14 Feb Super and non-resident frequently asked questions
1 November 2018
FirstTech Strategic Update, Tim Sanderson, Senior Technical Manager
This article contains answers to a range of questions the FirstTech team is frequently asked about superannuation for non-resident and temporary resident clients.
Note that this article does not cover questions about residency for SMSF clients, for more information about these issues, see section 5.8 of the FirstTech SMSF Guide.
Can non-residents contribute to Australian superannuation funds?
Non-residents are subject to the same contribution rules as Australian residents, for example the requirement to be under age 65 or aged 65 to 74 and meet a work test when making voluntary employer or personal contributions to super. An eligible client is therefore able to contribute to an Australian superannuation fund regardless of nationality, overseas residence, or whether they are a tax-resident of Australia.
Product providers require that documentation (such as the PDS) is received and the membership application process is completed while the person is in Australia. It is also important for non-resident clients to ensure they have (and provide their fund with) an Australian tax file number (TFN) as Australian super funds pay higher tax on employer contributions and cannot accept any other types of contributions where a TFN has not been provided.
My client (age 67) is living and working overseas. Can he satisfy the work test to make personal contributions to super?
Where a client aged 65 to 74 wants to make personal super contributions, they must have satisfied a work test during the financial year which requires them to have been gainfully employed for at least 40 hours within a period of 30 consecutive days. There is no requirement for gainful employment to occur within Australia or for the income earned to be taxable in Australia.
Therefore, if your client is employed for gain or reward overseas (eg, they are in paid employment) and they meet the 40 hours in 30 consecutive day requirement, they satisfy the work test.
Refer to ‘Can non-residents contribute to Australian superannuation funds’ above for more information on the contribution requirements.
My client (age 48) is a non-resident for tax purposes. Can she claim a tax-deduction for personal super contributions?
All clients eligible to make personal contributions (including non-residents for tax purposes) are eligible to claim a tax deduction for those contributions provided they submit a valid deduction notice within the required timeframe.
While non-resident clients are eligible to make personal tax-deductible contributions, it is important to understand the following practical differences and limitations:
A personal tax-deductible contribution cannot be claimed or used to reduce tax on income subject to a final withholding tax (for example unfranked dividends, interest, royalties and some payments from managed funds). This income is not assessable income of a client in Australia and therefore cannot be reduced by tax deductions.
A personal tax-deductible contribution can be claimed or used to reduce tax on income that is assessable in Australia. For clients who are non-residents for tax purposes, this can include rental income and realised capital gains from Australian real property, Australian business income and Australian employment income.
Because non-residents for tax purposes do not receive a tax-free threshold (they pay a marginal rate of 32.5% on their first $90,000 of taxable income), there is a benefit (where possible) in making a personal tax-deductible contribution that reduces their taxable income to Nil. In contrast, Australian residents for tax purposes generally do not benefit from making a personal tax-deductible contribution that reduces their taxable income below their effective tax-free threshold1.
The amount of tax deduction that can be claimed is limited to their level of Australian assessable income (ie, a tax loss cannot be created by claiming a deduction for personal super contributions).
Is Super Guarantee (SG) payable for employee clients who are non-residents or temporary residents?
SG contributions are not required to be paid by law on salary and wages earned in either of the following circumstances:
Salary and wages2 earned for work done outside Australia by a client who is a non-resident of Australia for tax purposes.
Salary and wages earned for work done outside Australia by a client who is a resident of Australia for tax purposes but is employed by an employer who is not a resident of Australia for tax purposes.
Can non-residents and temporary residents receive the Government Co-contribution?
Clients who have been a temporary resident3 at any time during an income year are not eligible to receive a Government co-contribution for that year.
For other clients who are non-residents for tax purposes, no specific exclusion applies. However, it’s important to note that one of the eligibility requirements to receive the Government Co-contribution is that at least 10% of the client’s total income4 for the income year comes from employment or running a business.
