Using Superannuation to reduce tax - does it really work?

[Marisawright]

We've been discouraged from moving to the UK because of the apparent tax obstacles: we don't want to move our investments from Australia, but once we're non-residents we'll get taxed at 32 cents in the dollar on everything.

 

Or maybe not.

 

I've discovered that you can always offset any tax owing, by paying the equivalent amount into your superannuation. It's a legitimate and above-board thing to do, and I've just done it for last tax year. The thing is, you can still do it even if you're non-resident.

 

So, instead of paying 32c in the dollar on the rental from my property, all I need to do is pay the equivalent amount into my super. Since I know what my rental will be, it will be easy to work out how much I need to pay in and I can do it any time during the same tax year. Result - no tax payable in Australia.

 

If I decide to sell the property, all I need to do is make sure I sell it early enough in the tax year so I've got time to work out the capital gains and pay the equivalent amount into my super fund.

 

This all sounds too good to be true, so I'm waiting with bated breath to see if anyone can punch holes in the scheme...the only thing I wonder about is whether, having legally avoided the tax in Oz, that means I'll get hammered by the UK tax system. The deposits do get taxed at 15% by the super fund, so I wonder if that would be enough to satisfy the UK?

 

Edit: I should add that I have no objection to paying tax per se. It's just that as a non-resident, my tax would more than double compared to staying in Australia. If I can bring my tax back to the same amount I'd pay here, I'll be happy.

Edited September 29, 2014 by Marisawright

[Chortlepuss]

It sounds like an excellent idea. Hopefully someone who knows a lot about tax can advise.....

[Gbye grey sky]

Unless I am missing something you may avoid paying tax in Oz on that income but would be liable to tax on rental profit as a UK resident taxpayer with overseas income. Also won't you need the income?

 

And if you stay in UK you will be liable to tax once you draw your Super 'pension'.

[NickyNook]

Do you have an ATO link for this tax offset you're using? I was only aware of being able to offset super contributions made on behalf of a spouse - and that's a limited amount and it only applies to residents.

 

Or are you referring to a deduction (rather than an offset) for super contributions? This is allowable but surely you'd need to deposit an amount equivalent to your total rental income into super in order to reduce your taxable income to zero so you won't be liable for any tax. Which reduces your income to zero so it's kind of overkill..

[Marisawright]

Do you have an ATO link for this tax offset you're using? I was only aware of being able to offset super contributions made on behalf of a spouse - and that's a limited amount and it only applies to residents.

 

Or are you referring to a deduction (rather than an offset) for super contributions? This is allowable but surely you'd need to deposit an amount equivalent to your total rental income into super in order to reduce your taxable income to zero so you won't be liable for any tax. Which reduces your income to zero so it's kind of overkill..

 

It is a deduction - sorry, I'm not a tax person so I'm not good at the jargon!

 

https://www.ato.gov.au/Individuals/Super/In-detail/Contributions/Claiming-deductions-for-personal-super-contributions/?page=2#Are_you_eligible_to_claim_a_deduction_

 

If you read that (and I've confirmed it with my tax agent), I don't have to pay in the whole income, just the amount of tax payable.

[Marisawright]

Unless I am missing something you may avoid paying tax in Oz on that income but would be liable to tax on rental profit as a UK resident taxpayer with overseas income. Also won't you need the income?

 

And if you stay in UK you will be liable to tax once you draw your Super 'pension'.

 

I don't have to pay the whole amount of the income into super, just the equivalent of the tax due.

 

Yes, that's the question - what I need to understand is how the double tax agreement works. If it's Australian income and it's been included in a tax return in Oz - which it will be - then is it regarded as 'taxed' even if I didn't actually have to fork out the tax?

 

I'm aware that my super pension will be taxed in the UK, but I'll have a tax free threshold. I'm not trying to avoid all tax, just the very heavy taxes levied on non-residents by Australia.

[NickyNook]

It is a deduction - sorry, I'm not a tax person so I'm not good at the jargon!

