For clients wanting to transfer to Australia their retirement savings accumulated overseas while working, they first need to understand the rules and eligibility criteria to be able to do this
Clients who have spent time working overseas or chosen to permanently retire in Australia, may have accumulated retirement savings overseas and want to consolidate these benefits into their Australian superannuation fund. It is important to understand the rules and eligibility criteria to be able to this.
As a first step, the client should contact the overseas fund to determine whether it will allow the transfer of benefits and any tax implications or exit fees. The client would also be well served to seek specialist international tax advice before pursuing the transfer.
Is the overseas fund a foreign super fund?
An individual can only transfer funds from a foreign super fund (FSF) into their Australian super fund. Some overseas retirement schemes do not meet the definition of a FSF and therefore, benefits may not be able to be transferred into their Australian super fund.
The Australian Taxation Office (ATO) generally takes the view that a fund is a FSF if it exclusively provides a narrow range of benefits in relation to retirement, invalidity or death of the member – i.e. consistent with Australian super laws. Schemes that allow withdrawals for non retirement purposes, such as housing or education, are generally not considered FSFs. A client can apply for a Private Binding Ruling from the ATO if they are unsure whether their overseas scheme meets the definition of an FSF.
For a fund that is not a FSF, the tax treatment of a payment to an Australian resident depends on how the overseas fund is classified. For example, some ATO private rulings have defined certain overseas schemes as foreign trusts, meaning the payment of the foreign ‘super’ is a trust distribution, with any income accrued since the person became an Australian resident, taxed at their marginal rate.
Note that special rules apply for clients transferring super between an Australian super fund (regulated by APRA) and a New Zealand KiwiSaver Scheme under the trans-Tasman retirement savings portability scheme. A discussion of this issue is beyond the scope of this article.
Requirements before transferring a FSF to an Australian super fund
If a client’s overseas fund does meet the definition of a FSF and they are able to transfer their benefits to their Australian super fund, they must satisfy certain conditions.
The transfer will be regarded as a member contribution and therefore, the client must be eligible to contribute to super. This means that at the time of transfer the client must be:
under age 65; or
aged 65 to 74 and have met the ‘work test’ in that financial year.
Further, a transfer cannot be accepted unless the client has provided their Australian super fund with their Tax File Number (TFN) or does so within 30 days of making the transfer. Failure to provide a TFN may result in the benefits being returned to the foreign fund.
The overseas pension scheme may apply further requirements before permitting a transfer, such as the member having permanently relocated to Australia and having not already commenced an income stream. Naturally, this should be checked with the relevant foreign fund.
Importantly, Australian super funds are not obligated to accept FSF transfers and some super funds choose not to accept them. It is important the client check with their fund before instigating a transfer.
Tax on transfer of FSFs to an Australian super fund
The client needs to consider the tax implications of transferring their FSF to Australia. Advice on the overseas tax treatment should be sought from a tax specialist with expertise in the relevant country’s laws.
Income tax may be payable on the applicable fund earnings component of a foreign fund transfer. The applicable fund earnings are generally defined as those earnings that have accrued since the client became a resident of Australia or ceased foreign employment.
If a client transfers overseas super to Australia within six months of becoming a resident of Australia or ceasing foreign employment, no part of the benefit transferred will be classified as applicable fund earnings and therefore, no tax should be payable.
Outside of this six-month window, a client will be subject to tax on the applicable fund earnings. This can be:
included in their assessable income and taxed at their marginal rate; or
taxed at 15 per cent within their super fund, although excluded from the concessional contribution cap.
A client can choose to have a portion of the earnings taxed within the super fund and the balance at their marginal rate. For example, a client could elect for any earnings that would result in a marginal rate of 19 per cent or more to be taxed within super.
To be eligible to elect for fund earnings to be taxed within super under section 305-80 of the Income Tax Assessment Act 1997, a number of conditions must be satisfied:
the entire balance of the FSF must be transferred;
the person must no longer have an interest in the FSF;
the client must elect this option in writing using the approved ATO form before they complete their tax return or earlier if required by their super fund; and
the client must be an Australian resident and have been so for more than six months.
Once an election is made, it cannot be revoked.
Tip: It will generally be advantageous to elect to have earnings taxed concessionally within the super fund. This means that the client does not have to pay tax from their personal savings and also reduces the amount of the rollover assessed under the non concessional contribution cap. However, for clients with low taxable income – where their marginal rate is less than the super fund tax rate – not making the election may be the more tax-effective option.
