firsttech20pension%20guide.pdfaustralia abn 48 123 123 124 (‘the bank’). you and your clients...

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FirstTechUK Pensions

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Important information about this document

This document is an introduction to the UK pension system and the Australian treatment of transfers of UK pensions into Australia.

UK pension system

Most of the UK section of this module is sourced directly from the Registered Pensions Scheme Manual published online by Her Majesty’s Revenue & Customs (HMRC) as at September 2009.

Pension Transfers Direct

Technical queries from advisers regarding the UK pension system may be forwarded to Pension Transfers Direct at:

(08) 9485 1064 or [email protected] or [email protected]

Pension Transfers Direct is not a related party of Colonial First State Investments Limited ABN 98 002 348 352 nor a subsidiary of the Commonwealth Bank of Australia ABN 48 123 123 124 (‘the Bank’). You and your clients should consider seeking expert taxation advice in relation to UK pension transfers; however, this is not a recommendation to seek, or an endorsement of, the advice provided by Pension Transfers Direct. Colonial First State or the Bank are not responsible for and do not accept any responsibility for any loss or damage from reliance on any statement, information or advice provided by Pension Transfers Direct.

Australian superannuation system

The Australian taxation of UK pension transfers was rewritten into the Income Tax Assessment Act 1997 (ITAA 1997) as part of the simplification of super, effective 1 July 2007.

Technical queries from advisers regarding the Australian superannuation system may be forwarded to the FirstTech team:

[email protected] or phone: 13 18 36

Adviser use only | 3

ContentsUK system – overview 6

State Pension 6

Basic State Pension 6

Qualifying years 6

Australian residents receiving UK basic State Pension 6

State Pension age 6

UK State Pension reform 6

Extra State Pension (or State Pension Deferral) 7

Additional State Pension 7

Contracting out 7

Guaranteed Minimum Pension 7

Protected rights 7

Private pensions 8

Occupational schemes 8

Salary-related schemes (defined benefit) 8

Money-purchase schemes (accumulation/defined contribution) 8

Personal pension schemes 8

Stakeholder pension schemes 8

Select UK pension rules 8

Lifetime Allowance 8

Enhanced and primary protected Lifetime Allowance 9

What is counted towards the LTA? 9

Benefit Crystallisation Event (BCE) 9

Lifetime Allowance charge 9

Transfers in excess of LTA to Australian QROPS – 25% LTA charge 9

Authorised member payments 10

Contributions 10

Tax deductions for contributions 10

Members who move overseas 10

Pension age 10

Normal minimum pension age 10

Accessing benefits 10

Retirement not required 10

Authorised lump sums 10

Pension commencement lump sum – 25% lump sum under age 75 10


Pension income 11

Money – purchase scheme options 11

Unsecured pensions (up to age 75 only) 11

Alternatively secured pensions (from age 75 only) 11

Secured pensions 11

Defined benefit schemes 11

Death benefits 11

Death before pension age 11

Death after pension age 12

Which benefits may be transferred to an Australian QROPS? 12

Exceptions 12

Qualifying recognised overseas pension scheme (QROPS) 12

What is a QROPS? 12

QROPS mandatory reporting requirements 13

How do you know whether an Australian superannuation fund is a QROPS? 13

Payments from a QROPS 13

What happens if the fund is not a QROPS? 14

UK taxation of unauthorised member payments 14

Unauthorised payments charge – 40% 14

Unauthorised payments surcharge – 15% 14

Scheme sanction charge – up to 40% 14

How will HMRC collect the tax? 14

Australian treatment of UK pension transfers 15

Australian tax year 15

Contribution rules 15

Work test 15

TFNs 15

Fund capped limit 15

Australian taxation of transfers of UK pensions 15

Contribution caps 16

Treatment of transfers completed within six months of becoming an Australian tax resident 16

Non-concessional contribution caps 16

Treatment of transfers completed after six months of Australian residency 17

Non-concessional contribution part of transfer 17

Assessable part of transfer 17


Applicable fund earnings 18

Reason for the tax 18

Calculating applicable fund earnings 18

Section 305-80 election – ATO NAT 11724 20

Election form 20

Anomaly 20

Australian residency 20

Leaving the pension in the UK 20

Foreign Investment Fund Rules 20

Small investor exemption 20

Exemption for interest in an employer sponsored superannuation fund 20

Foreign tax credits 21

Further information sources 22

Australian Taxation Office resources 22

Guidance 22

Forms 22

UK Pensions ATO IDs 22

Glossary 23


Warning! UK pensions are complex areas of advice due to laws applying to both the UK and Australia. You should ensure that you are authorised under the Financial Services Guide (FSG) to provide advice about UK pension transfers and that your client receives their own tax advice. This booklet is only a summary and general guide to the laws applying to UK transfers.

