[ MAStech ] TOP TIPS FOR OVERSEAS PENSION SCHEME TRANSFERS

Transcription

1 [ MAStech ] TOP TIPS FOR OVERSEAS PENSION SCHEME TRANSFERS 30

2 BY DAVID BARRETT AND KELLY COX, MAStech DAVID Barrett & KELLY Cox Clients who have lived and worked overseas will often have benefits accrued in foreign superannuation or pension schemes. Transferring these funds back to Australia is an opportunity for Australian financial services professionals to add value on the Australian side of the transfer, including advising on issues relating to the receiving superannuation fund and the Australian tax consequences Often the issues involved in a transfer are not straightforward. This article provides a number of tips for advisers when advising in this area. Appendices 1 and 2 provide a quick refresher of the basic rules applying to foreign superannuation fund transfers. TEMPORARY RESIDENTS Those who are treated as temporary residents for Australian tax purposes are exempt from Australian tax on certain foreign sourced income, generally including payments from foreign superannuation or pension schemes. It may be attractive to transfer foreign scheme benefits to Australia before a client s temporary resident status ceases. UNCERTAINTY OF RESIDENCE IN AUSTRALIA Additional tax implications may arise if a temporary resident s benefits are transferred and subsequently withdrawn because of permanent departure from Australia. Although the Australian tax consequences may be minimal, if the benefit has been transferred from the United Kingdom (UK), the payment may be an unauthorised payment subject to additional tax in the UK. Similarly, additional UK tax may apply if a client voluntarily withdraws benefits after retirement (or some other condition of release is met) from an Australian fund that includes benefits transferred from the UK (see also Tip 8). Clients who are uncertain whether they will remain in Australia may prefer to leave their benefits in the existing foreign scheme until they have more certainty. DAVID BARRETT KELLY COX 31

3 [ MAStech ] The chart below has been included to provide context to many of the ten top tips described in this article. 1. Is the client a temporary resident? OVERSEAS PENSION SCHEME TRANSFERS There are a number of Australian taxation and superannuation consequences of a benefit that is paid from an overseas superannuation/pension scheme in respect of an individual who is a resident or temporary resident for Australian tax purposes. te that this chart does not cover benefits paid from a New Zealand KiwiSaver scheme, which are subject to separate rules. Temporary residents for Australian tax purposes are exempt from Australian tax on certain foreign sourced income, generally including payments from foreign superannuation or pension schemes. Is the overseas scheme a foreign superannuation fund? The ATO generally takes the view that a foreign fund is a superannuation fund if it exclusively provides a narrow range of benefits, generally in relation to retirement, invalidity or death of the individual or otherwise as specified in Australian superannuation law. Timing of transfer Is the payment made within six months of the person becoming a resident? Applicable fund earnings 4. Are there applicable fund earnings? Is the full balance being transferred from the overseas scheme? 5. Contribution eligibility Does client meet the Australian superannuation contribution eligibility conditions? (see Appendix 2) Tax election Is tax election made in relation to applicable fund earnings? Tax treatment of lump sum payment Tax free Applicable fund earnings taxed at individual s marginal tax rate. Balance of transfer tax free Applicable fund earnings taxed at 15% in fund. Balance of transfer tax free Tax treatment may depend on structure of overseas fund 10. If benefit transferred to an Australian super fund... Australian superannuation contribution eligibility conditions apply (see Appendix 2) Contribution type 6. Whole transfer amount treated as Whole transfer amount treated as Applicable fund earnings not an or CC. Balance of transfer treated as. Whole transfer amount treated as 32

