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March 22, 2024

Why is it crucial for Australians to take utmost care when building wealth abroad?

Australian Tax Office – Tax on Accumulation – Tax-free Drawdown.

The Australian Tax Office (ATO) is unique. In fact, it is that unique that I have yet to work or discover a tax system which works in the same manner, that includes my time working in the Middle East, U.K., Switzerland and across Europe.

Typically, across the globe, pensions are allowed to grow tax-free year on year (often referred to as tax-free accumulation or tax free gross roll-up) with tax then being applied to the assets being withdrawn by the retirees. Let’s take the U.K. as an example, a Self-Invested Personal Pension (SIPP) will grow tax-free year-on-year and will benefit from a 25% tax-free lump sum withdrawal (Pension Commencement Lump Sum) at retirement. Above the PCLS, British residents will then pay marginal income tax relevant to their bands ranging from 0% up to 45% on all withdrawals made thereafter.

The ATO, on the other hand, enforce the complete opposite. They tax pensions each year, known as tax on accumulation, and they offer a tax-free drawdown for retirees which in Australia is from age 60 and beyond.

As a result, your Superannuation Fund will be taxed each year on accumulation at a rate of 15% or 10% depending on whether the holdings are income generating or capital growth. However, on drawdown, all withdrawals from age 60 – and forever until the pension is exhausted – are completely free of tax.

Australian Tax Office – Tax on Accumulation – Tax-free Drawdown.

Western World (EU, UK, Swiss) – Tax-free accumulation – Taxed on Drawdown.

This approach is also common with many personal investment vehicles for Australians, which often leaves Australian expats asking themselves; am I building my wealth in the correct structure?

Of course, the answer to that question will be different for each individual, as it inevitably depends on where you plan to be resident at retirement. As i say to my clients around the world; ‘you must be tax optimised for where you plan to be in the future, not just where you are right now.’

Why is it so important for Australians?

Without going into each individual asset class and how they are treated, the answer is simple:

  • The risk to Australians is that they are taxed twice.
  • The benefit to Australians is that there are vehicles that can be utilised which will benefit from tax-free accumulation, as well as tax-free drawdown.

Before deciding where you plan to build your wealth, whether it be surplus income; employer shares; pensions contributions; properties or other assets, first consider where you plan to retire and how the relevant system could impact and benefit you.

In my personal opinion, the Australian system has got it right. Pay less tax, when you most need the income – makes complete sense right? If you would like to explore how you can benefit from your international status as an Australian expat, you can book a complimentary consultation by clicking the button below……

Find Out More About Ryan Here

Ryan Donaldson Bio
Written By
Ryan Donaldson
Regional Manager - Europe

Ryan Donaldson

Chartered FCSI
Regional Manager - Europe & Private Wealth Advisor

In a career spanning numerous locations around the world, Ryan has first-hand experience of how to best support international investors with financial planning advice and security on a domestic and international level.

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