Colonial First State FirstWrap Super and Pension Fund (FirstWrap) is a qualifying recognised overseas pension scheme (QROPS). This means that FirstWrap has been approved and registered with Her Majesty’s Revenue and Customs service (HMRC) in the United Kingdom to accept the transfer value of a member’s entitlement from a UK pension fund. The HMRC registration number for FirstWrap is QROPS/500106. Colonial First State FirstChoice Super and Pension funds are not QROPS and therefore do not accept UK pension transfers.

There are a number of factors that determine whether a UK pension can be transferred to Australia. One of these factors is the type of pension. The major types of pensions are reviewed below:

W State Pension, and

W Private pension.

In discussing the UK pension system it is also important to note that the UK tax year commences on 6 April and ends on 5 April each year.

State PensionThe basic State Pension cannot be transferred to Australia. However, Australian residents may receive basic State Pension payments. The UK State Second Pension may interact with other UK pensions of an individual and it is useful to have a basic understanding of how this works.

Basic State PensionThe UK equivalent of the Australian Government age pension is the ‘State Pension’. From 9 April 2009, the full basic State Pension is £95.25 a week for a single person.Source: www.thepensionservice.gov.uk/atoz/atozdetailed/retirement.

asp#howmuch

Qualifying years

In the 2009–2010 financial year, if an employee earns at least £4940 they will fall within the National Insurance system and generate a qualifying year for the purpose of State Pension. However, an UK employee will only have ‘National Insurance

Contributions’ taken out of their pay if they earn more than £110 per week (for the 2009–10 financial year).

Generally speaking, the more qualifying years a person has, the more basic State Pension they will get when they reach State Pension age. Each tax year that a UK resident pays (or is treated as having paid or is credited with) enough National Insurance Contributions is called a qualifying year.

Men need to have 44 qualifying years to be entitled to the full (100%) basic State Pension. Women must normally have between 39 and 44 qualifying years to get a full State Pension, depending on the date they reach their State Pension age. People reaching State Pension age after 6 April 2010 will only need 30 qualifying years.Source: www.thepensionservice.gov.uk/planningahead/options/

basic-worked-out.asp

Once a person starts receiving the basic State Pension, it is reviewed once a year and, when necessary, increased at least by the level of inflation. The increase takes effect in April each year.

If the recipient is living abroad when State Pension rates go up, they may not get the increase. The pension is up-rated from the date of ceasing to be a National Insurance Contributor until State Pension age but for Australian residents it is not up-rated in retirement.

Australian residents receiving UK basic State Pension

The government pension received from the UK by an Australian resident taxpayer is assessable at personal marginal tax rates.

State Pension age

If entitled, clients may claim the State Pension at State Pension age. The State Pension age is:

W 65 for men, and

W between age 60 and 65 for women.

From 6 April 2020, the State Pension age for women will be 65. The change in State Pension age for women will be made gradually over a 10-year period from 2010 to 2020.

UK State Pension reform

The White Paper ‘Security in retirement: towards a new pensions system’ (May 2006) set out a number of proposals for changing the State Pension system and included proposals to increase State Pension age by one year in every decade to reach 68 in 2046. The Pensions Act 2007, which received Royal Assent on 26 July 2007, implements these proposals.

The State Pension age for both men and women is to increase from 65 to 68 between 2024 and 2046, with each change

UK system – overview


phased in over two consecutive years in each decade. The first increase, from 65 to 66, will be phased in between April 2024 and April 2026; the second, from 66 to 67, will be phased in between April 2034 and April 2036; and the third, from 67 to 68, between April 2044 and April 2046.

White Paper

www.dwp.gov.uk/pensionsreform/whitepaper.asp

Extra State Pension (or State Pension Deferral)A person can put off claiming their State Pension. Depending on how long they put off claiming, they could choose to get extra State Pension each week or a one-off taxable lump-sum payment when they do finally claim. Someone putting off a basic State Pension of £90 for five years could, at current prices and interest rates, get a lump sum of just over £28,040 or extra State Pension of nearly £46.80 a week for life.Source: www.thepensionservice.gov.uk/pdf/spd/spd1May08.pdf

Additional State PensionAdditional State Pension, also known as State Second Pension (S2P), is paid in addition to the basic State Pension. Until April 2002, it was usually known as the State Earnings Related Pension Scheme (SERPS) pension and depended solely on the National Insurance Contributions paid as an employee. From April 2002, State Second Pension reformed SERPS to provide a better Additional State Pension for low and moderate earners, and to extend access to include certain carers and long-term disabled people. An individual may get an Additional State Pension even if they do not get any basic State Pension.

