It's all about the right structure

Increasingly, the attractiveness of offshore superannuation is appealing to those in the fields of banking, accountancy and the law.

It is especially critical for people who may be employed away from their home countries and have to deal with a variety of different taxation regimes.

Understandably, it is an area little understood.

The Global Pensions Group specialises in this field. From a perspective of more than 35 years’ experience, Global Pensions Group Director, Kelvin Boyd, finds that the overseas pension funds have great appeal to an important group of people: `It offers flexibility in terms of the law regarding how much you can put in and what you then do with it,’ he explains.

Of course, central to any ideal way to secure one’s assets is a well-defined, clear structure. In fact, the structure becomes central to the program. As Boyd says, `You establish the structure by the (employment) relationship that is set up and you get assets into the structure because of that relationship.’

For members of corporate teams across the globe, he adds, this defines an ideal relationship.

Caps do inhibit the level of contributions in countries such as the United Kingdom, Australia, New Zealand and Hong Kong. But a member of an appropriately located international fund does not have to deal with these restrictions. Subject to the terms of his or her employment contract, the member has the flexibility as to how much of one’s salary is sacrificed as contributions to the Fund.

In concrete terms, an Australian taxpayer who decides on salary sacrifice to preserve a significant part of their income is capped up to $100,000 a year at a 15 per cent tax rate. Contributions beyond that cap hit a 46 per cent tax rate, with an allowance of $150,000 a year on a non-deductible basis.  Therefore, it makes no sense to contribute to an Australian Fund while you are employed and resident overseas.

As Boyd sees it, the ideal scenario is being able to protect assets in a superannuation fund and then repatriate the contributions and earnings, tax-free, to wherever you move until a final change of residence is made.

Such a structure is outside the rules relating to foreign trusts applied by many jurisdictions, such as the UK: `When you create a trust, you do so by way of a settlement. Under those circumstances, pretty well all major jurisdictions will tax the income. If, however, that money comes from an employment relationship, it would be outside taxing rules on trusts in most jurisdictions,’ observes Boyd.

That is because it comes from a totally different relationship.

In these circumstances, a superannuation arrangement forms part of an employment agreement. Therefore, ideally, the relationship brings a tax benefit because it has the correct structure in the right jurisdiction.

A wealth manager of the client’s choice looks after the assets in this superannuation fund, so that members of the fund have a say where the money is invested.

“No one,” says Boyd, “looks after your money better than you do.”

In this way, the risk tolerance is adjusted according to your wishes. Most people are very risk averse, because this asset is both protection against a worst-case scenario and a nest egg for retirement.

Or, as Boyd says, “A return can only be judged after allowing for risk.’