An increasing number of Australians are looking to Bali as a long-term retirement destination. With its all-year-round tropical climate, lower cost of living and its easy access back to Australia you can understand why.
Now there is a first of its kind Lifestyle Residential Resort for the 55+ expatriate market being planned in Bali and it might just be the thing for those wanting a more affordable and fulfilling retirement. Due for completion in 2022, it is time to start planning your move.
We asked for some independent advice from specialists in Retire to Asia to give their unbiased opinion on the implications of Australians retiring to Bali.
But how should you go about moving to Bali? What are some of the key issues you need to consider and strategies to be aware of that can maximise the benefits of your move to Bali?
While many will have an investment property and shares held personally, or even in trust, for most of us it’s our family home and superannuation assets that hold most of our retirement wealth.
It is the family home and superannuation where most of the key issues and strategies lie when planning to retire abroad.
A real-life case study – Andrew and Maya
This is a simplified version of a case that the team at Retire to Asia recently had. Andrew and Maya, both around age 60, family home valued at $1.4M and a combined superannuation balance of $900,000.
The main question was centred around whether to sell their family home and buy their retirement home in Bali? The alternate was to retain their home and to use superannuation money to purchase overseas.
Which option is best and why?
Option 1: Retaining family home – use superannuation money
There are many reasons to retain your family home at the initial retirement stage. These include:
What if you would like to return home?
Selling your home then choosing to return later can be an expensive strategy. Not only are there transactional costs in selling, then repurchasing a property, you also run the risk of buying back into a property market that has risen since you were gone.
We advise to only sell your Australian home when you’re absolutely certain you will not be returning home, or you will no longer need that property.
Increase your chance of retaining your Australian tax residency.
This is a complex area, and this is an extremely simplified answer. The questions here are:
Should I still be an Australian tax resident if I live in Bali?
and
Can I still be an Australian tax resident if I live in Bali?
Very basically, if you receive income from Australian property and investments and/or government pensions then you probably should remain an Australian tax resident. This is simply because the tax you pay as an Australian tax resident on Australian sourced income, usually will be lower than if the tax office taxed you at non-resident tax rates.
This is assuming your only source of income is from Australia. If you earn foreign income, then this may change depending on the level of incomes you earn in Australia versus overseas income.
The problem for many Australians living overseas is in retaining their Australian tax residency. Once the tax office deems that you have indeed permanently moved overseas, they will assess you to be a non-Australian tax resident and start taxing you as such.
Retaining your home in Australia, even if you rent it out is one of the ways you can show the tax office that you plan to return to Australia and are able to retain your Australian tax residency status for longer.
Retaining access to the Australian Medicare system
The is a carry-on from the previous point. Your access to the Medicare system (free healthcare in Australia) is dependent on you having a valid Medicare card.
While you have a valid Australian Medicare card, you can access the Medicare system. The Medicare card is renewed every five years. Your Medicare card cannot be renewed if you are registered as a non-Australian tax resident, even if you are an Australian citizen.
Therefore, if you lose your Australian tax residency, you will not be able to renew your Medicare card when it expires, and you will be limited in enjoying the free Australian healthcare.
Typically, retirees living overseas will take out International Private Health Cover. You will then need to claim any Australian medical care on this policy.
Retaining home may give better access to Age Pension benefits
The value of your principal residence is excluded from the assets test when working out eligibility for the Age Pension. A couple can have almost $900,000 in assessable assets and still receive a part pension amount. Therefore, for some, retaining wealth in a principal residence may allow you to access some added benefits.
While the Age Pension will not be a factor for many people looking to retire overseas, it is important to note that even $1 in Age Pension allows you to access all the other benefits that applies to pension recipients. Such as reduced medicine costs, property rates, car registration, transport costs back home plus Australian pensioner tax rebates.
Retaining family home was the better financial option (in this case)
In addition to all the above benefits in retaining the family home, we found that it made better financial sense to retain the family home, rent it out for extra income, and use superannuation funds to purchase a retirement property overseas.
Lump sum withdrawals from superannuation after age 60 are tax free and unlimited. Therefore Andrew and Maya were able to withdraw the full purchase amount for their Bali retirement property from superannuation and retain their family home.
The financial outcome to Andrew and Maya in retaining the family home:
Family Home in Australia | $1.4m |
Rental yield on Family Home | 3.3% |
Annual Income from family Home | $46,200 |
Annual tax payable (Andrew and Maya combined assuming no deductions) | -$1,862* |
Annual income received after Tax | -$44,338 |
Less: Cost of International Healthcare | -$5,600 |
Less: Cost of one addiitonal airfare back to Australia | -$1,850 |
Nett annual income from family home | -$36,888 |
*The couple were able to retain their Australian resident tax status. Tax that would be payable were they to be taxed at non-resident tax rates would be $7,507 pa. By retaining their Australian tax residency status, they will save approximately $5,645 pa.
According to the cost comparison web site Numbeo, consumer prices are approximately 43% lower in Bali than in Melbourne where the couple have their family home.
Therefore, the net rental income received of $36,888 in Australia would equate to an approximate equivalent income of $64,715 per annum in Bali for a comparable lifestyle.
As Andrew and Maya’s cost of living budget in Australia was $55,000 pa in retirement, by living in Bali the net income from renting out their property in Australia is more than adequate in paying for their lifestyle needs, without having to draw down their superannuation funds any further.