Contracting outA person may choose to take out another kind of second pension and leave the State Second Pension at any time during their working life. This is called ‘contracting out’. This can be done by any of the following options:

W joining a contracted-out occupational pension scheme (if the employer offers one)

W taking out a stakeholder pension, or

W taking out a personal pension.

If an individual chooses to contract out by joining an employer’s contracted-out occupational pension scheme, both employee and employer will pay lower, reduced rate National Insurance Contributions to compensate for any Additional State Pension the individual has given up. With some schemes (known as contracted-out money-purchase schemes), the Government will also pay an additional top-up rebate direct to the scheme to invest on the employee’s behalf. When the individual retires, the second pension will come from the employer’s scheme and not from the Additional State Pension.

An individual may also contract out by joining a stakeholder pension scheme (see page 8) or a personal pension scheme (see page 8). If this option is taken, instead of paying lower National

Insurance Contributions, once a year HM Revenue & Customs will pay directly into the pension a rebate of National Insurance Contributions. These payments are known as minimum contributions. The rebate is intended to provide benefits broadly the same as the Additional State Pension given up.

An individual may also join a stakeholder pension scheme or a personal pension scheme without contracting out of the Additional State Pension, but if this option is taken, the individual will not get the rebate (since they will receive the State Second Pension directly in retirement).

Some occupational pension schemes and some personal pension schemes are organised on a ‘rebate-only’ basis. This means that the only money being paid into the scheme is the National Insurance Contributions rebate.

Guaranteed Minimum PensionFrom 1978 to 1997, if a defined benefit occupational pension scheme wanted to contract out of the Additional State Pension, the employer had to agree that the scheme would pay at least a statutory minimum level of benefits – the Guaranteed Minimum Pension. While Guaranteed Minimum Pensions ceased to accrue in 1997, past rights still exist. This is a continuing source of complexity, particularly on wind-up and transfers.

The UK Government proposed to allow schemes to convert Guaranteed Minimum Pension rights into scheme benefits, offering the actuarial equivalent value in exchange1.

The Government intends to bring forward legislation to enable this change as soon as a suitable opportunity arises.

Protected rightsIn contracted-out defined contribution schemes and/or personal/stakeholder pension schemes, the amount of an individual’s pension fund derived from the rebate, its investment return and any tax relief on the rebate are known as protected rights. Certain conditions are attached to protected rights.

Protected rights may only be transferred to schemes that meet certain conditions. It has become easier for overseas pension schemes to meet these conditions since April 2006. Most Australian super funds that are qualifying recognised overseas pension schemes (QROPS) will meet the conditions. Please contact Pension Transfers Direct to confirm for a particular fund.

The UK Government has proposed to remove the remaining conditions that apply to protected rights2. This is so all scheme members’ entire ‘money-purchase pension’ (see page 8) funds can always be treated in the same way, eg rules applying to purchase of annuities, transfers, payment after death of member etc.

1 The White Paper ‘Security in retirement: towards a new pensions system’ (May 2006).

2 Department for Work and Pensions, Abolition of defined contribution (DC) contracting out: treatment of protected rights accrued in the past and proposed operational arrangements, Consultation Document, September 2006; www.dwp.gov.uk/publications/dwp/2006/DC%20consultation%20 document.pdf


Private pensionsAn individual will usually get tax relief on contributions to a private pension scheme.

Private pensions can be broken down into occupational and personal schemes as follows.

Occupational schemesAn occupational pension scheme is an arrangement set up by some employers to give their employees a pension when they retire. Occupational pension schemes may also pay a tax-free lump upon retirement and may provide benefits for dependants if the employee dies.

There are two main types of occupational scheme.

Salary-related schemes (defined benefit)

The pension received in a salary-related scheme is based on:

W the number of years in the scheme, and

W earnings (usually, earnings at retirement or upon leaving the scheme).

Money-purchase schemes (accumulation/defined contribution)

A money-purchase scheme is much like an Australian accumulation super fund.

Personal pension schemesA personal pension is another way of making regular savings for retirement. Income can be taken from a personal pension from age 50 (age 55 from 2010).

For every £80 paid into a personal pension, the Government adds £20 (based on the tax rates for 2009–10) up to £3,600 for a non-earner. If income tax is paid at the higher rate of 40%, the individual can claim back the tax difference (compared with the basic rate of income tax) from HM Revenue & Customs. So every £100 paid into a pension fund costs the individual £60 (based on the 40% higher rate of tax for the tax year 2009–10).