4 3. 4. DETERMINE WHETHER THE OVERSEAS SCHEME IS A FOREIGN SUPERANNUATION FUND Payments from entities which are foreign superannuation funds for Australian taxation law purposes may attract concessional tax treatment (see Appendix 1). Otherwise the tax consequences may depend on the nature of the transferring entity (see Tip 10). te also that transfers from New Zealand KiwiSaver schemes are subject to separate rules. The Australian Taxation Office (ATO) generally takes the view that a foreign fund is a superannuation fund if it exclusively provides a narrow range of benefits, generally in ATO GUIDANCE ON FOREIGN CURRENCY CONVERSION OF APPLICABLE FUND EARNINGS Payments from foreign superannuation funds that occur more than six months after an individual becomes an Australian resident (assuming the individual is not a temporary resident) may involve taxation of the applicable fund earnings. Applicable fund earnings are measured in Australian dollars ($A), requiring conversion from the foreign currency. The ATO recently released ATO ID 2015/7 which sets out its view of the calculation methodology and removes the previous uncertainty around this issue. The ATO s view is that applicable fund earnings should be calculated as the difference between relation to retirement, invalidity or death of the individual or otherwise as specified in Australian superannuation law. Schemes that facilitate non-retirement savings or allow withdrawals for non-retirement purposes (for example housing, education and medical expenses) are generally not considered foreign superannuation funds. 1 For example, the ATO determined that a foreign fund which included a Medisave account (used to fund hospitalisation expenses and approved medical insurance) was not a foreign superannuation fund. 2 Singapore s Central Provident Fund incorporates a Medisave account. Consider applying for a private ruling if there is uncertainty whether an overseas scheme is a foreign superannuation fund. the fund balance at the time of transfer and the balance immediately prior to the fund member becoming an Australian resident. Both amounts are converted to $A at the exchange rate applicable on the day the payment is received by the Australian superannuation fund. This approach produces the same applicable fund earnings as the approach taken in a number of older private rulings, but conflicts with results from more recent private rulings. 3 In the most recent private rulings, the ATO calculated applicable fund earnings using two exchange rates (that is, the rate immediately prior to the individual becoming an Australian resident and the rate at the date of transfer). Let s look at an example to illustrate how the different calculation methods (both in the ATO ID and in the later private rulings) work in practice. 1 ATO Private Rulings and ATO Private Ruling For example ATO Private Ruling

5 [ MAStech ] [ EXAMPLE ] Converting applicable fund earnings to Australian dollars ($A) Henry, age 53, became an Australian resident on 1 February 2013, at which time he had 250,000 in a pension plan in the UK. On 2 February 2015, Henry transfers his UK entitlements to his Australian superannuation fund. At the time of transfer, his UK entitlements had increased to 275,000. contributions or transfers have been made to the UK scheme since he became a resident. What is the Australian dollar value of Henry s applicable fund earnings? METHOD 1 Conversion rate based on transfer date (ATO ID 2015/7) METHOD 2 Conversion rates at valuation dates (certain ATO private rulings) Convert vested benefits to $A using the exchange rate at date of transfer Convert vested benefits to $A using the exchange rates at relevant dates UK benefits prior to residency = $485,000 (ie 250,000 x $1.94 = $485,000; /$A equals 1.94 as at 2 February 2015) UK benefits at transfer date = $533,500 (ie 275,000 x $1.94 = $533,500; /$A equals 1.94 as at 2 February 2015) UK benefits prior to residency = $380,000 (ie 250,000 x $1.52 = $380,000; /$A equals 1.52 as at 31 January 2013) UK benefits at transfer date = $533,500 (ie 275,000 x $1.94 = $533,500; /$A equals 1.94 as at 2 February 2015) Calculate applicable fund earnings in $A Calculate applicable fund earnings in $A Applicable fund earnings = $48,500 (ie $533,500 - $485,000) Applicable fund earnings = $153,500 (ie $533,500 - $380,000) Applicable fund earnings are $105,000 more with Method 2. Given the guidance in ATO ID 2015/7, the calculation process in Method 1 above should be adopted generally. 34

