It should be no surprise that taxation in Australia is high.
Covering 7.7 million km 2 , Australia is the world’s largest island, twice the size of India with less than 2% of its population.
Six states, two territories (each with their own governments), extreme weather and a first class public health. Australia sustains its vast infrastructure and services through income tax on a relatively small working population of 64% of its 27 million inhabitants, alongside taxes on worldwide income, capital gains on Australian taxable real property (no matter where the owner resides), and other indirect taxes.
Living in Singapore, we have seen prices rise significantly over recent years, but if you have dined in Sydney recently, you would appreciate the increased cost of living is not confined to the little Red Dot.
Naturally, when consumption spending increases, the ability to save money for a rainy day diminishes. Under Paul Keating, the government put measures in place to counteract that by making superannuation mandatory – cleverly shifting the savings burden from the government to the taxpayer. This compulsory, tax advantaged, saving scheme is designed to ensure that come retirement, working Australians would have a nest egg.
The challenge for the majority of us that have moved overseas is that the superannuation guarantee is no longer deducted at source from our incomes. Consequently, we (should) have additional monthly disposable income (increased by the reduced level of tax) burning a hole in our pockets, potentially leading to a future savings gap, if we don’t put it to good use.
They Say Every Challenge Provides an Opportunity
and this is indeed the case here. Whilst superannuation is certainly a valuable savings mechanism, it does have access restrictions and is not available until retirement and on reaching age 55 to 60 (depending on your date of birth), or when you reach age 65, even if you are still working.
In building any financial plan for clients, alongside determining how wealth is to be built and protected, it is equally important to reach clarity on what any accumulated wealth is to be used for and when it is needed. Ideally, one should have “buckets” of funding available for future anticipated expenditure – university education, holiday home, world trip etc etc. If for example, funding is needed for university fees and retirement is some way off, superannuation will not be an appropriate solution (even if we could add to it).
Fortunately, a viable and tax effective solution does exist for Australians living overseas in the form of an “offshore life assurance bond”. Capital growth within the structure is sheltered in Singapore (and even after returning to Australia), until such time that money is withdrawn. If this wasn’t good enough, if the money is withdrawn more than 10 years after establishment of the structure and the investor is an Australian tax resident at the time, there is NO tax on any amounts withdrawn. (The 10 year period holds provided that in any one year, the total investment made does not exceed 125% of the prior year, as that will trigger a reset of the 10 year start date.)
Not only can the structure be an important source for capital prior to retirement but it can be held as an important asset for tax free passive income to complement super/investment property income etc.
Clients often ask why every expat Australian does not utilise this opportunity. I wish I knew the answer.
The levels and bases of taxation and reliefs from taxation can change at any time. The value of any tax relief depends on individual circumstances. You are advised to seek independent tax advice from suitably qualified professionals before making any decision as to the tax implications of any investment.