Tax traps highlighted with transferring overseas super benefits

“Sometimes, overseas superannuation must stay there until a person reaches a particular age or all employment has ceased,” Mr Colley said.

“Under the Australian superannuation and tax laws, it is possible to transfer some amounts from overseas superannuation funds. However, the overseas fund needs to meet the definition of what our law defines as a superannuation fund for a direct transfer to take place.”

For example, pension funds in the UK, he said, are considered superannuation funds and benefits can be transferred directly, although the Australian fund may be required to meet certain conditions.

“In contrast, some funds in the US, such as 401k plans and Individual Retirement Accounts (IRAs), do not meet the definition of a superannuation fund and a direct transfer to an Australian super fund is unable to take place,” he cautioned.

“This is because the benefits available under those funds are not solely for retirement and associated purposes.”

Before initiating any transfer, Mr Colley said the member should talk to the overseas fund and see whether the transfer can take place and whether there are any conditions that apply.

“Next, it needs to be determined whether all of the overseas benefit, or only part of it, can be transferred to Australia. Finally, the tax implications both in Australia and overseas are crucial as to whether the transfer can go ahead,” he explained.

From a taxation point of view, Mr Colley said there may be tax payable on some of the amount transferred to the Australian fund, and excess contribution tax rules may apply as well.

“The taxable amount is calculated as the income that has accrued on the benefit that has remained in the overseas fund since the person has become an Australian resident for tax purposes,” he said.

“However, if the transfer takes place within six months of tax residency or when foreign employment ceased, then no tax is payable on the transfer.”

Any amounts that are not taxed in Australia from the overseas transfer, he said, are treated as non-concessional contributions and measured against the person’s non-concessional contributions cap.

“This can act as a limiting factor to whether the benefit is able to be transferred from some countries,” he said.

“The reason is that the amount transferred to the Australian fund may continue to be subject to the payment restrictions as they applied in the overseas country.”

It is important that advisers and clients are also aware, he said, that sometimes the benefits payable from the overseas fund may end up being more generous than transferring the benefit to an Australian fund.

“This could occur where the benefit in the overseas fund provides a lifetime indexed pension, which may not be available if the amount was transferred to an Australian fund,” he explained.

“In most cases, any pension payable from the Australian fund would be as an account-based pension. This may not provide a lifetime’s income stream as the benefit may run out earlier depending on the fund’s performance and how quickly it is drawn down.”