Superannuation assets and purchase of overseas property
The couple chose to purchase a retirement property in Bali for about AUD$425,000 by using superannuation funds and not the sale of the family home.
Current Superannuation Balance | -$900,000 |
Less: Purchase of Property | -$425,000 |
Superannuation balance after property purchase | -$475,000 |
As the rental from the family home will cover all living expenses in Bali, Andrew and Maya have no need to draw down further from their superannuation, allowing their fund balances to grow substantially over time.
Future conservative superannuation fund balance forecast:
Current balance - $475,000.
Annual net percentage return of the fund – 6%.
Annual inflation – 2.5%
Time | 5 Years | 10 Years | 15 Years | 20 Years |
Fund Balance | $635,700 | $850,600 | $1,138,400 | $1,523,400 |
Adjusted for Inflation | $564,100 | $670,000 | $795,800 | $945,100 |
Note: In addition, Andrew and Maya have retained their family home and the capital growth on that property.
Capital Gains Tax (CGT) consequence of renting out family home
As indicated previously, any rental income received will be taxable in Australia. The retention of Australian tax-residency status will substantially lower the tax payable to a minimal amount.
Under Australian tax law we are all allowed to claim one ‘Principal Residence’, whereby that residence will be excluded from CGT.
The couple can rent out their family home and receive income for up to 6 years and still enjoy the CGT free status. Once the 6 years has expired, the couple can restart another 6-year CGT exemption by moving back into the house, then moving out and re-renting the family home. There are no limits to how many times the couple can do this.
This strategy is allowable so long as Andrew and Maya do not claim another property as their principal residence.
Option 2: Selling family home to purchase property in Bali
Retire to Asia believes this strategy should only be employed if you are one-hundred percent certain that you will not be returning home to live permanently. As stated in the previous strategy, the cost of returning home after you have sold the family home can be very painful.
This example assumes Andrew and Maya chose to sell the family home and relocate.
Sale of Family Home | -$1.4m |
Purchase of Offshore Property | -$425,000 |
Nett Proceeds from Sale | -$975,000 |
Contributing funds to superannuation
Superannuation is a great vehicle to hold assets at any age. After age 60 and if you are retired, it is simply unbeatable. That’s because so long as your fund initial total contributions balance is below $1.6M, you can turn the whole balance into a tax-free investment vehicle.
No tax on any income of the fund, no capital gains tax on any sales of assets within the fund, and no tax on any income you receive from the fund.
Therefore, it’s usually best to deposit any surplus funds in retirement within the superannuation system.
However, there are limits to how much you can contribute.
Andrew and Maya were able to contribute $400,000 each into superannuation as tax-free contributions. They were able to do this by contributing $100,000 each in one financial year, then $300,000 each in the following financial year. They are then no longer eligible to make any further tax-free contributions into superannuation for another three years.
The remaining $175,000 is to be held personally outside superannuation.
Investment balance
Combined Superannuation Balance | -$1,7M |
Personal Investment Balance | -$175,000 |
Combined investment balance to provide retirement lifestyle | -$1,875M |
As was noted previously, the couple had a retirement cost of living target of $55,000 pa. As Bali has approximately 43% lower cost of living than Melbourne, this equates to a Bali equivalent of $31,350 pa cost of living.
Even when adding in the extra cost of International Private Health Insurance ($5,600) and the extra flight back to Australia ($1,850), the expected retirement cost of living target is reduced from $55,000 pa if living in Melbourne to just $38,800 pa while living in Bali for a comparable lifestyle.
This represents an annual reduction of $16,200 from their planned expenditure. This can be used to either save current investment assets, or increase their lifestyle benefits, or a combination of both.
Australian tax-residency status
Andrew and Maya do not have any other investment assets in Australia; therefore, their tax-residency status is no longer an issue.
Income received from their Australian superannuation fund after turning age 60 is no longer taxable Australian income. Income will be received tax free irrespective of where the couple choose to live.
If the couple chose to invest the $175,000 in Australia there will be a small amount of withholding tax payable in Australia. This will be quite negligible. If this is a concern this can be invested in an international investment fund offshore completely tax free.
Age pension consequence
Superannuation is an assessable asset. Therefore, this strategy of selling the family home and adding funds to superannuation will increase their assessable assets well above the couple upper threshold of $876,500 when they are eligible to claim the Age Pension at age 67. Therefore, accessing the Age Pension benefits are not an option for them in the foreseeable future.
About the Authors
Retire to Asia was established by Andrew Leeson and Jeff Gill having both worked in the investment banking industry for many years where Jeff ran the Sydney office for Mercer and Andrew formerly ran the private client services for iPac Asia, dealing with Australian Expats though out Asia before working for two private banks in Sydney. Retire to Asia is an independent company that deals with cross boarder issues that Australians face when living or moving overseas. The topic of “overseas” retirement is something they are passionate about and where they see themselves in the future.
The above information is highly general in nature. It is used to highlight some of the important issues people face in retiring overseas and should not be taken as personal financial advice or be acted upon. We recommend that anyone considering to retire overseas seek independent advice according to their circumstances.
If you would like to discuss the benefits of a personalised tailored report on issues that are relevant to your specific circumstances and retiring overseas, please contact Retire to Asia on the contact link below.
Click this link if you would like more details on The Wana Sandat Nusa Dua
Join our Retire2Bali Forum to openly discuss issues and questions on living and retiring in Bali