A foreign income tax offset may be available for any applicable fund earnings that are taxed personally (i.e. not within the super fund) in respect of any foreign tax paid.
Impact on contribution caps
Upon the Australian super fund accepting the FSF transfer, the rollover will be treated as a non-concessional contribution with two exceptions:
Any applicable fund earnings that the member has elected to be taxed in the super fund will not be regarded as a contribution but akin to normal earnings of the super fund. This amount will therefore not be assessed against either the concessional or non-concessional contribution cap.
Any amount transferred that exceeds the amount vested to the client at the time of transfer will be included in the assessable income of the fund and counted towards the concessional contribution cap.
Importantly, the removal of the fund capped contribution rule from 1 July 2017, means there is no limit on the amount that can be transferred in a single transaction. However, if the transfer causes the client to breach their non-concessional contribution cap, then excess contribution rules would apply. Note that individual super funds may have their own rules about accepting FSF transfers, which result in a contribution cap breach.
Calculation of applicable fund earnings
The applicable fund earnings represent the growth in the FSF between the time the client becomes an Australian tax resident and when the transfer occurs. This amount is calculated differently depending on whether the client was an Australian resident for the entire period.
Section 305-75 of the Income Tax Assessment Act 1997 sets out the method for calculating applicable fund earnings and this is summarised in Table 1.
Australian resident at all times whilst a member of the FSF
Not an Australian resident at all times whilst a member of the FSF
= Total amount of lump sum transferred (before any foreign income tax);
less contributions made to the FSF prior to transfer
less transfers from any other FSF prior to transfer
plus any previously exempt fund earnings*
= Total amount of lump sum transferred (before any foreign income tax);
less amount vested prior to becoming an Australian resident
less contributions made to the FSF during the remainder of the period
less transfers from any other FSF during the remainder of the period
multiplied by proportion (days Australian resident/total days member of foreign fund until transfer)
plus any previously exempt fund earnings*
* Fund earnings that were transferred to another overseas fund only become assessable upon transfer to an Australian super fund.
Clients may wish to apply to the ATO for a private ruling to determine their applicable fund earnings.
Conversion to Australian dollars of applicable fund earnings
ATO ID 2015/7 sets out a methodology of converting the fund earnings from a foreign currency into Australian dollars:
The amount in the FSF vested in the client when the lump sum is paid, is translated into AUD on the day of receipt of that lump sum.
The amount in the FSF that was vested in the client just before the day they became an Australian resident, is translated into AUD on the day of receipt of the relevant super lump sum.
The applicable fund earnings are determined by subtracting this difference in AUD.
However, note that some ATO private rulings have calculated the applicable fund earnings using different exchange rates (i.e. the rate at the date of transfer and rate just before becoming an Australian resident). This may result in a different amount of assessable earnings.
Current stance on transferring super from U.K. (i.e. QROPS rules)
Under current rules, individuals can only transfer funds from a U.K. pension fund to Australia (without incurring an unauthorised payment charge of 40 per cent or up to 55 per cent) if the Australian super fund meets the definition of a Qualifying Recognised Overseas Pension Scheme (QROPS).
The U.K. HM Revenue and Custom (HMRC) maintains a list of qualifying funds, although it disclaims that inclusion on the list does not guarantee the fund satisfies all the requirements so that tax on transfer is not payable. Clients should confirm directly with their Australian super fund whether it meets the QROPS requirements.
Most Australian super funds no longer qualify as a QROPS. This is because U.K. rules state that the overseas scheme must have a restriction on accessing super before age 55, except in the case of incapacity. Under the Superannuation Industry (Supervision) Regulations 1994, super benefits can be accessed under Australian super laws in various circumstances before age 55 (for example, financial hardship or compassionate grounds). Therefore, unless a fund’s trust deed prescribes more restrictive payment terms than the relevant legislation, most APRA regulated funds will not qualify as a QROPS.
Some individuals have set up self-managed super funds (SMSFs) with membership limited to persons aged 55 and over under the Trust Deed, so that the fund could potentially meet the definition of a QROPS and the U.K. pension can be transferred without incurring an unauthorised payment charge. Indeed, the overwhelming majority of funds listed on the HMRC QROPS list are SMSFs.
In a further restriction, the U.K. HMRC does not generally allow pension funds to invest in collectables or taxable property (for example, residential property). A QROPS registered SMSF investing in such investments could be considered a breach and result in a substantial tax penalty. It is vital that clients wanting to explore using an SMSF as a qualifying QROPS to facilitate a foreign super transfer, seek specialist tax and legal advice.
