Transfers from Overseas Funds – More than just Forex ConsiderationsJemma Sanderson

Director, Cooper Partners

Agenda

1. Foreign Superannuation – Australian Taxation Treatment:

i. Lump-sum;

ii. Pension

2. Taxation in Foreign Jurisdictions (ex UK);

3. What if not a Foreign Superannuation Fund?

4. UK Changes:

i. What are they;

ii. How do they impact our clients;

iii. What can we do?

5. Leaving Australia.

Payments from Foreign Superannuation Funds

The Australian Tax Position

Lump Sum Within Six Months of Australian Residency

• Tax-free to individual in their personal name (ITAA 97 s 305-60);

• Could be paid directly into superannuation in Australia;

• Would be non-concessional contribution (unless they wanted to claim a deduction);

• Simple………..

• Can be difficult to achieve, unless the transferring fund is aware of all of the details almost before the individual comes to Australia;

• Also, transferring fund needs to be happy with their own position.

Outside Six Months of Australian Residency • Balance as at date of residency, plus contributions since residency – tax-free;

• Growth between date of residency and date of transfer (“applicable fund earnings”) – taxable at individual’s marginal tax rate (ITAA 97 s 305-70);

• Growth component can be taxed in superannuation fund at 15%;

• ITAA97 s 295-200;

• Strict conditions to be met to use the concession (ITAA 97 s 305-80):

o Must be no benefits remaining in the source foreign super fund;

o All of the lump-sum needs to be paid into Australian fund;

• Treatment in the superannuation fund:

o Growth component – neither concessional nor non-concessional contribution

o Non-growth component – non-concessional contribution (ITAA 97 s 292-90);

o Need to watch for “fund-capped contributions” and SISR 7.04(3);

• Both the growth and non-growth components are classified as “fund-capped”;

• Fund could have refund obligation per SISR 7.04(4);

o Concern – foreign jurisdiction treatment if refund is made;

o UK – although under new rules, if the amount to be refunded is less than 25% could still be tax-free in the UK.

• Payments from foreign pensions are fully assessable in individual’s name in Australia;

• No eligibility for a rebate with respect to the payments;

• Deductions available:

o UK: National Insurance Pension or from the Pension Service – 8% deduction;

o Dutch: old age, widow, orphans pension from SVB – 25% deduction;

o Other pensions: request for determination of UPP (NAT 16543);

The ATO will determine how much of your pension that you contributed to, and divide it by your life expectancy at the commencement of the pension;

Foreign Pension Payments

Payments from Foreign Superannuation FundsForeign Jurisdictions

(ex UK)

• Depends entirely on the jurisdiction;

• Treatment of pensions versus lump sums;

• For example, in the United States:

o Over age 59.5, taxed at marginal tax rate;

o Under age 59.5, taxed at marginal tax rate, plus 10%;

• Each fund in the foreign jurisdiction will determine their own withholding requirements;

• Individual’s need to determine their own taxation position in each jurisdiction;

Foreign Jurisdiction (ex UK)

• If individual has paid tax on their pension or lump sum in the foreign jurisdiction, do they get an offset in Australia?

• FITO applies where individual is subject to tax in foreign jurisdiction and Australia;

• Therefore, if lump-sum amount is transferred directly into superannuation for growth to be taxed at 15%, no FITO for individual;

• FITO also only available to the extent the benefit is taxed in Australia;

• Different element that is taxed in Australia versus foreign jurisdiction;

Foreign Tax Paid

• Homer (60) moved permanently to Australia ten years ago;

• At the time he became an Australian resident, his US pension fund was worth USD 120,000;

• At the time he transferred his US account into Australia it was worth USD 300,000;

• In the US, Homer would be taxed on the USD300,000 at his US marginal rate (approximately USD83,000);

• Using an exchange rate of 1AUD:0.7USD, the growth and non-growth components of Homer’s benefit would be as follows:

o Gross lump sum – USD 300,000, or AUD 428,571;

o Growth – USD 180,000, or AUD 257,143;

o Non-growth – USD 120,000, or AUD 171,429;

