The rules dictating how United Kingdom pensions can be transferred into the Australian superannuation system are not as easy as they once were. Despite this development, these transfers are still possible and can still be very beneficial, writes Jemma Sanderson.
As many would have aimed to achieve, getting UK pension transfers accomplished prior to 30 June 2017 was of value, given the change in the non-concessional contribution provisions from 1 July 2017. Although the fund-capped provisions were in place, there were provisions available so that they would not apply, making such transfers prior to 30 June 2017 a triumph for many Australians who had benefits in the UK.
Now we are in the new Fair and Sustainable Superannuation regime, such transfers require more finesse, however, they are still more than achievable. We are seeing more expatriates consider this strategy, particularly given many defined benefit interests are subject to very low interest rates, and therefore the transfer value of their benefits is higher currently than at times in the past.
Given the revised non-concessional cap (NCC), and the fact some individuals may no longer be able to make any NCCs as they have more than $1.6 million in super, the finesse to be applied can assist in bringing benefits over from the UK and there being 15 per cent tax payable on the growth component only, with no further tax, either in the UK or Australia, being imposed.
Under the current rules, where a member has benefits in a UK pension account, in order to transfer that benefit to an Australian superannuation fund, several things must be in place:
- The individual must be over the age of 55.
- All members of the receiving fund have to be 55 years of age or older.
- If the money is to be rolled over with no UK tax implications (within the lifetime allowance), the receiving fund needs to be a Registered Overseas Pension Scheme (ROPS).
- Any rollover to a fund in Australia needs to take into consideration:
a. the taxation implications in Australia,
b. the contribution limits in Australia,
c. the taxation implications in the UK (this is dependent on b. above, and whether any amount rolled over is refunded back to the member in Australia).
5. If the money is to be taken as a lump sum (from a UK perspective), the Australian and UK taxation implications need to be considered.
Rollover to an Australian ROPS
There are several benefits of rolling over to an Australian fund:
- The growth, referred to as applicable fund earnings or AFE, that the pension assets have experienced since the member became an Australian resident is taxed at 15 per cent rather than the individual’s marginal tax rate, which could be up to 47 per cent.
- This AFE component doesn’t count towards the concessional or non-concessional contribution limit.
- By rolling over to a ROPS, no UK tax is withheld provided the individual is within their lifetime allowance.
However, the balance in the UK fund that the individual had at the time they became an Australian resident, plus any contributions since becoming a resident, is assessed towards the NCC, and therefore the value of this amount needs to be taken into consideration. If it is greater than the cap, which could be anywhere between zero and $300,000 in 2017/2018 depending on the member’s circumstances, then the excess may need to be refunded, or excess non-concessional contributions tax paid.
Despite the above considerations, such transfers are more than possible, with some finesse required in order for the above UK and Australian implications to be addressed. Several of the options available to individuals, depending on their particular circumstances, where they are within their lifetime allowance are as follows:
- A full transfer to the Australian ROPS:
a. AFE component taxed at 15 per cent,
b. excess non-concessional contribution is refunded to the individual, plus associated earnings,
reporting to Her Majesty’s Revenue and Customs (HMRC) of the refund to the individual with appropriate disclosure to ensure no further tax imposed by the UK,
c. no further tax being imposed by the UK will depend upon the individual’s circumstances and residency history.
2. A multiple-step process of transferring to an Australian ROPS:
a. partial transfer from UK Fund 1 to UK Fund 2 of the AFE and available NCC amount (or alternatively keep AFE and NCC amount in UK Fund 1 and transfer the balance to new UK Fund 2),
b. transfer of UK Fund 2 (the AFE and NCC amount) to Australian ROPS,
c. AFE component taxed at 15 per cent,
subsequent transfer of remaining UK pension amount to Australia after three-year bring forward is served,
d. could be multiple transfers depending on level of benefits in the UK and the non-concessional cap of the individual.
3. A full transfer to an individual in Australia from the UK:
a. AFE component taxed at marginal tax rate,
b. double taxation agreement between the UK and Australia should result in no further tax payable in the UK.
4. A combination of the above three strategies:
a. partial transfer from UK Fund 1 to UK Fund 2 of the AFE and available NCC amount,
transfer of UK Fund 2 to Australian ROPS,
b. subsequent transfer of UK Fund 1 direct to the individual taxpayer,
c. AFE component taxed at 15 per cent,
d. no UK tax due to the double taxation agreement,
e. no further Australian tax.