Whilst most personal U.K. pension plans can be transferred to an eligible QROPS, some pensions, such as funded defined benefit schemes, can only be transferred from the United Kingdom if U.K. independent financial advice is received prior to transfer. Transfers from unfunded U.K. defined benefit schemes (such as NHS, police, army) are no longer permitted and U.K. State Pensions cannot be transferred.
For transfers from 9 March 2017, the client and the QROPS must both be resident in Australia (and remain so for five U.K. tax years after transfer) to avoid potentially incurring a 25 per cent overseas transfer charge. Further, payments out of funds transferred to a QROPS on or after 6 April 2017, will be subject to U.K. tax rules for five tax years after the date of transfer, or if at the time of rollover or withdrawal, the member is a tax resident of the U.K. or has been in any of the 10 preceding U.K. tax years. Note that the U.K. tax year runs from 6 April until the 5 April.
Quarantining U.K. transferred benefits in a QROPS, which is separate from the client’s ‘Australian earned’ super benefits, may be advantageous because:
the client may be able to access their super, having satisfied a condition of release, such as ceasing employment after age 60. However, any funds withdrawn from the QROPS could be seen as drawing on the U.K. funds in the first instance and this may trigger an unauthorised payment charge; and
release of any funds from the QROPS to pay an excess contribution tax or charge, may trigger a U.K. unauthorised payment charge.
Whilst beyond the scope of the article, it is important to consider U.K. financial limits, such as the lifetime allowance test. The ‘lifetime allowance’ applies to U.K. pensions and QROPS, and is the maximum amount of concessionally taxed savings a member can accumulate over their lifetime. A tax charge is applied on any excess over the lifetime allowance limit.
On a final note, a client may have previously transferred U.K. benefits to their Australian super fund, which met the QROPS definition before the 2015 changes. They may be now seeking to rollover these benefits into another super fund, which is not an eligible QROPS. To avoid U.K. tax implications, the rollover should only be considered if the client hadn’t been a U.K. tax resident for five full U.K. tax years.
The transfer of overseas retirement savings to Australia is a complex area, with a myriad of rules and outcomes that vary depending on the type and country of origin of the foreign scheme, the client’s Australian residency and their Australian fund. It is important the client seek specialist advice when dealing with international tax issues and before transferring overseas super to their Australian super fund.
1. Thomas, age 56, transfers $300,000 from his FSF to his Australian super fund. Of this balance, $50,000 is determined to be applicable fund earnings, which he elects to have taxed within his super fund. Which of the following is correct?
$250,000 is assessed as a non-concessional contribution and $50,000 as a concessional contribution.
$300,000 is assessed as a non-concessional contribution.
$250,000 is assessed as a non-concessional contribution and $50,000 is not counted under either cap.
$250,000 is not assessed under either cap and $50,000 as a concessional contribution.
2. Lydia, age 54, transferred approximately $150,000 from her U.K. pension fund to her Australian super account in 2012. She has been an Australian resident for 12 years. She now wants to transfer her super to another super fund which is not a QROPS. Which of the following is correct?
She may be able to transfer the super but will incur an unauthorised payment charge of 25 per cent, as she has been a U.K. tax resident within the past 15 years.
She may be able to transfer the super without penalty, as she has not been a U.K. tax resident for more than five years.
She cannot transfer the super without penalty until she meets a retirement condition of release.
Once the funds are in an Australian super fund, she can transfer them to a non QROPS fund at any time, regardless of residency.
3. To be eligible to elect for applicable fund earnings to be taxed within super, which of the following criteria is incorrect?
The entire balance of the foreign super fund must be transferred.
The client must elect using the approved ATO form before they complete their tax return or earlier if required by their super fund.
The client must be on a marginal tax rate of at least 34.5 per cent (including Medicare).
The client must be an Australian resident and have been so for more than six months.
4. Celia, age 60, has a total super balance at 30 June 2018 of $1.7 million and will transfer the balance of $100,000 from her FSF into her Australian super fund within six months of becoming an Australian tax resident. Which of the following applies?
The $100,000 will be included in her non-concessional contribution cap and will be within her annual cap.
The $100,000 will be an excess non-concessional contribution if accepted by the super fund.
The $100,000 less applicable fund earnings will be an excess non-concessional contribution if accepted by the super fund.
The transfer will be rejected in all cases and returned to the FSF, as it will breach her fund capped contribution limit.
5. A U.K. State Pension can be transferred to an Australian super fund that meets the definition of a QROPS: