As we discovered last week, there’s a lot to think about when bringing retirement savings you earned abroad back home to Australia. So this week, I’ve got some examples for you to compare the financial outcomes of three different options you have when moving your money.
Case Study
We’ll begin by looking at a case study taken from the Australian Tax Office (ATO) website. The terms used here are discussed in my previous column [1].
Marianne is 62 and used to live and work in the United States. She became an Australian resident for tax purposes three years ago and she transferred $420,000 from her foreign retirement savings into her Australian super fund.
This transfer counts towards her non-concessional contribution limit, which is currently capped at $450,000. Marianne hasn’t made any other non-concessional contributions that would be counted against this limit.
Of the $420,000 transferred, $400,000 of the benefit was vested in her at the date of transfer, of which $50,000 was deemed to be Applicable Fund Earnings [1] (AFE). The remaining $20,000 was added to her account by her foreign employer at the time of transfer to Australia.
Marianne has three different options:
- She includes all of her AFEs in her personal tax return.
- She includes none of her AFEs in her personal tax return.
- She elects to include part of her AFEs in her personal tax return (eg, $30,000).
[2]Different amounts of tax will be payable depending on whether you include the AFEs in your super fund return or on your personal tax return. When determining where to include your AFEs, think about how the inclusion will affect existing benefits.
For you own income tax affairs, you might need to consider the Family Tax Benefit, Child Care Benefit, Government Co-Contribution and other similar tax offsets because including any AFEs on your return will have an impact on these benefits.
Excess contributions tax applying to your super contributions might also be an important consideration. This means you need to run the numbers on both strategies to work out which one is best for you.
But what happens if you personally receive a benefit from an overseas super fund or you direct the fund to pay somewhere other than the Australian super system (for example, against their home mortgage)? In this case, the Applicable Fund Earnings and Assessable Foreign Fund Amounts must be included in your personal tax return and tax would be paid at your marginal rate.
Transfers from UK Pension Schemes
Except for money used to fund the British State pension, most money in UK pension schemes can be relatively easily transferred to Australian super funds.
The UK Government has a transfer regime, which means pensions can be transferred as authorised tax-free payments out of the UK (up to a Lifetime Allowance of £1.5 million, which applies from 6 April 2011) as long as the retirement fund it is being put into is registered as a Qualifying Registered Overseas Pension Scheme (QROP Scheme). Amounts above the Lifetime Allowance are taxed at 25%. A 40% penalty tax will apply for transfers to a non-QROP Scheme.
The applications to become a QROP Scheme are relatively simple and are often approved in less than 40 working days of application being submitted.
If a benefit is transferred to a non-QROP scheme, then you’ll be liable for a penalty if it’s made while you’re a UK resident, or if you were a resident there in the last five years.
This penalty tax might apply if unauthorised payments are taken from a UK retirement benefit after it has been transferred to Australia. Some have argued that any excess contributions tax might not be an authorised payment. Equally benefit splitting due to divorce might be an unauthorised payment.
An Australian QROPS Scheme must report all payments out of their fund for a UK resident or someone who had been a UK resident within the last five years. Details of UK residency must also be provided.
Transfers to and from New Zealand
In July 2009 the Australian and New Zealand governments signed a memorandum of understanding to establish a trans-Tasman retirement savings portability scheme. The Australian Government has not legislated this announcement.
Things to consider before transferring retirement savings to Australia:
- The rules of the source country in relation to foreign super transfers to an Australian super fund including exit taxes, early release penalties (both tax and fund administration)
- The exchange rates as the money arrives in Australia
- If some or all of the retirement benefits funds are left in the Foreign Super Fund what would be the tax treatment on that fund in Australia?
- The Australian taxation treatment of the funds
- The sum of money that would be transferred
- The investor’s age
- The investor’s capacity to meet the ongoing fees for the preferred structure
- The investor’s capacity to meet all tax bills, especially initial tax obligations
- The likelihood of the investor being able to meet the ongoing compliance obligations in both the source country and Australia if the overseas super is transferred
- The entitlements foregone in the source fund.
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
- Paul Rickard: Advice for the yield hungry [3]
- Peter Switzer: Global easing cycle well underway [4]
- Rudi Filapek-Vandyck: The broker wrap: brokers’ downgrading frenzy [5]