Transferring UK pension scheme benefits to Australia: The basics — Part 2
UK pension funds meet the definition of a foreign superannuation fund. As such, transfers are subject to special Australian tax treatment when transferred to an Australian superannuation fund.
When a benefit is transferred from a UK pension scheme within six months of an individual becoming an Australian tax resident, the transfer is tax-free from an Australian perspective.
If the benefit is transferred to an Australian superannuation fund (i.e. a QROPS), it is counted against the individual’s non-concessional contribution cap.
However, when the transfer occurs after an individual has been an Australian tax resident for more than six months, the growth that has occurred on the UK benefit between the time they became an Australian resident and the time the funds are received by their Australian superannuation fund is taxable. This is referred to as applicable fund earnings.
Applicable fund earnings are included as assessable income of the individual and are taxed at their marginal tax rate.
Alternatively, when an individual’s interest in their UK fund is being transferred, a written election (Australian Taxation Office [ATO] form NAT 11724) may be made to have the applicable fund earnings taxed as income of their Australian superannuation fund. When this occurs, the applicable fund earnings are taxed at a rate of 15 per cent rather than at the individual’s marginal tax rate. When electing to have the applicable fund earnings taxed as income of their superannuation fund, the election form must be given to Australian superannuation fund no later than when the funds are transferred from the UK fund.
The applicable fund earnings form part of the individual’s taxable component; however, they are exempt from being counted against their concessional contribution cap.
Non-concessional contribution cap
Amounts transferred from a UK pension fund will be counted against the individual’s non-concessional contribution cap, either in part or full. That is, the amount transferred, less the applicable fund earnings where an election is made to have them taxed as income of the QROPS, is assessed against the non-concessional contribution cap.
Therefore, non-concessional contribution implications need to be considered. Before considering the question of non-concessional contribution caps, is the Australian fund able to accept the transfer in the first place? Put simply, if an individual is aged 65 to 74, they will have to firstly meet the work test for the transfer to be accepted by their QROPS.
It is then necessary to consider the non-concessional contribution cap implications.
If aged 65 or older at the start of the financial year in which the transfer is to be received, the amount that can be received will be limited to a maximum of $100,000. That is, the three-year bring forward is not available.
Likewise, if an individual was aged 64 or younger at the start of the financial year, and their total superannuation balance exceeded $1.4 million, the amount they can access under the three-year bring forward is scaled back to either $200,000 or $100,000.
If a person’s total superannuation balance exceeds $1.6 million, a non-concessional contribution cannot be made; therefore, a transfer from a UK pension scheme will not be possible.
Having an amount transferred from a UK pension scheme that exceeds the non-concessional contribution cap can have unintended UK tax consequences, as any subsequent withdrawal of the excess non-concessional contribution may give rise to an unauthorised (UK) payment that is taxed at 55 per cent. This problem may be alleviated where an individual has sufficient other Australian superannuation they could elect to withdraw to cover their excess non-concessional contribution and associated earnings.
Where an individual has a UK pension scheme balance that, if transferred to a QROPS, is likely to exceed their non-concessional cap, splitting the benefit into a number of separate accounts (possible using a number of Self Invested Personal Pensions) in the UK and then drip-feeding the transfers to a QROPS over time may be a viable option.
The timing of transactions to take advantage of favourable exchange rates is often an important consideration.
In 2015, the ATO released an Interpretative Decision ID 2015/7 that stated the exchange rate to be used when calculating the applicable fund earnings and the relevant Australian taxation consequences of the transfer are the exchange rate applicable at the time of receipt in Australia of the transferred funds.
Transferring benefits from a UK pension scheme to Australia can be complicated as it involves the application of laws of both Australia and the United Kingdom.
Not only are transfers restricted to individuals from age 55, but a range of other factors including the application of the non-concessional contribution cap and potential ongoing UK reporting and tax consequences need to be considered.
Peter Kelly, retirement strategies and solutions, Centrepoint Alliance