5. The above strategies require additional considerations, including:
a. The cost of implementation and the involvement of UK financial and taxation advisers in the transactions, as well as the relevant liaison required with HMRC.
b. The timing of any transactions, particularly with respect to setting up new funds in the UK, setting up a new fund in Australia and obtaining ROPS status.
c. One option may yield a higher net amount within Australia, however, the timing and additional requirements to be met could be prohibitive.
Important overall considerations
Further, in making such a decision regarding the transfer of any funds to Australia, the following also need to be reviewed again, depending on the individual’s circumstances:The upfront tax implications – although the position where the AFE component is only taxed at 15 per cent is generous, this is still an upfront tax impost, which means less funds net of tax to invest.
Applicable fund earnings confirmation – the calculation of the value of the benefit when they became an Australian resident is very important, particularly where an individual has a defined benefit interest. An actuary would generally be engaged to provide a valuation of the benefit as at the date of residency, however, on occasion it is prudent to obtain a private ruling from the ATO to confirm that calculation, especially if some of the records are not complete or there are substantial sums involved.
The foreign exchange risk – where the benefits are physically brought into Australia and converted to Australian dollars, then this may not be at the best rate. Please note, where the ROPS is an SMSF, the funds don’t have to be converted to Australian dollars, they can remain in British pounds and invested in British pound assets, albeit held within an Australian superannuation account.
The longevity risk – where it is a defined benefit, by taking a capital sum the member is forgoing a guaranteed pension payable for their life (and usually 50 per cent to 67 per cent then payable to their spouse for their life). This needs to be weighed against the fact that where both the member and their spouse pass away early, there is generally no capital sum payable to their estate or other beneficiaries.
Ongoing tax implications – where a member decides to retain their benefits in the UK and commence a pension from those benefits, that pension will be fully taxable in Australia at their marginal tax rate with the potential for a yearly deductible amount.
Ongoing tax implications – where a member transfers benefits to Australia, if they end up with total superannuation of greater than the transfer balance cap, some of the pension account transferred to Australia may not be tax exempt, and potentially subject to 15 per cent tax on earnings within superannuation.
Lifetime allowance (LTA) considerations – there is an LTA imposed on pension members in the UK. The standard LTA in the 2017/2018 UK tax year is £1 million. Where the LTA is exceeded (an LTA event would be transferring benefits out of the UK to Australia), then any payment of benefits above that limit is subject to a 25 per cent charge. This needs to be considered in light of bringing funds to Australia under the LTA sooner rather than later versus benefits remaining in the UK and the potential for further earnings to result in an excess to the LTA.
Some individual’s may have an enhanced or protected LTA, which is greater than the standard £1 million. This also needs to be taken into consideration. Further, in some circumstances an LTA charge could be claimed back in Australia as a foreign income tax offset, however, that would be dependent on the circumstances at the time and the taxation imposed in Australia on any benefit.
The fund is unable to invest in residential property as the taxable property provisions in the UK would result in the value of the residential property being subject to 55 per cent tax.
Ongoing reporting obligations – once benefits are transferred to an Australian ROPS, the ROPS has ongoing reporting obligations to HMRC for a period of 10 years from the transfer of funds. Items that would need to be reported include:
- any payments to the member, including the refund of any excess non-concessional contribution amount,
- the commencement of a pension for the member,
- where the ROPS may no longer satisfy the ROPS requirements,
- where the ROPS invests in taxable property.
Some of the above may be subject to additional tax in the UK, depending on the circumstances.
Estate planning – there are always estate planning considerations, particularly with respect to the tax implications, such as control, who the beneficiaries are, and whether they are in Australia or not.
Accordingly, there are some substantial opportunities for benefits transferred into Australia from the UK, but many items that need to be considered. For anyone looking to transfer funds from the UK, or indeed any other foreign jurisdiction, into Australia and the Australian superannuation system, it is important to consider the options and the pros and cons of each option and which may be most appropriate. There are many factors to consider with such benefits, however, one thing is clear: getting specialist advice both in Australia and in the foreign jurisdiction is vital to ensure any transfer is undertaken correctly and with minimal adverse implications.