6 5. 6. QUIRKS WITH THE TAX ELECTION Clients can elect for the applicable fund earnings of a foreign superannuation fund payment made to an Australian superannuation fund to be taxed within the Australian fund at 15 per cent, instead of being included in their personal assessable income and taxed at marginal tax rates. ALLOW A BUFFER FOR FLUCTUATIONS IN THE EXCHANGE RATE The amount transferred to an Australian superannuation fund from a foreign superannuation fund is subject to Australian superannuation contribution eligibility conditions (see Appendix 2). In addition, that part of a transfer which is treated as a non-concessional contribution () may be subject to penalty tax rates if the individual s cap is exceeded. Legislation has recently been enacted to allow withdrawal of excess s made after 1 July 2013, plus 85 per cent of associated earnings. The associated earnings will be taxed at the individual s marginal rate For a client to be eligible to make the election, the entire balance of their foreign superannuation fund must be transferred. The election must be made in writing by submitting an approved form (ATO form NAT 11724) to the Australian superannuation fund before the client lodges their tax return for the year of transfer, or earlier if required by the fund. The ATO s view is that an election cannot be revoked or varied once it is made. 4 less a 15 per cent tax offset. Excess s not withdrawn from superannuation will be taxed at the highest marginal rate. Although this legislative change may provide relief from the cap problem for foreign superannuation fund transfers, careful planning of the amount transferred to the Australian superannuation fund will still be required to manage the fund-capped contribution limit issue (see Tip 7 and Appendix 2). te also the issue in Tip 8 in relation to transfers from the UK. As the actual exchange rate at the transfer date will be unknown at the time of planning, it may be prudent to allow for currency fluctuations by transferring an amount less than the relevant cap to provide a buffer. [ EXAMPLE ] Fund-capped contribution limit Returning to Henry, assume that the $A depreciates and his UK benefits convert to approximately $555,500 (based on an assumed GBP/AUD exchange rate of 2.02), resulting in applicable fund earnings of $50,500 using Method 1 on the previous page. As the transfer value exceeds the fund-capped contribution limit of $540,000, his Australian fund will not be able to accept the transfer as a single payment. 4 ATO ID 2012/27. 35

7 [ MAStech ] CONSIDER MULTIPLE TRANSFERS FROM THE FOREIGN SUPERANNUATION FUND As Australian superannuation funds are unable to accept single contributions which exceed the fund-capped contribution limit ($540,000 in 2014/15 if the client had not reached age 65 on 1 July 7.[ 2014, otherwise $180,000), multiple transfers may be required. OPTION 1 ] Henry requests two separate transfers Henry requests that the UK scheme transfer his benefits to an Australian superannuation fund in two separate payments: $180,000 in 2014/15, with the balance (currently $375,500) to be transferred in 2015/16. The ATO 5 treats the applicable fund earnings as part of the first transfer of $180,000 if a lump sum or annuity may be subsequently paid from the foreign scheme. However, as Henry has an interest remaining in the foreign scheme, he is prevented from making the tax election for applicable fund earnings associated with the first transfer (see Tip 5). Transfer 1 (2014/15) Transfer 2 (2015/16) UK benefits at transfer date $555,500 $375,500 Transfer amount $180,000 $375,500 Applicable fund earnings included in transfer $50,500 - Eligible to make tax election Australian tax payable $24,745 (ie $50,500 x 49% MTR) - Contribution amount/type $180,000 $375,500 5 ATO ID 2012/48 Forward Thinking Download the free Forward Thinking app to your ipad or Android device. ANDROID APP ON

8 [ OPTION 2 ] Henry partially transfers to a new scheme before transferring to Australia Henry transfers $180,000 from his original UK scheme to another UK scheme, then transfers this amount to his Australian superannuation fund in the 2014/15 income year. The remaining $375,500 in the original UK scheme is subsequently transferred to his Australian fund also in 2014/15. Henry seeks UK advice, especially in relation to an appropriate UK scheme to receive the first transfer. Henry can make the tax election for the applicable fund earnings related to the $180,000 transfer, as he will have no remaining interest in the transferring UK scheme. This strategy reduces his overall tax liability on the applicable fund earnings by $17,170. Transfer 1 (2014/15) Transfer 2 (2014/15) UK benefits at transfer date Original UK scheme $375,500 $375,500 New UK scheme $180,000 - Transfer amount $180,000 $375,500 Applicable fund earnings included in transfer $50,500 - Eligible to make tax election Australian tax payable $7,575 (ie $50,500 x 15% fund tax) - Contribution amount/type $129,500 $50,500 applicable fund earnings (not an or concessional contribution (CC)) $375,500 te that some foreign schemes may be unwilling or unable to facilitate multiple transfers out of the scheme. Where this occurs, consider transferring the client s entire benefits to a new scheme that allows multiple transfers to implement the above strategies. In this situation, and in general with transactions that involve foreign licensing jurisdictions, financial services professionals with expertise and licensing in the relevant jurisdiction should advise clients on the overseas scheme and the foreign tax consequences. Issues specific to UK transfers Generally, an individual who permanently leaves the UK may transfer their UK pension scheme benefits to an overseas scheme/fund that is a Qualifying Recognised Overseas Pension Scheme (QROPS). A QROPS is a superannuation or pension scheme outside the UK that agrees with Her Majesty s Revenue and Customs (HMRC) to meet certain reporting obligations in relation to payments made out of the fund. 37