 

https://www.ato.gov.au/Individuals/Super/In-detail/Contributions/Claiming-deductions-for-personal-super-contributions/?page=2#Are_you_eligible_to_claim_a_deduction_

 

If you read that (and I've confirmed it with my tax agent), I don't have to pay in the whole income, just the amount of tax payable.

 

Sadly, something doesn't add up, here.

 

Deductions are not deducted from your tax bill - they're deducted from your taxable income.

It is offsets (or rebates) that are deducted from your tax bill.

 

Say you earn $10000 a year from your rental.

Tax on that is $3200 as you don't get a tax-free allowance being a non-resident.

So you pay $3200 into your super - an allowable deduction - which means that your taxable income is reduced by $3200 - so it's now down to $6800.

You still have to pay tax at 32% on that $6800 - so you now owe $2176.

 

Sure, it's a reduction in your tax but not enough to bring it down to zero.

The only way to do that, using deductions, is to pay the whole $10,000 into your super therefore leaving your taxable income at zero.

[rammygirl]

Even though the rental income is taxed in Aus, you still declare it on UK tax return. They take into account tax paid in Oz but the deductions are more generous in OZ than UK.

 

we had to do this when we were in UK with income from rental in Oz. Unfortunately the UK tax office only offset tax paid in OZ On the rental against the rental income in UK, not all earnings so you do lose.

 

it is a double whammy with no allowance and higher rate. UK a are thinking of getting rid of the allowance for non residents too, it does make sense as the tax then goes to where income arises.

[Gbye grey sky]

Sadly, something doesn't add up, here.

 

Deductions are not deducted from your tax bill - they're deducted from your taxable income.

It is offsets (or rebates) that are deducted from your tax bill.

 

Say you earn $10000 a year from your rental.

Tax on that is $3200 as you don't get a tax-free allowance being a non-resident.

So you pay $3200 into your super - an allowable deduction - which means that your taxable income is reduced by $3200 - so it's now down to $6800.

You still have to pay tax at 32% on that $6800 - so you now owe $2176.

 

Sure, it's a reduction in your tax but not enough to bring it down to zero.

The only way to do that, using deductions, is to pay the whole $10,000 into your super therefore leaving your taxable income at zero.

 

That was my conclusion too hence my point about needing the income. There is also the likelihood that the UK would not recognise the Super contribution as an allowable deduction against the rental income and, and, in this example, deem the whole $10,000 as taxable income in the UK. So you may have a tax liability but zero income.

 

I still think your best bet is to divest yourselves of your Oz assets before moving to the UK and just live with the Capital Gains Tax.

[Marisawright]

That was my conclusion too hence my point about needing the income. There is also the likelihood that the UK would not recognise the Super contribution as an allowable deduction against the rental income and, and, in this example, deem the whole $10,000 as taxable income in the UK. So you may have a tax liability but zero income.

 

I still think your best bet is to divest yourselves of your Oz assets before moving to the UK and just live with the Capital Gains Tax.

 

The investment property is on the market as we speak, but it's a DHA property and apparently they're very slow to sell. Silly really, because I think they're great - mine has been a terrific no-worries investment and the rent has gone up every year. The thing is, DHA charges high management fees and a lot of people can't see past that.

 

So here we are unable to leave for several more months, probably.

[Marisawright]

Sadly, something doesn't add up, here.

 

Deductions are not deducted from your tax bill - they're deducted from your taxable income.

 

 

Sorry, you are quite right, I'm not thinking. I'm waiting to hear from my tax agent what the figure is I need to pay in - but that's not because I only pay the equivalent of the tax, it's because I pay the equivalent of my assessable income, not my actual income (i.e. after all deductions like depreciation).

 

The thing is, I don't need the income immediately and as I'm over 60, I can draw money out of my super again any time, anyway. And I'm not trying to avoid ALL tax, just trying to get it back to what I'd normally pay.