Retiring overseas to some exotic location where the coffee is good and the lifestyle idyllic, not to mention cheap, is a bucket list item for so many of us hard working executives. However, there are a number of things you need to know before you go.
Among them are matters relating to retirement planning and tax, in particular tax residency and if you have an Employee Share Scheme that will add complications too. There are also rules around superannuation. But hey, with good advice you’ll get it all sorted, and before you know it you’ll be enjoying your time in the sun.
Retirement age is just a number, and more of us are leaving the demands of executive life behind early.
While it may just be me, I seem to be having more conversations than usual with younger executives who are contemplating throwing in the work towel, or already have, in favour of a life of leisure.
It might also just be me, but many of them are talking about jetting off to Italy.
Indeed, everywhere I look there’s an article talking up the benefits of retiring in Tuscany, Lombardy, Veneto while retiring to destinations a little closer to home, including New Zealand and Indonesia also feature strongly on my clients’ bucket lists.
For many executives who have lived and worked overseas during their career, they’ll be well aware of the importance of tax residency.
That is, the ATO has tax residency requirements that determine if you are a resident for tax purposes. To qualify you’re assessed against four statutory tests: a Resides test, Domicile test, 183-day test and Commonwealth superannuation test.
If you are a tax resident you must declare all your income earned in Australian and overseas and accordingly, pay Australian taxes.
While it will always depend on individual circumstances, there can be important benefits or consequences to maintaining your Australian tax residency. If you are an Australian tax resident, our tax system can be more sympathetic than those of foreign tax jurisdictions by providing tax offsets for tax paid in foreign jurisdictions.
If you remain an Australian tax resident regardless of where you live, your income, even if it’s earned overseas, could be taxed under Australian tax rules. If your circumstances dictate you’re a non-resident for Australian tax purposes, some of your Australian assets won’t be taxed by the ATO. However, it’s important to seek qualified tax advice and understand where the tax residency lines lie and what your obligations are in both Australia, and any other applicable foreign tax jurisdictions.
Determining tax residency can be complicated and you’ll need advice before you go to clarify whether you are a full tax resident, part-year or even a dual-resident.
This is important because, apart from the possibility of paying more tax than necessary which could adversely impact your financial position, there’s also the matter of filing tax returns with foreign authorities which can add complexity and expense.
A qualified tax adviser will be able to provide more specific advice on this and each of the tax matters that follow, but it’s all part of collaborative financial planning which is a central pillar of our Executive Strategies approach.
When it comes to accessing your superannuation to support your foreign lifestyle, this too can have complications in some countries.
Generally speaking, once an Australian turns 60 years of age, they can start to withdraw money from their superannuation account tax free.
However, in some countries, funds drawn from super is considered taxable income, and you could face paying a double tax, as a second local jurisdiction tax may be required on the withdrawal of funds.
Different conditions and tax rates may apply for different countries which could have a considerable adverse effect on your retirement savings.
There are also complications for Australian tax residents who have worked abroad, accumulated superannuation in a foreign country and now wish to retire in their home country of Australia.
Many foreign ‘superannuation’ funds result in amounts taken as pension payments or withdrawals, as being taxable in Australia with a foreign tax credit for tax paid in a foreign jurisdiction on amounts withdrawn. Determining the optimal time for when foreign superannuation funds should be accessed needs careful assessment of each individual’s circumstances, including the level of employment or passive income they receive at the time. Different tax years in foreign jurisdictions compared to Australia, also need to be factored in.
Further, SMSFs also have strict compliance rules and trustees must be Australian tax residents.
Again, you’ll need qualified financial and taxation advice before you go.
Employee share schemes (ESS) are complex at the best of time and this complexity usually continues when the scheme participants retire.
Even though you’re no longer an employee, you will still need to meet strict compliance rules. This includes determining your ESS taxing points and the amount of tax incurred, which is a task that can be both time consuming and complicated.
Then once you know your obligation and when they’re due for payment, you’ll need to have cash on hand (presumably from your retirement savings) to pay it.
ESS tax can be significant and without advance planning, you could find your cash position falls short. You may then need to prematurely sell down shares to meet your tax bill, rather than allowing them to continue to generate income to be used for enjoying your retirement lifestyle.
For those whose retirement has been somewhat forced upon them due to their role being made redundant, there may be ‘good leaver’ provisions. These may enable some rights or shares in your former employer’s company to be retained which can continue to enhance your retirement wealth.
Further if you’ve lived and worked abroad during your employment tenure, your former remuneration package may have tax equalisation policy requirements that can also affect how much tax you will need to pay.
I could go on, but I’m sure you get the picture. ESS is complicated.
If you are planning to retire (let alone retire overseas) you’ll need specialised advice.
I’m both a financial adviser and ESS strategist, and I’m very accustomed to advising executives on the complexities of ESS. I have three key goals for my ESS clients.
The first is to provide financial planning strategies and solutions for avoiding paying more tax than is required, next is to plan so that cash is on hand to pay tax obligations and on time (to avoid what can be hefty penalties), and just as importantly, to manage the ESS so the participant can benefit from the wealth their ESS can contribute to their retirement lifestyle.
Next steps
I’m 100% in favour of living out your retirement dreams in an overseas paradise, but as explained here it’s always best to get advice BEFORE you go.
Not least because once you leave Australia, it can be difficult or possible to change your circumstances. Perhaps more importantly, feeling financially confident in your retirement will mean the vino you will no doubt be sipping on somewhere on the Italian Riviera will taste sweeter for it. Ciao!
To find out more about what you need to know when considering retiring overseas, please give me a call on +61 (0) 7 3007 2080 or email contact@executivestrategies.com.au to request a call back.
To learn more about James Marshall, visit this link.
Executive Strategies is a specialised information hub for executives and senior managers who may have founded their own business or who work for growing private, ASX listed companies or government businesses. Its purpose is to provide access to specialist advisers and information that addresses the often-complex issues affecting their personal prosperity.
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.