The employment or business income of people who are non-residents for tax purposes is generally assessable in Australia only to the extent that it is generated in Australia. This means that non-residents who are working or running a business in Australia may qualify for the Government Co-contribution, but non-residents who only have foreign employment / business income (which is not assessable and therefore not included in a client’s total income), or those who are not working or running a business at all, cannot qualify.
Can non-residents and temporary residents receive low income super tax offset (LISTO) contributions from the Government?
Clients who have been a temporary resident3 at any time during an income year are not eligible to receive the Low Income Superannuation Tax Offset (LISTO) for that year.
For other clients who are non-residents for tax purposes, no specific exclusion applies. However, it’s important to note that one of the eligibility requirements to receive LISTO is that at least 10% of the client’s total income4 for the income year comes from employment or running a business.
The employment or business income of people who are non-residents for tax purposes is generally assessable in Australia only to the extent that it is generated in Australia. This means that non-residents who are working or running a business in Australia may qualify for LISTO, but non-residents who only have foreign employment / business income (which is not assessable and therefore not included in a client’s total income), or those who are not working or running a business at all, cannot qualify.
Can non-residents and temporary residents receive the spouse contribution tax offset of up to $540 if making eligible spouse contributions?
The general eligibility rules to make spouse contributions apply equally to residents and non-residents, including that, at the time of the contribution, the receiving spouse is under age 65 or is aged 65 to 69 and has satisfied a work test during the financial year (this work test can be satisfied with gainful employment undertaken both inside and outside Australia).
However, a person making a contribution for their spouse can only claim the spouse contribution tax offset of up to $540 where both the contributing and receiving spouse are Australian residents for tax purposes at the time the spouse contribution is made. Therefore, a client is unable to receive a spouse contribution tax offset if they, or their spouse, are a non-resident for tax purposes at the time of the contribution.
The spouse contribution tax offset rules don’t deal directly with clients who are temporary residents (either for visa or tax purposes). Where a client is a temporary resident, it is necessary to know whether they are an Australian resident or non-resident for tax purposes to determine their eligibility for the spouse contribution tax offset.
Can non-residents or temporary residents aged 65 or over make downsizer contributions when selling their main residence?
Downsizer contribution rules apply equally to clients who are Australian residents and non-residents (including temporary residents). However, two of the eligibility requirements to make a downsizer contribution make it practically difficult for many clients living overseas to qualify.
The first is the requirement that the dwelling being sold is located in Australia, meaning a client cannot make a downsizer contribution upon selling their foreign home.
Assuming the client does own a dwelling in Australia, the second issue is that they generally qualify for at least a partial main residence exemption upon the sale (or would qualify but for the fact that the dwelling is a pre-CGT asset or the dwelling is owned by their spouse). This requirement means that a client must have resided in their Australian home for a period of time for it to be considered their main residence and qualify to make a downsizer contribution.
The effect of these rules is that clients living overseas with foreign property or Australian properties used only for rental / investment purposes will not qualify to make downsizer contributions. However, clients who have an Australian dwelling that qualifies for a partial main residence exemption can still make a downsizer contribution on disposal where they have since moved overseas and no longer reside in the dwelling.
From 9 May 2017, the Government has proposed denying the CGT main residence exemption to clients who are non-residents for tax purposes at the time of disposal, with a transition period allowing the exemption to still apply until 30 June 2019 for CGT assets held prior to 9 May 2017. If legislated, this would deny any main residence exemption to many non-resident clients, and as a result, deny the ability to make a downsizer contribution on disposal. At the time of writing, this proposal had not been legislated.
Can non-residents or temporary residents use the First Home Super Saver (FHSS) Scheme to save for a first home via super?
The FHSS scheme is not restricted to Australian residents, and interestingly non-resident clients who have already owned a home overseas are not prohibited from using the scheme. However, it can be practically difficult for non-resident clients to make use of the FHSS scheme to buy a first home in Australia.
One of the main requirements of the FHSS scheme is that within 12 months (or a longer period if allowed by the Commissioner) of making a withdrawal under the scheme, the person must enter into a contract to purchase or construct their first home and intend to occupy the home as soon as practicable (and for at least 6 of the first 12 months in which it’s practicable to occupy). Where a non-resident purchased a home that was inhabitable but did not commence living in the home immediately after purchase, it is unlikely they will comply with the scheme rules.