For Example - Homer

• Homer is unaware of the Australian taxation treatment of his lump-sum, and assumes that because it was taxed in the US, it won’t also be taxed in Australia;

• He subsequently uses the monies to pay off his home mortgage in Australia;

• The $257,143 will therefore be taxed in his Australian return;

• In the US, the entire USD 300,000 was subject to tax;

• In Australia, on the growth component, or USD 180,000 was subject to tax;

• Accordingly, Homer would only be eligible to receive 60% FITO with respect to the US tax paid;

o Australian tax payable on $257,143 is $95,947 (incl. ML & TBRL);

o US tax paid of USD 83,000;

o 60% is USD 49,800, or AUD 71,143;

o So, Homer’s Australian tax liability would be $24,804;

o Total tax payable by Homer on USD 300,000 of $143,375 (USD 83,000 plus AUD 24,804) – 33.45%

What If?• Homer immediately deposited the payment of his US lump-sum into his Australian

super fund with the intention that the fund would be taxed?

• The growth component would be subject to tax in the super fund at 15%;

• $257,143 at 15% - $38,571;

• As Homer is not personally taxed on the lump-sum, no FITO available;

• Total tax payable on lump-sum:

o US tax paid of USD 83,000 (AUD 118,571);

o Australian tax payable on $257,143 is $38,571 in super fund;

o Total tax payable by Homer on USD 300,000 of $157,142 – 36.67%.

Foreign Superannuation Funds

• For the above taxation treatment (taxation of growth component and the ability to elect that the growth component is included in fund’s assessable income), the transfer must be from a “foreign superannuation fund”;

• Not all foreign “pension” funds meet this definition;

• Baker’s case – Merrill Lynch IRA was not considered to satisfy this condition;

• SISA section 10 - “superannuation fund” is an indefinitely continuing fund that is a provident, benefit, superannuation or retirement fund;

• IRAs allow the payment of benefits that would not be permitted by the SISA (eg. the ability to lend monies to member to buy a home);

• Taxpayer wasn’t able to avail themselves of the concession;

Foreign Superannuation Fund

• So, how would the payment in Baker’s case actually be taxed?

• The IRA would be classified as a foreign trust;

o The corpus of the trust is excluded from taxation under 99B(2)(a) – only the growth portion in the trust from Australian residency would be assessable;

o However consideration needs to be given as to what comprises the corpus. For example, any income earned during the year which has not been paid out but accumulated instead over the years would likely be assessable under 99B (generally the case with a pension fund);

o Taxpayer likely to be taxed on difference between value received and the level of contributions paid in to the foreign pension over time;

o Not just considering the period since becoming an Australian resident;

Taxation if not Foreign Superannuation Fund?

• Need to exercise caution – not all funds are created equal, and not all transactions are eligible for the concessions;

• Information requirements to go back so far?

UK Pensions

• ROPS changes;

o Pension Age Test;

o Fund can’t make payments before age 55, in circumstances other than ill-health;

o Although Australian funds generally satisfy this condition given our preservation age, as the “financial hardship” and “compassionate grounds” conditions of release allow for release prior to 55, all funds were removed;

ROPS Changes in April 2015

• All QROPS were removed from the list in April 2015;

• Amendments to trust deeds that limited the Trustee’s ability to pay benefits unless they were in accordance with the conditions under the UK ROPS rules weren’t sufficient for reinstatement;

• Changes that ARE SUFFICIENT FOR REINSTATEMENT:

o Limiting the members of the fund to those who are aged 55 and over;

o Therefore, anyone who is under 55 can’t be a member;

o Already seeing a number of Australian SMSFs on the register.

Impact

• Where the members are already 55 or over, then making the appropriate amendments and applying for the status could be worthwhile;

• Need to then attend to rollover from UK fund;

• What if one members is close, but the other isn’t? Roll the younger member out?

• Reporting requirements – at least 10 years back to the UK;

• NEED TO WATCH:

o Taxable property provisions under UK Finance Act;

o SMSF can’t invest in residential property with UK rollover funds (even if it satisfies SIS provisions);

o If the fund does, up to 55% liability in the UK;

Practically…..

