Case Study – Making a move to Australia need not be a taxing issue

Thinking of moving to Australia for retirement? Here's what you need to know about income tax and other issues to consider, from a tax and financial planning perspective.

By Brendan Harper, Head of Technical Services, Friends Provident International


Bob and Sue live in Singapore, are married and have 2 children (both born in the UK), David, who is working in London, and Emma, who is in her final year of university in Sydney. Bob is British, and Sue is Australian. Both have had excellent careers in London and Singapore, and have lived in Singapore for the past 10 years. They are now contemplating retirement within the next 5 years. They plan to retire in Australia, but to maintain a property in London for their own use when visiting their son. Their assets consist of 2 UK personal pensions that they accumulated when resident in the UK, a property in London and a property in Sydney. Their other retirement funds are in insurance policies that they purchased, and have saved regularly into, whilst in Singapore.


What are the main issues they need to consider from a tax and financial planning perspective in contemplation of their retirement?


Income Tax


Bob and Sue will be moving away from a low tax territory – Singapore, where the top rate of tax is 20%, to a high tax jurisdiction – Australia, where the top rate of income tax is 49%!


Being potentially subject to such a high tax rate can make the difference between a comfortable and not so comfortable retirement, so it is essential that their retirement planning takes account of this and, if possible, aim to mitigate the impact.


The good news is that, in recent years, the Australian tax position in relation to overseas investments has greatly improved. Prior to 2011, their Singapore insurance savings and UK pensions would have been subject to the “Foreign Investment Funds” (FIF) regime. This was a harsh piece of legislation that would have forced them to annually declare, and pay tax on, the increase in value of the funds, regardless of whether they withdrew money from them or not.


The FIF regime was repealed in 2011, meaning that insurance bonds can continue to accumulate in value without any annual tax liabilities until money is withdrawn or the policy is surrendered. On withdrawal or surrender, the gains made are subject to income tax, but with a provision that once the policy has been in force for at least 8 years, the amount of taxable gain is reduced by one third, two thirds after 9 years, and the proceeds are tax free once the policy has been in force for 10 years or more.  This is subject to a condition where, should additional premiums be paid, no premium a policy year exceeds the premium paid in the previous year by more than 25%.


The UK pensions also benefit from tax free growth until income is taken, in which case it will be subject to Australian income tax. Technically, the UK pension income is also subject to UK income tax but a claim can be made under the UK – Australia double tax treaty so that income is paid without deduction of UK income tax.


If Bob and Sue intend to remain permanently in Australia, the situation could be improved by transferring the UK pensions to an Australian superannuation fund. In order to do this, the Australian superannuation fund must have registered with the UK tax authority (HMRC) as a “Qualifying Recognised Overseas Pension Scheme” (QROPS). As long as the fund is a QROPS, the transfer can be made free of UK tax.


As long Bob and Sue are under age 65, the can each transfer up to AU$540,000 into the Australian fund as a tax free “undeducted contribution”. If the transfer is made more than 6 months after they take up Australian residence, any growth in the value of the UK pension fund is taxable in Australia, either at Bob and Sue’s marginal rate of income tax, or at a concessional rate of 15%, which is borne by the Australian superannuation fund.


Furthermore, any income drawn by Bob and Sue from the superannuation fund after age 60 is free of Australian income tax.


Succession Planning


Another financial planning point that needs to be considered is the passing on of their wealth, possibly first to the surviving spouse, and eventually to their children. The good news is that Australia does not have Inheritance Tax (IHT). However, as Bob is UK domiciled, his estate is subject to UK IHT, even though he does not live in the UK.


Normally, a transfer of an estate between spouses is exempt from IHT but this exemption does not apply where the transferring spouse is UK domiciled (Bob), and the recipient spouse is not UK domiciled (Sue). In this case, there is a lifetime spousal exemption of £325,000, plus a nil rate band of £325,000 that can be passed free of IHT, with any excess subject to IHT at 40%.


Bob could take steps to adopt a new “domicile of choice”, in which case his non-UK estate will not be subject to IHT once 3 years has passed since adopting a new domicile. In Bob’s case, this can only be done once he actually settles permanently in Australia, so a potential liability remains until he does so.


The good news is that the pension funds (whether in the UK or Australia) will not be subject to IHT. In relation to the non-pension assets, Sue could make an election to be treated as UK domiciled when she inherits the assets, allowing them to pass to her free of IHT. Making this election potentially makes her worldwide assets subject to IHT on her death. However, as long as she survives, and remains non UK resident, for at least 4 years after making the election, the domicile election falls away, meaning that any non-UK assets owned by her can pass to the children free of IHT.


Many expatriates choose Australia as a future retirement destination. With some careful planning beforehand and with the help of a financial adviser, those who do so can structure their affairs so that retirement income, and wealth transfer is tax efficient.


Important Notes

The above information is of a general nature and is not a substitute for financial advice. Independent financial advice is recommended, which Friends Provident International cannot offer on an individual basis.