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The truth about planning a cheaper retirement overseas

A growing number of Aussies are chasing a cheaper lifestyle overseas

Add runaway power bills and exorbitant property prices to cold winters, rising crime rates and overcrowding, and it’s easy to see why more Australians are swapping the traditional retirement at home for overseas destinations.

Many retirees are attracted to south-east Asia, given that it offers a more luxurious and adventurous existence for a portion of the price, especially with retirement visas being easy to acquire.

Ironically, while Australians are being encouraged to become self-funded retirees, it’s important to note that, subject to satisfying rules around income and asset tests, it’s possible to spend time overseas while receiving the age pension.

While that’s compelling for many, a look at recent trends suggests that the overseas lure isn’t exclusively about “retirement refugees” looking for cheap and cheerful lifestyles in the sun.

Since 1993 the number of Australian retirees receiving pensions overseas has soared from around 23,000 to 80,000-plus, with New Zealand, Italy and Greece accounting for about half of them.

Run the numbers

Australia has bilateral social security agreements with Ireland. Photo: Bigstock

Before choosing the country to retire in, Nathan Walker, financial adviser with RSM Australia, recommends investing sufficient time doing your financial homework.

When crunching the numbers, he says it’s important to ponder the affordability of remaining in Australia, as well the costs associated with relocating offshore.

Sixty may well be the new 40 but that’s cold comfort if the prospect of 30-plus years in retirement will be spent without enough to live on, he says.

While figures from the Association of Super Funds of Australia (ASFA) suggest singles and couples need $545,000 and $640,000 respectively for a comfortable retirement, average super balances in 2015-16 for women and men were a measly $68,499 and $111,853.

The good news is that you can preserve your age pension entitlements while living in certain countries. However, given that the super and tax implications can be problematic, Walker recommends seeking advice about the rules before you leave.

Many countries in Asia don’t tax overseas earnings but in some places the consequences of being deemed a resident (after six months) could fully expose your superannuation to tax, even though it’s tax free in Australia at age 60.

While Centrelink won’t allow you to receive the pension if you live overseas permanently, Walker says those looking to receive the age pension as soon as they return to Australia will also need to convince Centrelink they’re back permanently.

“Retirees must notify Centrelink when travelling overseas for longer than six weeks, and not doing so can implicate both their age pension and Medicare entitlements,” warns Walker.

“If you’ve spent some of your working life in one of the 30 countries Australia has bilateral international social security agreements with (including the US, New Zealand, Canada, Spain, Portugal, Ireland, India and Japan), you may also be eligible to receive social security benefits from that country too.”

Tax implications

tax file
You may still be required to file an Australian tax return. Photo: Bigstock

Rami Brass, partner and national head of tax with RSM, urges anyone contemplating retirement offshore to seek sound tax advice to avoid expensive mistakes. Before moving, he says, you need to consider whether or not you will remain an Australian resident for Australian tax purposes.

Generally, you’ll satisfy the Australian resident test if you reside or are domiciled in Australia or if you’re actually present in Australia for more than half the income year, whether continuously or with breaks, and you don’t have a permanent home elsewhere.

“Remaining an Australian tax resident means you’ll need to keep filing an annual Australian tax return,” says Brass. “Even if you’re not, you may still be required to do so.”

Assuming you remain an Australian resident for tax purposes, you’ll typically be taxed on your global income from all sources, whereas non-residents or foreign residents are only taxed by the Australian government on their Australian-sourced income.

“However, instead of paying 32.5% tax once you’ve reached $37,000 in annual income, as a foreign resident you’ll start paying tax at the rate of 32.5% in the dollar on the first $87,000 of Australian-sourced income,” says Brass.

Harsher measures

New rules introduced in 2012 mean that from the date you become a foreign resident, the ATO will deem you (unless you elect otherwise) to have sold all your shares and you will be required to pay tax on your capital gain, irrespective of whether you’ve sold them or not.

The removal of the discount for foreign residents on capital gains (on taxable Australian property) accruing after May 8, 2012 means you’ll also be liable to pay tax on 100% of the capital gain during that period, rather than 50% had you remained an Australian resident (during that period).

Given the additional pending tax hits on non-residents, courtesy of draft legislation, Brass says retirees will need to weigh up the merits of investing in property in Australia. As the law currently stands, non-residents can rent their property for up to six years and still retain their CGT main residence exception (MRE).

However, from July 1, 2019 non-residents will lose their MRE, regardless of how long they previously lived in it, and any property that’s unrented/uninhabited for over six months annually will incur a levy.

“You’ll have to sell before that date, or hold property until you return to Australia,” says Brass. “If the Sydney property you bought in 2000 for $450,000 is now worth $3 million, that’s a hefty CGT on 100% of the $2.55 million.”

Medicare and super

One Australian man was forced to wind up his SMSF before before moving to Malaysia. Photo: Bigstock

Technically, self-managed super funds are in breach of control issues if all members of the fund are away from Australia for over six months.