Where a client who is a non-resident for tax purposes wishes to make a withdrawal under the FHSS Scheme, it is important for them to:
Speak with their tax adviser about whether a Double Tax Agreement (DTA) exists between Australia and their country of residence and if so, whether it modifies the normal Australian tax treatment of their FHSS Scheme withdrawal.
Seek advice from a tax specialist in their country of residence regarding the tax implications of receiving a FHSS Scheme payment from an Australian superannuation fund.
Temporary residents are also potentially able to use the FHSS scheme to buy a first home in Australia. However, unless the client finds their first home while still a temporary resident or after they become a permanent resident, use of the scheme will often not be tax-effective.
Where a temporary resident elects to make a withdrawal under the FHSS scheme, the normal tax treatment applies provided their benefits are still with their superannuation fund at the time of withdrawal ie. concessional contributions and earnings are assessable income and taxed at the client’s marginal tax rate but with a 30% tax offset. This tax treatment applies regardless of whether they are still a temporary resident, have become a permanent resident / citizen, or have ceased being a temporary resident and left Australia but their benefits have not yet been transferred to the ATO.
However, where a temporary / former temporary resident receives a FHSS Scheme withdrawal and they are a non-resident for tax purposes at that time, it is important to consider any modifications to the Australian tax treatment by a Double Tax Agreement and the tax treatment that may apply in their country of tax residence – see earlier in this question for further information.
It is important to note that once the withdrawal occurs, the client then generally has 12 months to enter into the contract to purchase or construct their first home, and they must intend to occupy the home as soon as practicable (and for at least 6 of the first 12 months in which it’s practicable to occupy). Where this does not occur, the client must recontribute the net withdrawal to super as a non-concessional contribution, or pay additional tax.
How can non-resident clients access their preserved superannuation benefits?
Non-residents (excluding temporary residents or former temporary residents – see the next question) are subject to the same preservation rules as Australian residents. To access preserved superannuation, a non-resident must meet one of the standard conditions of release, which could include retirement on or after preservation age or reaching age 65.
Where a non-resident wishes to meet the retirement condition of release, foreign gainful employment is included when determining whether the retirement condition of release has been satisfied.
My client is a temporary resident. What conditions of release can he meet to access his preserved superannuation?
From 1 April 2009, temporary residents and former temporary residents7 can access their super benefits as a single lump sum once they leave Australia and their visa has ceased to be in effect.8 However, temporary residents cannot satisfy many standard conditions of release such as retirement, reaching age 65, severe financial hardship, compassionate grounds or reaching preservation age / transition to retirement. Temporary residents do still have access to some standard conditions of release such as death, permanent incapacity, temporary incapacity and terminal illness.
It’s important to note that where a temporary resident accesses their super benefits as a single lump sum upon leaving Australia it will be taxed as a Departing Australia Superannuation Payment (DASP)9 rather than a regular superannuation lump sum.
My client is a temporary resident leaving Australia. What happens if she does not elect to withdraw her super and instead leaves it in her Australian fund?
A former temporary resident’s10 superannuation becomes unclaimed superannuation 6 months from the later of when they depart Australia and when their visa ceases to have effect.
The ATO periodically provides superannuation funds with notices about former temporary residents with unclaimed superannuation, and the fund is then required to transfer the unclaimed superannuation of these members to the ATO by the next ‘scheduled statement day’. Once the transfer occurs, the client will no longer have an interest in the fund and any benefits of membership (eg, insurance) will be lost.
Once the client’s unclaimed superannuation is held by the ATO, their balance effectively earns interest equal to CPI, instead of the actual investment earnings that applied through their superannuation fund.
The client can request the withdrawal of their benefits via Departing Australia Superannuation Payment (DASP) application on the ATO website. This payment will be taxed as a (DASP)9 rather than a regular superannuation lump sum.
My client has been in Australia a number of times on a range of temporary work visas, one of which is a working holiday maker visa. She built up superannuation each time but it has now all been transferred to the ATO. What tax will apply if she applies to withdraw her balance?
