April 27, 2024

Tax Residency, Superannuation, Employee Share Schemes and retiring overseas

For high earning mining and resources business leaders and executives dreaming about retiring overseas tax residency, superannuation and a range of matters affecting your Employee Share Scheme (ESS) will each need your attention. Before you leave Australia!

Why? Because each of these issues can be tricky, and no one wants to spend time sorting out complex problems across multiple tax jurisdictions when they should be enjoying their idyllic overseas retirement lifestyle instead.

#1 Tax Residency
Mining and resources business leaders who have lived and worked overseas during their careers will be well aware of the importance of tax residency. Or more’s the point, how getting it wrong can result in a tax headache that can involve reams of paperwork and paying more tax than you could have otherwise.

Australian tax residency is tested and these tests are based on your actual circumstances as they are now, as well as how they may be in future.

This means you’ll need advice before you retire overseas as well as later regarding how your tax residency may change to a non-resident status if your circumstances change once you are overseas.

Your future circumstances could of course make no difference to the ATO’s test outcomes and you could continue as an Australian tax resident while living overseas. However, if the tax residency test results were to indicate you had become a non-tax resident of Australia, you may be subjected to the tax residency rules (and the tax obligations) of the country where you spend your time.

It’s important to note you cannot simply “elect” to be an Australian tax resident (or not) as it is determined by your circumstances.

As discussed here, rules apply to both our Australian tax system and overseas tax jurisdictions and the tax implications and need to be thoroughly worked through before, then after you leave Australia to avoid any unwelcome tax surprises.

Tax residency rules
To be deemed an Australian tax resident, individuals are assessed against four Australian Taxation Office tests, which include a Resides test, Domicile test, 183-day test and Commonwealth superannuation test.

If you meet the requirements and qualify as an Australian tax resident, you can live overseas but you must declare all your income to the ATO. This includes income earned in Australia and overseas. You are then be obliged to pay Australian taxes as appropriate for that income.  In some circumstances, you may receive a tax offset on taxes you pay on earnings in foreign jurisdictions.

Conversely, if you are a non-resident for Australian tax purposes, you could find yourself in a position where a foreign tax office demands tax to be paid on some of your Australian assets, which could include your superannuation and amounts you may have drawn from it.

Tax residency can be complicated. Seeking qualified tax advice and understanding your obligations in both Australia and other countries is important because the last thing you want to be worrying about when you’re living your retirement dream is how you’ll pay an unexpected tax bill.

#2 Superannuation

Current ATO rules allow Australians to begin withdrawing tax-free money from their superannuation account once they turn 60 years of age.

This is not the case throughout the world. Some countries consider funds drawn from a super account to be taxable income.

Naturally, this is an important financial issue that needs to be addressed before you chose an overseas retirement location.

For those with a SMSF, it’s important to know the ATO has strict compliance rules that require trustee management and control to be based in Australia.

If your SMSF’s control was to become ‘non-resident’ then the ATO can enforce tax penalties which could be financially detrimental to your retirement savings.

For Australian tax residents who have lived and worked overseas, contributed to a foreign superannuation fund and wish to return to Australia when they retire, they too may face challenges.

Foreign superannuation, which is often taken as regular payments or lump sum withdrawals, are generally fully taxable in Australia (similar to how employment income and investment income are taxed).  However, depending on the circumstances, the ATO may apply a tax credit against tax paid in the foreign tax jurisdiction.

There are other matters too, such as determining the optimal time for when foreign superannuation funds should be accessed, particularly as some countries can have different ‘tax years’ from Australia.

Your personal income position regarding your employment or passive income received at the time will also need to be considered. This is determining the optimal time to access foreign superannuation benefits as well as the tax obligation on drawing amounts from foreign superannuation.

Again, qualified, integrated advice is highly recommended.

#3 Employee share schemes (ESS)

Even though you may have retired, the Employee Share Scheme was part of your remuneration, will continue to demand your attention.

Typically you will need to identify your ESS taxing points, the amount of tax incurred and when that tax obligation is due for payment.

While income from ESS dividends is a welcome passive income stream for your retirement, any unexpected tax obligation isn’t.

Without planning, meeting your ESS tax bill can adversely affect your retirement savings.

You’ll need cash on hand and if you don’t, you may be forced to prematurely sell some of your ESS shares to pay it.  Unfortunately, selling shares means they no longer have the potential to grow in value, produce dividends and generate the passive income your retirement plans may rely upon.

For those whose retirement came earlier due to redundancy, there are often ‘good leaver’ provisions that can enable some ESS rights or shares to be retained which can continue to contribute to your retirement income.

If you lived and worked overseas for the company, this can affect the amount of tax you may be obliged to pay.  Your ESS may also have a tax equalisation policy that will need to be addressed.

ESS is complicated and as a qualified financial adviser and ESS strategist who has worked with mining and resources executives and business owners for more than a decade, may I strongly suggest you get advice.

Qualified advice can help you avoid paying unnecessary tax, ATO imposed interest and tax penalties while helping you to make more of your ESS wealth opportunities.  The latter being of particular importance when it comes to generating income streams that can positively contribute to your overseas retirement lifestyle.

Next steps
The key is not just to get qualified financial planning, ESS and tax advice it’s to do it well BEFORE you leave Australia for your overseas retirement destination. Being properly informed will enable you to make decisions and implement strategies that are right for you.

At Resources Unearthed, we are known for our collaborative ‘advice team’ approach that considers each part of the whole – financial planning, tax, ESS, super, legal – and strives to deliver seamless, integrated solutions. To learn more, please contact James Marshall for a 20-minute no obligation discussion by calling +61 (0) 7 3007 2000 or emailing contact@resourcesunearthed.com.au

To learn more about James, visit this link.

Resources Unearthed is a solutions hub that connects senior executives, established professionals and business owners in mining and resources with proven specialist advisers.

Stratus Financial Group and its advisers are Authorised Representatives of Fortnum Private Wealth ABN 54 139 889 535 AFSL 357306. This advice is general and does not take into account your objectives, financial situation or needs. You should not act on it without first obtaining professional financial advice specific to your circumstances.

*Please note: For advice and services relating to this matter that are not offered under the Fortnum Private Wealth AFSL, in accordance with our collaborative advice model, when required, such matters are referred to appropriately qualified professionals.

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