Cashing in super before you are 60 and moving overseas

Question

I’m planning to cease Australian tax residency and would like to confirm that my proposed sequence does not breach the SMSF residency rules, and that I have the CGT treatment of my personal share portfolio correct.

My proposed steps are:

While I am still an Australian tax resident, I withdraw all benefits from my SMSF pension accounts into my personal bank account so that no member balances remain in the fund.
I keep the SMSF bank account open with a small cash balance only to cover final tax and accounting fees. The SMSF makes no new investments or benefit payments after my withdrawal.
I notify my SMSF accountant/administrator that the fund is effectively being wound up and that I will be leaving Australia, and they prepare to complete the final accounts, audit and SMSF annual return showing the fund as wound up.
Still as an Australian tax resident, I purchase a large portfolio of foreign (US) shares in my personal name.
Two weeks later, I leave Australia and cease to be an Australian tax resident. In my departure‑year tax return I apply CGT event I1 to my personally held foreign shares (electing not to defer), using the date of departure as the deemed disposal date. At that time I have a long‑term lease and residence arrangements overseas.
Around two months after I have left, my SMSF accountant lodges the final SMSF annual return, and the ATO formally finalises the SMSF wind‑up and cancels the fund’s ABN.
I then pay any ATO assessments and the SMSF accountant’s fees from my personal bank account.

On that basis, could you please confirm:

(a) For the period while I am overseas but before the ATO formally cancels the SMSF ABN, do I breach any SMSF residency rules (central management and control, active‑member test), given that all member benefits have already been paid out and the fund is only in wind‑up/administration mode?

(b) For my personally held foreign shares acquired while I was an Australian tax resident in step 4, then held as a non‑resident, and for which I elect CGT event I1 at departure, is it correct that I:

pay Australian CGT only once on the deemed disposal as at the date I cease residency; and
do not incur further Australian CGT on gains while I am a non‑resident (and would only be taxed on gains arising after I later re‑enter Australia as a resident, measured from the market value on re‑entry)?

If any aspect of this sequencing is risky or non‑compliant, could you please advise how you would adjust the order of steps or the documentation to ensure both SMSF residency compliance and correct CGT treatment of the foreign share portfolio?

Answer

You say you are 47 but have met a condition of release. I assume this is because you have a terminal illness or you are permanently incapacitated. Nevertheless, you will probably be taxed on the lump sum withdrawal. Have you considered this? Is it worth it? You can continue to hold funds in a superannuation fund after you have left Australia. In your circumstances it may be better to rollover into a public fund. You can open a new superannuation account in a public fund as long as you do so before you become a non resident. Now the trouble is your new country may be brutal in its taxing of your superannuation when you do take it out.

I have also seen you complex Askbantac question and realise there is a lot of money involved here. Absolutely worth getting advice specific to your circumstances, including about the country you are moving to. You need a firm that can find out, for you, how a superannuation pay out when you’re 60 will be taxed in your new country and how Australia will interact. I suggest a big firm like BDO who have offices around the world they can consult. Mark Molesworth mark.molesworth@bdo.com.au is the best contact in Australia to get you started and he is very candid. Depending on the country you are moving to there are specialist firms for example if you are moving to the UK consider https://www.bdhtax.com/ But I think Mark has the best resources to help you.

The amount of tax that you will pay on your lump sum depends on what the lump sum is made up of. Tax free will be fine, that is money you have put into super that you have not claimed a tax deduction for. But I suspect a large portion is going to be taxable. There may even be an untaxed element which is even worse. By the way you can’t just draw out the tax free. What ever the ratio of tax free to taxable to untaxed is on the total balance is the ratio applied to each withdrawal.

Taxable will be taxed at your marginal tax rate or 22%, whichever is lower
Untaxed will be taxed at your marginal tax rate or 32%, whichever is lower but if the untaxed amount is too high it could even be taxed at the highest tax rate.
If you wait till you are 60 you can withdraw the funds tax free. Subject to your country of residence which is where you need advice from Mark.

Regarding your questions:

(a) For the period while I am overseas but before the ATO formally cancels the SMSF ABN, do I breach any SMSF residency rules (central management and control, active‑member test), given that all member benefits have already been paid out and the fund is only in wind‑up/administration mode?

It would be practical to appoint your Accountant in your place to manage the fund as trustee. This is allowed.

The key issue here is central management and control. You would need to formally appoint an Australian based individual to act as trustee or director (typically via an enduring Power of Attorney). It must be a genuine delegation of control, do not make any decisions while you are overseas. You also need to make sure the trust deed allows this.

(b) For my personally held foreign shares acquired while I was an Australian tax resident in step 4, then held as a non‑resident, and for which I elect CGT event I1 at departure, is it correct that I:
– pay Australian CGT only once on the deemed disposal as at the date I cease residency; and
– do not incur further Australian CGT on gains while I am a non‑resident (and would only be taxed on gains arising after I later re‑enter Australia as a resident, measured from the market value on re‑entry)?

This is correct, taking care to meet the residency tests in our double tax agreement with your new country. The CGT is unlikely to be much considering the acquisition date and the date of leaving Australia but make sure you have something in your tax return so you can show you made that election.

If any aspect of this sequencing is risky or non‑compliant, could you please advise how you would adjust the order of steps or the documentation to ensure both SMSF residency compliance and correct CGT treatment of the foreign share portfolio?

I am happy with your choices as far as Australian tax law is concerned. Get a proper power of attorney drawn up for the super fund and make sure your tax return shows you triggered a CGT event. But you need to consider the tax on the money you withdraw from the super fund. It maybe better to roll it across to an Australian public fund and selectively draw down. Though the country you move to may well want to tax the income stream from Australia. Some countries tax any earnings on the fund even though they are not paid out. Some countries want to tax the lump sum as income even if you wait till 60, even though it would be tax free in Australia.

I am going to refund your complex Askbantacs question because I think you need to have the whole issue dealt with by Mark Molesworth or a similar expert that can get right inside your circumstances and have access to tax planning strategies in relation to the country you are moving to.