The recent disappearing trick by Her Majesty’s Revenue & Customs (HMR&C) Office in the United Kingdom to chop the list of Qualifying Recognised Overseas Pension Schemes (QROPS) notifications for Australian funds, except for one lonely government superannuation fund as at early July, has resulted in significant pressure being put on the Australian Treasury and relevant politicians to do something about it.
If you think Australia has been singled out by the colonial masters, then look again; all countries have been in the firing line. Even approved funds resident in Switzerland have been dropped from 100 to just one scheme.
The main reason for the change is that amendments to the law in the UK now permit members entitled to a pension from the fund to take the whole amount as a lump sum. Previously, there was limited access where a person could receive up to 25 per cent of pension entitlements as lump sums and the remainder as a pension. The change has placed a ban on anyone withdrawing amounts under the age of 55, with a limited exception of the payment of ill-health benefits.
Up until 5 April, transferring the value of a UK pension benefit was possible where the Australian fund was able to establish that the amount transferred would hold the benefit in the fund on similar terms. Any payments made from the respective transfer was required to be reported to the HMR&C within the QROPS reporting period, depending on whether the person was a UK tax resident at the time of the payment or had been a UK tax resident within in any of the preceding five UK tax years.
Once the transfer had been made to the Australian QROPS, it could be taxable in the hands of the member or in the fund in terms of section 295-200 if an election was made to that effect under section 305-80 and subdivision 305-B of the Income Tax Assessment Act 1997. The amount of tax payable depends on how long the member has been an Australian resident prior to the transfer and the amount accrued on the benefit since arrival in Australia.
The penalty for rolling over to any fund that does not qualify as a QROPS is horrendous, with tax of 55 per cent of the amount rolled over from a qualifying fund in the UK to a non-QROPS fund anywhere in the world. The same applies to transfers and rollovers from an Australian QROPS to another fund in Australia that is not on the HMR&C notifications list.
There is some good news in the gloom, with a small window between 6 April and 17 April as the HMR&C is willing to accept that rollovers to a fund that was accepted as a QROPS up until 5 April and the rollover was accepted up to 17 April would not be hit with the penalty rate. That date is the time funds were required to respond to confirm whether they continued to meet the requirements as a QROPS.
In addition, those who had transferred their benefit to the Australian superannuation fund prior to 6 April or during the short transition period will not be subject to the 55 per cent tax, even though the fund will not satisfy the requirements of a QROPS from that time. For example, a benefit that was transferred from a UK fund in 2011 would not be subject to the penalty tax merely because the fund did not meet the new rules as a QROPS from 6 April 2015 or within the transitional window. Anyone who has requested a transfer subsequent to 17 April may need to see whether they are able to cancel the request to transfer if there is time to do so.
There have been attempts by a number of Australian funds that previously met the QROPS requirements to amend the governing rules. These amendments purport to allow the fund to meet the UK requirements by ensuring benefits for those under 55 can only be made in circumstances identical to the UK rules. In other cases it has been proposed that an SMSF be established with the governing rules worded for the sole purpose of accepting only the benefit transferred from the UK.
In relation to some of the amendments, there are a few questions that arise under the operation of the Australian income tax law. Under the Superannuation Industry (Supervision) Act there is only one compulsory condition of release, which is the member’s death. However, the operation of the income tax law and other laws, such as the Bankruptcy Act, also requires a trustee to pay amounts to a taxpayer, the commissioner or other authorised parties prior to the member reaching the age of 55. Whether these payments would be in breach of the UK conditions of the pension age test needs to be clarified.
Funds that have their governing rules couched in an appropriate manner may still be stymied by the fact the transfer or rollover to the Australian fund may be subject to a number of factors, which they may not be able to control. The first is having the HMR&C include the name of the fund on the list of QROPS notifications and the second is the willingness of the UK fund to authorise the transfer to the Australian fund and then whether it will be released tax-free.
In any case, anyone who is even thinking about transferring amounts to Australia needs to seek advice from someone specialising in this area or contact the fund in the UK to see whether a transfer is possible on the same basis as the pre-6 April rules.
We can only wait and see whether this impasse will be broken by either the UK authorities recognising Australian funds, which occurred when the QROPS rules commenced many years ago, or the Australian superannuation legislation is amended to accommodate the change in one way or another from 6 April 2015.