9 [ MAStech ] 8.CHANGES TO AUSTRALIAN LAW MAY RESULT IN UK TAX ISSUES While the changes to the taxation of excess s (see Tip 6) provide some Australian tax relief for clients who have exceeded the cap, the release of excess s from an Australian QROPS that holds a UK transfer amount may be regarded as an unauthorised payment, potentially leading to UK tax penalties. A client who is or has been a UK resident in the current or previous five UK income years is potentially liable for UK tax on payments made from a QROPS. In some cases, clients may wish to defer transferring benefits until they are no longer subject to UK tax. Financial services professionals with expertise in the UK tax consequences of releasing excess s should advise clients on these matters. TO UK LAW MAY IMPACT 9.CHANGES ABILITY TO TRANSFER BENEFITS The British Government has prohibited transfers from UK unfunded public service defined benefit schemes to schemes that provide flexible benefits. Broadly, flexible benefits are benefits that are not defined benefits. The recently passed provisions prevent transfers from certain UK schemes to Australian funds from 6 April Also effective from that date is a requirement that clients receive appropriate independent advice prior to the transfer of defined benefits from certain UK private sector schemes to schemes that provide flexible benefits. Payments from schemes that are not foreign superannuation funds If the overseas scheme is not a foreign superannuation fund, the tax treatment of a payment to an Australian resident may depend on an assessment of the type of entity making the payment. Certain ATO private rulings 6 indicate that if the overseas scheme is a foreign trust, the payment may be considered a trust distribution and any income accumulated in the scheme since the individual became a resident may be subject to tax at the individual s marginal tax rates. In another private ruling, the ATO indicates that the overseas scheme is not a foreign superannuation fund, and while the ruling does not identify the entity type, the ATO concludes: There is no other provision in the Australian taxation provisions that apply to your pension fund payment. Therefore the payment is not regarded as assessable income. 7 SPECIALIST TAX ADVICE OR APPLY FOR 10.SEEK A PRIVATE RULING Assessing the tax implications of a payment from a foreign scheme that is not a foreign superannuation fund may require specialist tax advice. Given the differing potential outcomes discussed above, a private ruling should be considered if certainty regarding the tax treatment of these payments is required. 6 ATO Private Rulings and ATO Private Ruling

10 [ APPENDIX 1 ] Recap on tax treatment of foreign superannuation fund transfers Australian tax applying to foreign superannuation fund transfers varies depending on when the benefits are transferred and whether a tax election has been made in relation to applicable fund earnings. Broadly, applicable fund earnings is the growth in the value of the benefit since the client became an Australian resident, less transfers and contributions made to the overseas scheme in that period. For clients who have had broken periods of residency, the calculation is more complex. For Australian residents who are not temporary resident visa holders, transfers will generally be taxed as follows: Transfer occurs Amount Contribution type Tax treatment Within six months of Australian residency Entire transfer amount Tax free t a deductible contribution After six months of Australian residency tax election made Applicable fund earnings Balance of transfer Does not count towards CC or caps Taxed at 15% in super fund t a deductible contribution Tax free t a deductible contribution After six months of Australian residency no tax election Applicable fund earnings Balance of transfer Included in individual s assessable income and taxed at marginal rates t a deductible contribution Tax free t a deductible contribution [ APPENDIX 2 ] Recap on contribution eligibility Superannuation contributions (including payments from foreign superannuation funds to Australian superannuation funds) are subject to the following contribution eligibility conditions. Australian superannuation contribution eligibility conditions Work test Age limit Members aged 65 or more must have met the work test before the fund can accept a transfer from a foreign superannuation fund An Australian superannuation fund is unable to accept a personal contribution in respect of a member after 28 days following the end of the month in which the member turns 75 Fund-capped contribution limit Tax file number A fund is unable to accept a single transfer from a foreign fund if it exceeds: the annual cap ($180,000 in 2014/15), or three times the annual cap if the member is 64 or less on 1 July of financial year ($540,000 in 2014/15) This limit applies to the whole amount of the transfer, including the applicable fund earnings, not just the amount that is an The member must have quoted their Tax File Number to the Australian superannuation fund in order for the fund to accept the transfer 39

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