Michael Forer
Technical

Changes to Superannuation for Temporary Residents

By Michael Forer, Technical Services Consultant

The Temporary Residents' Superannuation Legislation Amendment Bill 2008 and the Superannuation (Departing Australia Superannuation Payments Tax) Amendment Bill 2008 were both passed in Parliament in late 2008.

The objective of these Bills is to reduce lost accounts and unclaimed money in the Australian superannuation system which are the result result of temporary residents leaving Australia without taking their superannuation benefits with them.

Temporary residents can currently claim their superannuation after (permanently) departing Australia by applying for a Departing Australia Superannuation Payment (DASP) from their superannuation fund. The DASP is the value of their superannuation minus tax.

From 1 April 2009, the final withholding tax rate on the taxed element of a DASP will increase to 35% (up from 30%), and on the untaxed element of a DASP will increase to 45% (up from 40%).

Therefore, temporary residents departing Australia should consider taking their superannuation prior to 1 April 2009 to avoid paying the higher tax rate.

The changes

Under the legislation changes, the superannuation of a temporary resident will become unclaimed and payable to the ATO after the individual ceases to hold a temporary visa, has departed Australia and at least six months has passed. No interest is paid on the balance of the superannuation whilst it is held by the ATO unless the person returns as permanent resident sometime in the future.

Temporary residents who have departed can then recover any amounts paid to the ATO as unclaimed money where certain conditions have been satisfied. The funds can be claimed at anytime but the withholding tax will still be deducted from the payment even if the person has met another condition of release (such as retirement or attainment of 65).

Therefore, a departed temporary resident will not be entitled to the same tax free benefits that an Australian resident receives if taking a lump sum over age 60. As a result, there is no benefit in a temporary resident retaining their superannuation funds in Australia and making a withdrawal after age 60 as the tax treatment will be identical.

For any temporary resident who has their super account transferred to the ATO after they depart Australia and after 30 June 2007, and who later returns to Australia as a permanent resident, the account will attract interest at the long-term bond rate less tax while held by the ATO.

In addition, upon their return to Australia, such people will be able to have their balance, with interest accrued to the age of 65, transferred to a super fund or paid as a retirement or death benefit after an application fee is paid.

Therefore, a temporary resident departing Australia with intentions of returning as a permanent resident may wish to retain their funds in Australia, however it is important to note that this will not avoid the 35% withholding tax being charged.

Case Study

Mark has recently returned to the United Kingdom after spending the past 2 years working in Australia at a large consulting firm. In that time Mark has accumulated $25,000 in his Australian superannuation accumulation account.

If Mark applies for a DASP from his superannuation fund he will receive the following payment:

  Pre 1 April 2009 After 1 April 2009
DASP Taxed element $25,000 $25,000
DASP Tax Rate 30% 35%
DASP Tax Payable $7,500 $8,750
Net Payment $17,500 $16,250

If Mark returns to the UK without applying for a DASP from his superannuation fund, the balance will become unclaimed and payable to the ATO after 6 months has passed.

Mark could recover this amount from the ATO at anytime, however the funds will not earn any interest whilst they are held with the ATO.

Therefore, it would be recommended that Mark applies for the DASP from his superannuation fund prior to 1 April 2009 to maximise his net payment.

Summary

As a result of these changes, it would nearly always be recommended that a departing temporary resident applies for a DASP.

Whilst a DASP will be heavily taxed, if the funds are retained in Australia, the withholding tax will still apply but the funds will be held by the ATO earning little or no interest.