So you’ve lived or worked overseas and have money sitting in a non-Australian based retirement or pension fund and now you want to bring it home. But moving your retirement savings from one country to another can have some significant tax consequences, particularly if you move too much at once.
This is quite a common problem faced by wanderlust Aussies, with the United Kingdom topping the list of overseas pension fund transfers. Hong Kong, Singapore, New Zealand and the United States are also popular source countries.
There are many factors that come into play when transferring overseas superannuation money.
Here I’m going to talk about the tax situation in Australia only. Next week, I’ll look at transfers from two popular destinations, the UK and New Zealand.
The two key issues that determine the tax treatment of an overseas super benefit when it’s transferred into the Australian super system are the investor’s residency status and the normal contribution caps (click here [1] to see which cap applies to you).
Residency
‘Residency’ refers to Australian income tax laws. It doesn’t necessarily have anything to do with residency under immigration law. You can be a resident for tax purposes, but not a permanent resident of Australia for immigration purposes.
You’ll probably be a resident for Australian tax purposes if you live in Australia or if you’ve been in Australia for more than 183 days in an income year, unless you can prove to the Australian Tax Office that your permanent or usual home is outside Australia and you don’t intend to live in Australia permanently.
The next issue is how the contribution caps come into play.
Contribution caps
The bottom line is that the Australian super system may restrict the amount of money coming into Australia from overseas super schemes. All such transfers are deemed to be contributions under the super and tax laws and therefore must remain within the cap or suffer a tax penalty.
A lot of people get confused on this point because some parts of the tax laws call these ‘transfers’, which are often taxed differently to contributions.
As overseas super benefits are classed as contributions, anyone aged at least 75 can’t move foreign super fund money into the Australian super system. Those aged at least 65, but under 75, must satisfy a minimum work test (at least 40 hours in up to 30 consecutive days).
And before a super fund can accept any overseas super benefit, they’ll need your Tax File Number.
When an overseas super benefit is deposited into an Australian super fund, a trustee will need to work out the Applicable Fund Earnings (AFE). The AFEs is basically the amount your overseas retirement savings have earned – through interest or other investments – since you became an Australian income tax resident.
If you have an overseas super benefit contributed into an Australian super fund less than six months after your foreign employment terminated, then your AFE will be zero. The AFE will also generally be zero if you’ve been an Australian income tax resident for less than six months at the time the money is paid into the Australian super system.
For all other cases, the AFE is subject to tax. You can elect to pay anywhere between zero and 100% of this tax yourself at your marginal tax rate.
If you haven’t remained a beneficiary of your overseas super or pension fund, then whatever tax you haven’t personally paid will be paid by your super fund. It will pay tax on this amount at 15%.
The ATO has created a special form for this election.
Non-concessional contributions
The portion of an overseas super benefit that represents contributions and earnings to be paid to you if you leave your foreign retirement scheme is reported to the ATO as a non-concessional contribution (officially these payments are called a ‘non-assessable foreign fund amount’). Your AFEs are included here, unless you’ve elected to have the super fund pay the tax on this amount.
As this portion of an overseas benefit is deemed to be a non-concessional contribution, it will count towards your non-concessional contribution limit. In some cases, a super fund will have to return the portion of an overseas super benefit if it causes you to exceed this limit.
Any amount from an overseas super fund that exceeds what legally has to be paid and is not a non-concessional contribution will be deemed to be a concessional contribution and is taxed accordingly. Officially, these amounts are called “assessable foreign fund amounts”.
Points to remember:
- Overseas super fund transfers can be tricky.
- Consider the expenses including tax in Australia and overseas before transferring money here.
- The amount of tax you pay will depend on how long you’ve been an Australian resident for income tax purposes.
- Some of your overseas benefits will count towards your contribution caps.
Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.
Also in the Switzer Super Report
- Charlie Aitken: Bank stocks, rate cuts and a Greek tragedy [2]
- Alia McMullen: The consequence of borrowing from your SMSF [3]
- JP Goldman: How Europe will affect us [4]