request that the temporary resident's 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. The applicable withholding tax rates are as follows:

• 0 per cent for the tax-free component 
• 35 per cent for a taxed element of a taxable component 
• 45 per cent for an untaxed element of a taxable component.

Prior to late 2008, a temporary resident who satisfied an 'ordinary' condition of release (such as retirement or attaining preservation age) could receive their super subject to the usual concessional rates of tax. This option is no longer available to temporary residents.

Example of DASP

Jane, who is a temporary resident of Australia, has $300,000 in an Australian superannuation fund comprising entirely of a taxable component. On 3 July 2007, Jane turned 61 years old and retired.

Prior to the change in the rules, retirement would have been an appropriate condition of release for Jane. Jane would have been able to withdraw her superannuation entirely tax free as she was over 60 years.

Now assume 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 -- if we apply the current withholding tax rates -- is $105,000 (ie $300,000 x 35%).

Thus Jane suffers a $105,000 increase in tax due to a difference in timing and being caught by DASP even though she is over 60 years of age. (Despite this fact, many advisers still state that super is tax free beyond 60 years of age.)

Resulting unfairness

The above 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.

This point is best illustrated when a person with an existing Australian superannuation balance becomes a temporary resident and then departs Australia as in Jane's example above.

It is not unusual, for instance, for some non-residents to accumulate money in the Australian superannuation system due to a range of factors such as family members making contributions for them and where they work overseas for an Australian company and their employer contributes to a superannuation 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.

In particular, DASP will apply to a person who started an Australian superannuation fund well before the 2008 changes who:

•  has never worked in Australia;
•  began contributing to the Australian super system many years ago;
•  had the opportunity to retire before the 2008 changes came into effect; and
•  has not held a temporary visa since the new rules came into effect and who only ever visited Australia for a short holiday.

Such a person can end up paying substantially more tax as a result of the new DASP rules.

Practical implications for financial advisers

As the world becomes more global, advisers must ensure that they notify their non-resident clients who intend to travel to Australia and have a superannuation balance here subject to the above risks.

The trap that non-residents can otherwise readily fall into is to obtain a temporary resident visa and subject all their accrued superannuation entitlements to hefty Australian tax.

A non-resident with an existing Australian super balance should therefore determine whether they can withdraw their superannuation moneys prior to applying for a temporary resident visa (this generally assumes they have attained their preservation age or age 60 and retired from gainful employment).

Daniel Butler and Tina Conitsiotis are lawyers with DBA Lawyers.