For individuals that have migrated to or are returning to Australia, it may be possible to arrange for the transfer of retirement benefits from a foreign superannuation fund into a complying Australian superannuation fund.
The overseas treatment of such transfers should be investigated with a professional specialising in the relevant overseas laws and requirements (taking into account things like costs, accessibility and foreign tax considerations).
After reading this article, you should be able to:
• discuss the tax treatment of foreign superannuation fund transfers
• illustrate the importance of the timing of the transfer
• calculate applicable fund earnings
• explain the relevance of the superannuation contribution caps.
• outlines the treatment of the transfer from an Australian income tax perspective
• considers ways in which tax could be minimised in such circumstances
• looks at ways to avoid any associated traps.
An Australian taxpayer may receive a lump sum from a foreign superannuation fund (foreign SF). A foreign SF is a fund that is not an Australian superannuation fund (Australian SF) and is a fund that is an indefinitely continuing provident, benefit, superannuation or retirement fund.
The ATO has indicated that not all foreign retirement schemes satisfy the definition of a foreign SF. For instance, schemes that provide for non-retirement savings and benefits may not qualify.
Superannuation lump sums transferred from foreign SFs into Australia are taxed in Australia at varying rates depending upon:
• when the transfer is received in Australia (before or after six months of Australian residency)
• whether an “election” is made regarding applicable fund earnings (AFE) to be taken at an individual level or a superannuation fund level (i.e. broadly meaning earnings growth since becoming an Australian resident — see later)
• the non-concessional contribution (NCC) caps, and
• a person’s age in the financial year the transfer occurs (this will affect any work test requirements).
When an individual transfer a superannuation lump sum from their foreign SF directly to an Australian SF, they can choose to have all or part of the assessable part of the lump sum treated as assessable income by an individual’s Australian SF. Should they elect to do this, their Australian SF will pay tax on the assessable part of the lump sum at a concessional rate of 15%, instead of paying tax at individual marginal tax rates.
Special rules apply for clients transferring superannuation between Australia and New Zealand under the trans-Tasman retirement savings portability scheme. There are also additional restrictions that may prohibit or restrict UK pension transfers into Australia.
Transferring foreign superannuation to an Australian superannuation fund
If an Australian SF receives a superannuation lump sum directly from a foreign SF, the member can choose to have some, or all of the assessable part of the lump sum treated as assessable income of the Australian SF.
In this event the Australian SF pays tax on the assessable part of the lump sum (referred to as AFE) at the concessional fund tax rate of 15%, rather than the member paying tax at their marginal tax rates.
The member can make this choice:
• up until the day they lodge their income tax return for the year of transfer, or
• the day they would have been required to lodge one if they don’t need to lodge a tax return.
This is the case unless the governing rules of the Australian SF provides an earlier time.
If the member makes this choice, they must complete and submit the approved form to the fund, namely the ‘Choice to have your Australian fund pay tax on a foreign superannuation transfer’ (ATO NAT 11724) form. Once the choice is made, it cannot be revoked or varied.
A resident taxpayer has A$200,000 in a foreign SF which is paid directly to an Australian SF. Assume the assessable amount of the payment is $40,000 (that is, the AFE).
The taxpayer chooses to have the $40,000 treated as assessable income of the Australian SF so the resident taxpayer must complete the NAT 11724 form and submit it to the Australian SF.
The Australian SF will then include the $40,000 in its assessable income, and the amount to be included in the individual’s assessable income will be reduced to nil.
The member should complete this form if all of the following apply:
• They are an Australian resident transferring their entire entitlement in a foreign SF to a complying Australian SF.
• They receive their benefit more than six months after becoming an Australian resident or terminating their foreign employment.
• The benefits transferred include earnings in the foreign fund, accumulated since becoming an Australia resident, that would have been assessable income for Australian tax purposes (i.e. they would have paid tax on that amount at their marginal tax rate).
• They want to have their fund pay income tax on some or all of these earnings instead (a superannuation fund generally pays 15% tax).
There are tax consequences when transferring amounts from a foreign SF to yourself directly.
If the lump sum from the foreign SF is paid directly to a member (or another person on their behalf), there is no tax impact on the Australian SF. The assessable amount of the payment will be included in the member’s assessable income and taxed at their marginal tax rate in Australia.
If a member is unable to transfer their foreign superannuation fund on a tax-free basis within six months of becoming an Australian resident, it is important to then consider whether the member may be able to choose to have all or part of the assessable part of the lump sum treated as assessable income by the recipient Australian superannuation fund.
Should a member elect to do this, the Australian superannuation fund will pay tax on the assessable part of the lump sum at a capped concessional rate of 15%, instead of paying potentially higher individual marginal tax rates. However, the impact the contributions caps might have on the transfer needs to be considered.
If you are not careful in your planning, you will end up paying a large amount of tax. Speak to one of our tax consultants for further information on 1300 651 682 or email your questions on email@example.com.