Stakeholder pension schemesStakeholder pensions are personal pension plans established post April 2001 subject to some additional regulations particularly governing their underlying charging structures.

Stakeholder pensions are provided by UK financial services companies such as insurance companies, banks, investment companies and building societies. Other organisations such as trade unions may also offer stakeholder pensions to their members. Individuals can directly approach a stakeholder pension provider about starting to contribute to a stakeholder pension. Employers must provide employees with access to a stakeholder pension, unless they are exempt.

Employers are exempt if they:

W have fewer than five employees, or

W offer an occupational pension scheme for all their employees to join within one year of them starting work, or if they offer to contribute an amount equal to at least 3% of earnings into another form of personal pension for their employees, as long as the pension does not have penalties for employees who leave the scheme.

Stakeholder pensions are flexible and easily transferred, with a limit on the management charges that can be charged each year. Stakeholder pensions can help people who do not have access to an occupational pension or a good-value personal pension to save for their retirement. Stakeholder pensions are also suitable for the self-employed, moderate earners or people who do not have an income of their own but can afford to save for a pension.

Select UK pension rulesThe UK Government undertook major reforms to the UK pension system from 6 April 2006 – known as ‘A Day’.

Reform was needed, as there were eight different tax regimes governing UK pensions. Each had its own set of complex rules regarding amounts that could be paid in and benefits that could be paid out.

On retirement, you could convert a maximum of 25% of a personal pension fund – excluding any fund built up by contracting out of the State scheme – into a tax-free lump sum. This percentage varied for other types of pensions.

There were limits to the amounts that could be paid for personal pension schemes, and the amount of pension and tax-free lump sums that could be provided by occupational schemes.

Funds had to be used to buy a pension by age 75.

Lifetime AllowanceFrom 6 April 2006, UK residents are now able to save up to a Lifetime Allowance (LTA) of £1.75 million, in their pension scheme. The LTA is much like Australia’s old Reasonable Benefit Limit. Any pension savings above this allowance are taxed at 25%, or 55% if taken out as a lump sum. It includes not only the amounts paid in, but also all the interest or investment growth that has built up.

The Lifetime Allowance is the set level of benefits a UK resident can draw from all registered pension schemes in their lifetime, without triggering certain UK tax charges.


The standard LTA is expressed as a capital value and is set at a particular standard level for each tax year. The table below shows the standard LTA figures for the tax years 2006–07 to 2010–11. The Lifetime Allowance for later tax years will be set by UK Treasury Order.

UK tax year Standard Lifetime Allowance

2006–07 £1.50 million

2007–08 £1.60 million

2008–09 £1.65 million

2009–10 £1.75 million

2010–11 £1.80 million

Enhanced and primary protected Lifetime Allowance

In some circumstances an individual’s LTA will actually be higher than the standard LTA in any particular tax year because they are entitled to what is called an enhanced Lifetime Allowance. The enhanced Lifetime Allowance is similar to Australia’s old Transitional Reasonable Benefit Limit. This may be, for example, where the member holds a certain type of pension credit in a registered pension scheme, or because they are entitled to ‘primary protection’ as they held pension rights on 5 April 2006 of more than £1.5 million.

There are also rare circumstances where an individual’s LTA will be lower than the standard LTA.

What is counted towards the LTA?

When a member becomes entitled to draw benefits from a registered pension scheme, they use up a percentage of their LTA. Scheme administrators are required to check whether an amount ‘crystallising’ at a point in time exceeds the member’s available LTA.

The circumstances where an LTA test occurs are referred to as Benefit Crystallisation Events (BCEs). This is similar to Australia’s old Reasonable Benefit System where certain Eligible Termination Payments counted towards the person’s lifetime Reasonable Benefit Limit.

Benefit Crystallisation Event (BCE)

An amount is ‘crystallised’ when a Benefit Crystallisation Event (BCE) occurs.

There are nine BCEs. A transfer of a member’s benefits to a qualifying recognised overseas pension scheme is a BCE. Other BCEs relate to payments or deemed payments to members and payments of lump sum death benefits.

At each BCE a capital value is calculated. For transfers to QROPS, the capital value is the amount crystallised upon transfer. This capital value is converted into a percentage of the Lifetime Allowance. That percentage is then measured against the member’s available Lifetime Allowance remaining at that point in time.

ExampleMike crystallises benefits with a capital value of £150,000. The standard LTA at that point is £1.5 million, so the percentage used up is 10%. If Mike had not crystallised any other benefits previously, he will have 90% of his Lifetime Allowance still available for the next BCE.

The same process occurs when Mike crystallises benefits at a future date.

