Overview
With an increasing number of overseas countries opening up and the trends moving towards greater global mobility, it is becoming more common for advisers to be asked ‘Can I transfer my overseas super/pension savings to Australia?’. The answer to this question is complex and unless carefully managed can result in unexpected taxes and penalties.
Is it a ‘foreign superannuation fund’?
If the foreign fund does not satisfy the definition of a FSF, the amount cannot be transferred to an Australian superannuation fund in accordance with div 305 of the ITAA 1997. If the overseas fund involves a trust structure, then the amount that exceeds the member’s own contributions to the overseas fund is likely to be subject to the trust provisions in division 6 of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936).
The first issue to be considered is whether the overseas fund will qualify as a FSF. The definition of FSF imports a requirement that the fund be a ‘superannuation fund’, and therefore, a ‘provident, benefit, superannuation or retirement fund’ (see s 10(1) of the Superannuation Industry (Supervision) Act 1993 (Cth) (SISA)). There is case law and ATO guidance on when an overseas entity will be a FSF and this requires a detailed analysis of the relevant terms and conditions that apply to the overseas entity or fund.
Assuming the overseas fund does qualify as a FSF, a transfer of money from a FSF to an Australian superannuation fund (including an Australian SMSF) will broadly be subject to Australian income tax on any growth in the FSF that has accrued in that foreign fund in respect of a member since the date of the member’s Australian tax residency commenced, unless the transfer occurs within six months of residency.
The legislation is complex and there is little useful ATO guidance on how the provisions in div 305 of the ITAA 1997 operate in a number of circumstances. Accordingly, we are often engaged to provide advice and, where needed, prepare private ruling applications to the ATO.
Where the overseas fund is not a FSF
If the foreign fund does not satisfy the definition of a FSF, the amount cannot be transferred to an Australian superannuation fund in accordance with div 305 of the ITAA 1997. If the overseas fund involves a trust structure, then the amount that exceeds the member’s own contributions to the overseas fund is likely to be subject to the trust provisions in division 6 of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936).
In particular, s 99B of the ITAA 1936 can assess an Australian resident on any earnings or capital growth in respect of an overseas fund that have not previously been subject to tax in Australia. This can result in significant tax liability assessed at the marginal tax rates applicable to an Australian resident individual taxpayer plus the usual levies such as Medicare Levy which is currently 2%. However, s 99B does not tax the amounts that constitute the ‘corpus’ of the trust. The analysis of what amounts form the corpus of a trust can be complex and will generally include member or employee contributions made to a foreign fund. However, it is important to note that not all contributions to an overseas fund add to corpus.
It is also important to determine what type of structure or entity the overseas fund is as trusts are not recognised in certain overseas jurisdictions. Moreover, some overseas pensions, retirement savings or similar plans may be provided by an insurance company or similar overseas entity. It is important that the governing rules and detailed terms and conditions of the overseas fund are reviewed carefully to determine the type of entity to ensure the correct tax treatment can be applied.
Where the foreign fund does not meet the definition of a FSF as required under div 305 of the ITAA 1997, care is needed as a transfer from one foreign fund to another on behalf of an Australian resident to give rise to assessable income even though the Australian resident does not receive any amount or payment here in Australia. That is, the tax legislation assesses amounts that are paid or applied on behalf of a taxpayer and these amounts are deemed to be received even though they are not actually received by the taxpayer here in Australia. In particular, s 99B provides that:
… an amount paid or applied for the benefit of, a beneficiary of the trust estate who was a resident … the assessable income of the beneficiary … shall … include that amount.
Section 99B applies to amounts transferred or paid to an Australian resident ‘during’ a financial year from a trust that has not previously been subject to tax in Australia. Many overlook the fact that s 99B applies to amounts paid or applied at any time during a financial year which may catch amounts that are paid to a person before they actually become an Australian resident. For example, John may become a resident on 1 May 2022 but had an amount paid in January 2022 from a foreign fund where his adviser thought this amount was outside the Australian tax net as John was not an Australian resident when the amount was actually paid.
Care should therefore be taken with the timing of payments or transfers from foreign funds and trusts and the time of when a person becomes an Australian resident in view of the breadth of the Australian tax rules.
Capital gains tax (CGT) implications
While a capital gain arising on the payment from a ‘superannuation fund’ is typically disregarded in Australia, amounts paid from an overseas fund may not be entitled to this exemption. Accordingly, the CGT provisions and their interaction with s 99B also need to be considered. Again, the commencement of Australian residency is important for CGT purposes as an individual’s overseas assets are generally brought into the Australian tax net at their market value when that person becomes an Australian resident (apart from assets that constitute Australian real property as defined in div 855 of the ITAA 1997 which are generally still subject to tax in Australia).
On the other hand, where a person ceases to be an Australian resident this can trigger a CGT event on their assets unless an election is made, again apart from Australian real property under div 855 of the ITAA 1997.
The CGT rules should be analysed prior to becoming a resident as the CGT provisions can apply in addition to the usual income tax provisions. However, a capital gain may be reduced to overcome double taxation in certain circumstances.
Private ruling
Due to the considerable uncertainty surrounding this area of tax law, many seek private rulings from the ATO on the above issues to minimise risk. A private binding ruling may be an appropriate course of action to obtain some level of comfort. However, we would generally recommend that expert advice be obtained to determine what laws and tax applies. We can also provide input on whether a private ruling is appropriate and, if where one is needed, prepare a ruling request.
Conclusions
The above highlights some of the complexity surrounding the payment or transfer of money from foreign super/pension plans, retirement funds and similar structures. Incorrect advice or handling can result in significant tax liabilities. Expert advice should therefore be sought before attempting to pay or transfer any money to Australia and well before a person overseas becomes an Australian resident for tax purposes.
Related articles:
- Latest on UK pension transfers to SMSFs
- QROPS UK changes impact SMSFs deeds
- SMSFs, super & international issues
- Ensure an SMSF meets the residency tests
- International issues facing SMSFs today
- Transferring foreign superannuation fund amounts to an Australian resident
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This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional. The above does not constitute financial product advice. Financial product advice can only be obtained from a licenced financial adviser under the Corporations Act 2000 (Cth).
Note: DBA Lawyers presents monthly online SMSF training. For more details or to register, visit www.dbanetwork.com.au or call 03 9092 9400.
For more information regarding how DBA Lawyers can assist in your SMSF practice, visit www.dbalawyers.com.au.
By Shaun Backhaus ([email protected]), Senior Associate and Daniel Butler ([email protected]), Director, DBA Lawyers
DBA LAWYERS
26 September 2022
