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When will an overseas pension fund not be considered a ‘foreign superannuation fund’ under Australian law?
The two big issues are generally whether the overseas fund is subject to ‘a condition of release’ - to wait until pension age (like in our super regime) and whether the offshore funds are held on ‘trust’ for the investor.
We see clients who have thought that ‘all’ offshore pension fund arrangements will qualify under Australian law, leading to them not making the right choices before they seek advice.
Examples like the United States ‘individual retirement accounts’ (IRAs) or employer-sponsored ‘401k’ plans are prime examples, where these fail the test for Australian law because you can take the money out early, regardless of age restrictions.
The key options generally available to an Australian who has funds in an overseas pension fund that will not be considered a ‘foreign superannuation fund’ under Australian law
Clients should consider whether the foreign fund rules allow them to leave the accumulated money in the foreign fund or permit them to take a pension or annuity from the foreign fund.
These decisions can save tax on the amounts or defer the time at which tax in Australia may become payable.
If the client decides they want to transfer the money into Australia, then they should consider doing so BEFORE they become an Australian resident – to avoid adverse tax consequences.
If the client decides they want to transfer the money into Australia AFTER they become a tax resident of Australia, then they will need to comply with Australian superannuation rules and potentially pay Australian tax on some or all of their transferred funds.
What are the consequences of making the wrong choice?
The biggest downsides revolve around getting the timing wrong and not choosing the right options for what the client may want to do with the funds, with an additional issue about not having the right information about the composition of the funds.
The wrong combination of these issues could lead to the whole of the amount received being treated as being assessable income of the client in Australia, if they receive it as a resident of Australia and don’t have the records to dissect the character of their receipt.
Other big issues under Australian superannuation rules
Non-concessional contribution caps are a big issue, which many clients don’t properly consider when making these decisions.
Cap planning is a familiar issue for super advisors and financial planners, but this isn’t something that inbound clients may be familiar with or that offshore advisors may consider at all (we have seen some of both).
Depending on their [later] stages in life, we have also had inbound clients who have not met the ‘work test’ at the time when they want to start making contributions to an Australian superannuation fund – so that can be an issue, too.
What is most essential for advisors and clients to appreciate on the topic of funds not regarded as ‘foreign superannuation funds’ under Australian law?
Timing is vital. Clients should be thinking about whether they get their payment before they become Australian residents, whether they want to invest it into an Australian superannuation fund (and thus need to manage non-concessional contribution caps and other restrictions), and whether they may be taxable on all/part of the amount if they receive it after they become an Australian resident.
The other big issue is the foreign country tax rules, as sometimes the withdrawal will be subject to tax as a withdrawal from the pension fund and sometimes the type of income accumulated (like interest or dividends) may be subject to withholding tax when paid to a non-resident of that country. Of course, Australia may allow a ‘foreign tax offset’ on direct income taxes or withholding taxes, but maybe not on a compulsory exaction that is NOT a tax on income (like a withdrawal charge).
However, there is a third issue around the client needing to know the composition of the fund amount – as to how much is capital (or corpus) and how much accumulated income on the invested funds. This is relevant if the amount to be received may be [partly] taxable in Australia as a distribution of income not previously taxed in Australia paid to an Australian resident from a trust – under ‘Section 99B’ of the ITAA 1936. The capital part (corpus) is NOT taxable, but you need to be able to dissect the total to demonstrate how much is corpus and how much untaxed income, ‘if the Tax Man comes knocking’.
How can Tax Controversy Partners help you?
We can advise you on the taxation and superannuation consequences of your current situation and on the choices you may need to consider to manage these risks – preferably before you commit to actions like changing your residency.
We have seen a number of clients whose affairs have been mismanaged, either because they did not seek advice before doing things or sought advice from an advisor who did not understand the relevant issues well enough to help them manage those issues.
Given the considerable complexity in these issues, getting the right advice as early as possible can be essential to avoid big down-sides for you.
At Tax Controversy Partners, our experienced lawyers can assist you in understanding your options and explain the taxation and superannuation regulatory implications of your potential choices. Please contact us using our online contact form, via email at admin@taxcontroverypartners.com.au or by phone at 02 8513 3813.