• Once age 55, UK pension members now have the ability to take their benefits in the form of:

o An annuity;

o A flexible access drawdown fund;

o An Uncrystallised Funds Pension Lump Sum (UFPLS);

• A UFPLS is taxed as follows in the UK:

o 25% is tax-free;

o Balance is taxed like a pension in the UK;

Pension Changes in April 2015

Impact

• More options available for taking benefits upon attaining age 55;

• Instead of applying for ROPS status at age 55 to rollover benefits, consider using the UFPLS provisions;

o Tax out a lump-sum;

o 25% is tax-free, 75% is taxed as a pension in the UK;

o Make a contribution of the amount into an Australian superannuation fund;

o Wouldn’t prohibit the investment decisions in the SMSF re residential property;

• WHAT ABOUT THE 75% TAX IN THE UK?

• In the UK, this will be taxed like pension income;

• At the individual’s marginal rate in the UK;

• UNLESS, there is a DTA that contains provisions regarding pensions;

• Australia and the UK have a DTA;

• The taxation right for pension payments rests with………

o THE RESIDENT COUNTRY;

o Being AUSTRALIA.

Tax on 75%

• Treatment in Australia of the payment?

• Pension, or lump-sum payment?

o The 75% is taxed as pension payments in the UK;

o However, is classified as a UFPLS;

• So, from an Australian perspective, is it a lump-sum, or a pension?

o ITAA 307-65 defines “superannuation lump-sum”;

o ITAA 307-70 defines “superannuation income stream benefit”.

• Most indicators point to Lump-Sum, which means that ITAA subdivision 305-B may apply;

• Growth and non-growth components;

• Growth taxed at marginal rate, or super fund tax rate if election made;

• For the avoidance of all doubt, Private Binding Ruling;

• Cake, and eat it too:

o Treated as a pension and therefore taxed in Australia under DTA;

o Treated as a lump-sum and therefore only growth component taxed in Australia.

Leaving Australia

Numerous Misconceptions

• Departing Australia = eligible to receive superannuation;

o Only if you qualify as having the relevant visa (SISR 6.20A);

o Australians who are departing permanently overseas still can’t access their super accumulated in Australia until they meet a condition of release;

o Departing Australia = eligible to receive superannuation;

• Over Age 60, therefore any payment is tax-free (even if DASP):

o ITAA97 s 301-170 and s 301-175;

o Only if become PR will you receive the tax-free treatment.

• When eligible to receive a Departing Australia Superannuation Payment (DASP), the tax withheld is as follows:

o Tax-free Component: tax-free

o Taxed Taxable Component: 35%

o Untaxed Taxable Component: 45%

DASP Taxation

Thank youQuestions?

Jemma Sanderson, Director

Cooper Partners Financial Services Pty Ltd

Email: jsanderson@cooperpartners.com.au

Phone: 08 6311 6900

Disclaimer

© Jemma Sanderson, Cooper Partners Financial Services Pty Ltd 2016

This presentation is for general information only. Every effort has been made to ensure that it is

accurate, however it is not intended to be a complete description of the matters described. The

presentation has been prepared without taking into account any personal objectives, financial situation

or needs. It does not contain and is not to be taken as containing any securities advice or securities

recommendation.

Furthermore, it is not intended that it be relied on by recipients for the purpose of making investment

decisions and is not a replacement of the requirement for individual research or professional tax

advice. This presentation was accompanied by an oral presentation, and is not a complete record of

the discussion held. No part of this presentation should be used elsewhere without prior consent from

the author.

Disclaimer

© SMSF Association 2016

This presentation is for general information only. The material and opinions in this presentation are those of the author and not those of the SMSF Association. Every effort has been made to ensure that it is accurate, however it is not intended to be a complete description of the matters described. The presentation has been prepared without taking into account any personal objectives, financial situation or needs. It does not contain and is not to be taken as containing any securities advice or securities recommendation.

Furthermore, it is not intended that it be relied on by recipients for the purpose of making investment decisions and is not a replacement of the requirement for individual research or professional tax advice. This presentation was accompanied by an oral presentation, and is not a complete record of the discussion held. No part of this presentation should be used elsewhere without prior consent from the author.