Where a client applies to withdraw their super balance that has previously been transferred to the ATO, the payment is treated as a ‘Departing Australia Super Payment’ (DASP) for tax purposes. The standard tax rates for a DASP are:
Tax free component: Nil
Taxable component (taxed element): 35%
Taxable component (untaxed element): 45%
However, where a DASP is paid on or after 1 July 2017 and includes amounts attributable to contributions made while a person is a working holiday maker11, the tax rate applied to the taxable component (both taxed and untaxed element) increases to 65%.
This means that even though only part of your client’s balance accrued while they were a working holiday maker, all of the taxable component will be taxed at 65%.
Clients who work in Australia as both working holidaymakers, and other forms of temporary residents, can avoid having all of their superannuation taxed at the higher working holidaymaker tax rates by ensuring they withdraw their superannuation from their fund after each period of time in Australia, rather than allowing it to be automatically transferred to the ATO and amalgamated with any other ATO held superannuation.
Can my client rollover her super benefits to another country when permanently leaving Australia?
In most cases not. Preserved superannuation must remain within the Australian superannuation system regardless of whether a client remains in Australia or permanently relocates elsewhere.
Where a client has already satisfied a condition of release (eg, retirement) and has unrestricted non-preserved benefits, they could elect to withdraw their benefits and (if eligible) contribute them to a foreign superannuation / pension scheme in the country in which they’re relocating, however they would need to consider the Australian and foreign tax and other consequences of doing so.
An exception applies for Australians permanently relocating to New Zealand. Under the superannuation portability agreement between Australia and New Zealand, clients permanently relocating from one country to the other can transfer their superannuation with them. For example, an Australian permanently moving to New Zealand can transfer their Australian superannuation to a New Zealand KiwiSaver Scheme.
For more information about super portability between Australia and New Zealand, refer to section 18.3 of the FirstTech Super Guide.
How are super income stream payments taxed if paid to a client who is a non-resident of Australia for tax purposes?
As a default position, the tax treatment of superannuation income stream payments made to residents and non-residents for tax purposes is the same (although it is important to note that non-residents are subject to non-resident marginal tax rates and are not required to pay Medicare levy).
For example, where income stream payments consisting only of taxable component (taxed element) are paid to a client from a taxed superannuation fund:
Income stream payments are tax free (not assessable income and not exempt income) where the client is aged 60 or over
Income stream payments are assessable income and taxed at marginal tax rates with a 15% non-refundable tax offset applying where the client has reached their preservation age but is under age 60.
Income stream payments are assessable income and taxed at marginal tax rates with no tax offset applying where the client is under their preservation age.
However, it is also important to check whether Australia has a double tax agreement (DTA) with the country in which the client is a resident for tax purposes. Where this is the case, any provisions in the DTA override the Australian tax law that would have otherwise applied12.
Most DTAs specifically address the tax treatment of pensions (and similar) payments. While they can provide for certain income to be taxed in the ‘source country’, the ‘country of residence’, or both, it is common for pensions to only be taxable in the country of residence under a DTA.
Non-resident clients looking to receive income stream payments from their Australian superannuation fund should therefore confirm with their tax adviser whether a DTA exists and what Australian tax treatment applies to their payments. A list of Australia’s DTAs (also referred to as ‘income tax treaties’) can be found on the Treasury website.
Clients should also seek advice from a tax specialist in their country of residence to confirm what the tax implications of receiving income stream payments from an Australian superannuation fund will be in that country.
Where a superannuation income stream is not assessable in Australia under a DTA, the superannuation provider is not required to withhold tax on income stream payments made to non-residents. Similarly if the non-resident is age 60 or over, superannuation income stream payments are not subject to withholding tax unless the income payments are defined benefit income in excess of $100,000 pa.
Where a superannuation income stream is assessable in Australia under a DTA, the superannuation provider is required to withhold tax on income stream payments made to non-residents at withholding rates determined by the ATO’s Tax table for superannuation income streams (Schedule 13). This will generally be non-resident marginal tax rates estimated by the ATO according to a range of factors including age, components and income stream type. The client can apply for a refund if the amount of withholding tax paid to the ATO is greater than tax owed.
