Superannuation Strategy for Australian Expats: Saving Tax for Loved Ones with the Recontribution Strategy

For Australians Expats living and working overseas, superannuation remains one of the most effective ways to build long-term wealth. Even while abroad, your super can continue to grow in Australia under favourable tax conditions.

However, many expats are unaware of what happens to their super when they pass away. Superannuation has its own set of rules for how it’s distributed, who can receive it, and how it’s taxed.

One way to reduce the potential tax burden on your beneficiaries is by using the Recontribution strategy. This superannuation strategy for Australian Expats can help ensure more of your super ends up in the hands of your loved ones rather than the tax office.

Superannuation Is a Non-Estate Asset

Superannuation is treated differently from your other assets when you pass away. It does not automatically form part of your estate and is not controlled by your Will, unless you direct it to be.

The trustee of your super fund decides who receives your super unless you have a valid binding death benefit nomination in place. A binding death benefit nomination allows you to choose eligible beneficiaries to receive your superannuation upon your passing, or you can nominate your estate to handle the funds through your Will. Learn more about Beneficiary Nominations.

For Australian Expats, this separation from the Will may be useful. Even if you live overseas, your super remains under Australian law and can be managed independently from other estate assets.

Who Can Receive Superannuation Death Benefits

Superannuation death benefits can only be paid to certain people defined as dependants under super law, or to your estate. Eligible dependants include:

• Your spouse or de facto partner;

• Your children of any age;

• Someone financially dependent on you;

• Someone in an interdependency relationship with you;

However, the tax treatment of these benefits depends on whether the person receiving them is considered a tax dependant or a non-tax dependant under Australian tax law.

Who Pays Tax and Who Doesn’t

If your death benefit is paid to a tax dependant, it is received tax-free.

Tax dependants include:

• Your spouse or de facto partner;

• Your children under 18 years;

• Anyone who was financially dependent on you;

• Anyone in an interdependency relationship with you;

If the death benefit is paid to a non-tax dependant, such as an adult child who is financially independent, they will usually have to pay tax.

How much tax applies depends on the components that make up the deceased’s superannuation balance when they pass away:

• The taxable (taxed) component is generally taxed at 15% plus the Medicare levy (17% total).

• The taxable (untaxed) component is taxed at 30% plus the Medicare levy (32% total).

• The tax-free component is always tax-free.

Most superannuation balances are primarily made up of a taxable component, which consists of employer contributions and investment earnings within your super account.

This means adult children could lose a significant portion of the inheritance if most of your super is in the taxable component.

How the Recontribution Strategy Works

The recontribution strategy involves withdrawing part or all of your super once you are eligible and then recontributing it as a non-concessional (after-tax) contribution.

Here’s how it works:

• You withdraw funds from your super after reaching preservation age and meeting a condition of release, such as retirement.

• If you are over 60, this withdrawal is usually tax-free.

• You then recontribute the withdrawn amount back into your super as a non-concessional contribution.

This process can shift part or all of your balance from the taxable component to the tax-free component. As a result, significantly less tax is paid when your super is eventually distributed to your beneficiaries.

Why This Matters for Australian Expats

Many Australian Expats intend to leave their super in Australia and pass it on to family members who live there.

Adult children, however, are treated as non-tax dependants. This means they will likely pay tax of up to 17% or 32% on the taxable portion of the super they inherit.

By using the recontribution strategy, Australian Expats can increase the tax-free portion of their super and reduce the amount of tax their children will pay.

Even a modest recontribution over time can make a big difference. For example, converting $500,000 of taxable super into tax-free could save $85,000 in tax when the benefit is paid out.

Important Considerations

Before starting a recontribution strategy, it’s essential to understand the rules:

• Contribution limits: Non-concessional contributions are capped at $120,000 per year, or $360,000 under the bring-forward rule.

• Eligibility: You must have met a condition of release to withdraw and be eligible to contribute based on your age and total super balance.

The Importance of Seeking Professional Financial Advice

While the recontribution strategy can be a powerful superannuation strategy for Australian Expats, it is also complex. Getting it wrong can lead to serious and costly mistakes.

If you exceed contribution caps, you may be required to withdraw the excess and pay penalty tax.

Australian Expats face additional challenges. Exchange rate movements, overseas residency status, and differing rules between super funds can all complicate how withdrawals and contributions are treated.

A licensed Expat Financial Adviser can:

• Assess your eligibility to withdraw and recontribute funds;

• Help you stay within contribution limits;

• Determine the most tax-effective timing for withdrawals;

Professional advice is especially important if you live overseas and are unsure how your super interacts with your foreign tax obligations. The right advice can save your beneficiaries tens of thousands of dollars and prevent avoidable tax consequences.

Conclusion

For Australians living overseas, managing superannuation is about more than just investment returns. It’s also about ensuring your wealth is passed on efficiently to the people you care about most.

The recontribution strategy is a valuable superannuation strategy for Australian Expats who plan to leave their super to adult children in Australia. By restructuring your super balance, you can reduce future tax liabilities and leave a larger legacy for your family.

Runway Wealth Management is the trusted Financial Adviser to the Australian Expat community. Our tailored advice is backed by expertise, education and experience, which allows us to be at the forefront of Australian Expat Financial Planning.

If you would like to speak to one of our Expat Financial Advisers about this blog or if you have other queries, we would be more than happy to speak with you. Feel free to send us an enquiry through the ‘Contact Us’ tab provided in the link below:

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General Advice Disclaimer: The information contained herein is of a general nature only and does not constitute personal advice. You should not act on any recommendation without considering your personal needs, circumstances, and objectives. We recommend you obtain professional financial advice specific to your circumstances.