As the sole member of his SMSF, one of Walker’s clients was forced to wind up his fund before permanently before moving to Malaysia some years ago.

Had the client failed to meet his SMSF compliance obligations, his super fund would have incurred the top marginal tax rate. With no foreseeable plans to return to Australia, and no suitable family member to step in and manage it, he decided to roll the SMSF into a retail fund.

“Had his SMSF owned direct property, the wind-up of the fund would have been a lot more difficult,” recalls Walker.

“While he has returned to Australia may times since, it’s usually to visit family or for healthcare issues.”

Finally, if you remain an Australian resident for taxation purposes you’ll also continue to be liable for the Medicare levy and the Medicare levy surcharge if your income exceeds the surcharge thresholds and you don’t have an appropriate level of private patient hospital cover.

Pros and cons

There’s nothing stopping people flying back to Australia for medical treatment under Medicare. Photo: Bigstock

Once you’ve crunched the numbers and allowed for swings in currency, only then, warns Shane McNally, overseas retirement specialist with Exfin, can you weigh up the pros and cons of retiring offshore.

While there’s a veritable laundry list of things to address, McNally recommends starting with the no-brainers.

The obvious question is why you’re moving overseas. For example, if it’s all about spicing up your retirement, he says leaving Australia may not be the best way to do it.

“Living overseas for up to six months annually and moving with the seasons might give you the best of both worlds, especially if you’ve never lived overseas before,” he says.

Other no-brainers that McNally urges people to ask themselves include: will I be able to buy property overseas, what’s the state of my health, is there longevity in my family, will affordable health care be available and do I have ties in Australia that make leaving it difficult?

While Asia is arguably cheaper than Australia, he reminds retirees that places such as the UK and the US clearly won’t be.

Similarly, McNally recommends factoring in the cost of returning to Australia unexpectedly, and what happens to any kids or other family members you’re going to struggle to live without.

He says health insurers won’t provide cover once they leave Australia. Admittedly, you’ll get health insurance from the country you’re moving to but McNally says it won’t be cheap, nor will it cover pre-existing conditions.

“There’s nothing currently stopping people flying back to Australia for medical treatment under Medicare,” says McNally. “But I wouldn’t be surprised if in future Medicare entitlement is linked to residential status.”

Choose a destination

With its affordability and legal system, Sri Lanka is worth putting on the radar. Photo: Bigstock

According to International Living Australia’s latest index, based on where you can get the best bang for your real estate buck, cost of living and overall quality of life, Malaysia is 2018’s top retirement destination, followed by Thailand.

With living costs considerably lower than Australia’s, it comes as no surprise that six of the top 10 destinations are in south-east Asia, including Cambodia, Bali, the Philippines and Vietnam.

The four other top 10 countries are in South America: Mexico, Ecuador, Panama and Costa Rica. Ranked 12 and 13 respectively, Spain and Portugal both offer golden visa programs.

While those investing €500,000 ($765,000) in real estate can receive permanent residence after five years, McNally warns that the tax regulations governing these two countries are complex.

Meanwhile, Malaysia rates highly across all 10 factors on which it’s measured, including world-class affordable healthcare, good infrastructure, excellent year-round weather, lots of expats and living costs half those of Australia’s.

Foreigners who meet the minimum purchase price can buy freehold property in Malaysia.

As Malaysia is a former British colony, English is widely spoken, and the country is only an eight-hour-or-so flight from Sydney for instance. The Malaysia My Second Home visa allows you to live there for 10 years, and then it is automatically renewable for another decade.

But even though the Malaysian government runs a generous retirement program, retirees can no longer import cars and household possessions free of excise duty and sales tax. Another downside, warns McNally, is a rule of law that affords fewer civil liberties than Australia does.

“If you’re planning to retire overseas for more than 15 years, move to a country with regulations that allow you to buy property freehold,” he advises. “Personally, I don’t like countries with Sharia law.”

While Penang, off Malaysia’s north-west coast, and Thailand’s northern city of Chiang Mai are standout retirement destinations, McNally says retirees looking for good quality, affordable round-the-clock care should also consider the Philippines.

Due to its affordability, legal system and status as a former English-speaking British colony, he says Sri Lanka is also worth putting on the radar.

super fees
Ask yourself how you will manage living away from friends and family. Photo: Bigstock

Questions to ask yourself before retiring overseas

• Will I need to work offshore to support myself financially?
• Do I understand the complexities of being a non-resident for tax purposes?
• How will retiring overseas affect my super?
• Will overseas healthcare be adequate and affordable?
• Can I take my age pension with me?
• What should I do about private health insurance?
• Where do I want to spend my “last stages” of retirement?
• What’s the best way to invest while living overseas?
• How will I manage living away from friends and family?
• If I return to Australia, will I qualify for the age pension?

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