Where a non-resident receives superannuation income stream payments that are assessable in Australia under the relevant DTA, the superannuation provider will be required to withhold tax at a rate of 45% if the client has not quoted an Australian tax file number.
How is a super lump sum taxed if paid to a client who is a non-resident of Australia for tax purposes?
As with the tax treatment of income stream payments (see previous question), the default position is that the tax treatment of superannuation lump sums made to residents and non-residents for tax purposes is the same (noting that non-residents are subject to non-resident marginal tax rates and are not required to pay Medicare levy).
Aged 60 and over: lump sum is tax free
Between preservation age and age 59: First $205,00013 of a lump sum is assessable income but taxed at a zero rate, with any amount above this assessable income and taxed at a maximum rate of 15%.
It is important to check whether Australia has a DTA with the country in which the client is a resident for tax purposes. Where this is the case, the DTA may modify the default rules and provide that only Australia, or the client’s country of residence, or both countries, have the right to tax the lump sum. Where a DTA exists and Australian tax applies on an Australian superannuation lump sum, a client will generally receive a tax offset / credit in their country of residence equal to the Australian tax paid.
Clients should also seek advice from a tax specialist in their country of residence to confirm what the tax implications of receiving a lump sum from an Australian superannuation fund will be in that country.
Where superannuation lump sums are not assessable in Australia under a DTA, the superannuation provider is not required to withhold tax on superannuation lump sums made to non-residents.
Where a superannuation lump sum is assessable in Australia under a DTA, the superannuation provider is required to withhold tax on lump sums paid to non-residents at withholding rates determined by the ATO’s Tax table for superannuation lump sums (Schedule 12). These rates are at the same maximum rates as residents less the 2% Medicare levy.
Where a non-resident receives a superannuation lump sum that is assessable in Australia under the relevant DTA and has not provided a TFN, the superannuation provider will be required to withhold tax at a rate of 45% where the non-resident is:
Under age 60, or
Aged 60 or over and receiving an untaxed element.
- See FirstTech’s article ‘Effective Tax free thresholds for 2018-19’ for further information.
- Except where the salary and wages are subject to a certificate provided by the ATO to prevent the double coverage of superannuation under Section 154C of the Superannuation Guarantee (Administration) Act 1992 (Cth)
- A temporary resident is the holder of a temporary visa under the Migration Act 1958 (Cth). However, this exclusion does not apply to clients who are New Zealand citizens or who are the holder of a Subclass 405 (Investor Retirement) or Subclass 410 (Retirement) visa.
- Total income includes assessable income (disregarding assessable FHSS released amounts), reportable fringe benefits and reportable employer superannuation contributions.
- Higher rates apply where the client was a working holidaymaker.
- This assumes that the Australian super fund does not maintain additional preservation requirements over and above the legislated conditions of release.
- A temporary resident is the holder of a temporary visa under the Migration Act 1958 (Cth). The modification of conditions of release for temporary residents do not apply to a person who is an Australian citizen or permanent resident, a New Zealand citizen, or the holder of a Subclass 405 (Investor Retirement) or Subclass 410 (Retirement) visa.
- While the majority of Australian super funds must comply with this condition of release, it is voluntary in the case of unfunded public sector superannuation schemes.
- For further information about DASPs, refer to section 9.9 of the FirstTech Super Guide.
- A temporary resident is the holder of a temporary visa under the Migration Act 1958 (Cth). A former temporary resident’s superannuation will not become unclaimed money if they are an Australian citizen or permanent resident, a New Zealand citizen, or someone who has made a permanent visa application that has not yet been determined.
- A working holiday maker is a person holding a Subclass 417 (Working Holiday) visa or a Subclass 462 (Work and Holiday) visa, as well as certain related bridging visas.
- International Tax Agreements Act 1953 (Cth) s4
- Low rate cap amount for 2018-19. This assumes the client has not previously received a withdrawal involving taxable component since reaching preservation age.