This time Mike crystallises a further £500,000 when the standard LTA is £2 million. So Mike has used up a further 25% of the standard LTA. In total Mike has used up 35% (10% + 25%) of his LTA.

To help individuals keep track of their available LTA, a scheme administrator is required to give the member a statement telling them the percentage of the standard LTA they have used up in total under that scheme, either after every BCE or annually.

Lifetime Allowance charge

Where the amount crystallising at a BCE is more than the member’s available LTA, that excess becomes what is called a chargeable amount. This chargeable amount is subject to a Lifetime Allowance charge (tax). This charge is intended to negate the tax relief those funds attracted over time, both on the contributions and the fund growth.

The level of the Lifetime Allowance charge arising on the chargeable amount will vary depending on whether a lump sum is paid or whether the monies are retained within the scheme, or transferred to a qualifying recognised overseas pension scheme.

Lifetime Allowance charge

Benefit Crystallisation Event Tax rate

Lump sum paid 55%

Rights retained in the scheme 25%

Transfer to a QROPS 25%

Transfers in excess of LTA to Australian QROPS – 25% LTA charge

If the transfer to a qualifying recognised overseas pension scheme results in the member’s Lifetime Allowance being exceeded, the Lifetime Allowance charge is 25%. The 55% rate cannot apply, even though the payment in effect is a lump sum, because it is not being paid to the individual, so does not fall within the 55% rate charging provision.

If a member subsequently withdraws benefits relating to the transferred amount from the Australian QROPs, the withdrawal does not count towards the individual’s LTA; however, other UK taxes may apply upon withdrawal.


Authorised member payments

Transfers to QROPS, among certain other types of payments from UK pension schemes, are classified as authorised member payments. It is important to note that a transfer to a non-QROPS is unauthorised and so taxable in the UK.

ContributionsThere is no limit on the amount that may be contributed to a UK registered pension scheme by either a member, employer or other person. However, if total contributions exceed the annual allowance (£245,000 in the 2009–10 financial year), there might be a tax charge of 40% on the member.Source: www.hmrc.gov.uk/manuals/rpsmmanual/rpsm06100030.htm

Tax deductions for contributions

The maximum amount of contributions on which a member can claim UK tax relief in any tax year is the greater of:

W £3,600, or

W 100% of the individual’s assessable UK earnings capped at the annual allowance (£245,000 in the 2009–10 financial year).

Members who move overseas

An individual who is a member of a registered pension scheme and is no longer resident in the UK is a ‘relevant UK individual’ for a tax year, if they were resident in the UK both:

W at some time during the five tax years before that year, and

W when the individual became a member of the pension scheme.

These individuals may also qualify for tax relief on contributions up to the basic amount of £3,600.

Pension age

Normal minimum pension age

Generally, scheme rules must not allow members to take any pension benefits from any registered pension scheme before they reach the normal minimum pension age.

Please note that this is the pension age for pensions taken outside the State Pension system. Please see page 6 for the State Pension age.

The normal minimum pension age for a member is:

W before 6 April 2010 – age 50, or

W on or after 6 April 2010 – age 55.

Protection for the rights of certain members on 5 April 2006 to take pension benefits before age 55 or 50 may be given in particular circumstances.

Accessing benefitsOnce a member reaches normal minimum pension age (see previous paragraph) they may access their benefits. When benefits are accessed this will be a Benefit Crystallisation Event. The taxation of the benefits will depend on whether the payment is ‘authorised or ‘unauthorised’.

Retirement not required

There is no requirement that the member must retire before benefits can be taken.

Authorised lump sumsThere are eight authorised lump sum payments. The circumstances and conditions defining those payments are set out in the UK legislation. Each of the eight different authorised lump sum payments has different characteristics. Some are paid tax-free, and some are subject to specific tax charges. Any lump sum payment that does not fall within one of these definitions will be an unauthorised member payment and will be taxed accordingly.

The eight types of lump sum that are authorised member payments are:

W a pension commencement lump sum

W a stand-alone lump sum

W a serious ill health lump sum

W a refund of excess contributions lump sum

W a trivial commutation lump sum

W a short service refund lump sum

W a winding up lump sum, and

W a Lifetime Allowance excess lump sum and an equivalent pension benefits commutation lump sum.

Of most significance to Australian planners is the pension commencement lump sum.

Pension commencement lump sum – 25% lump sum under age 75

When a member first becomes entitled to an authorised pension benefit, a registered pension scheme may, within set limits, pay the member a tax-free lump sum at that time (or within six months of that pension entitlement arising). Such a payment is referred to in the legislation as a pension commencement lump sum.

A scheme can only pay such a lump sum where the member has not previously used up an amount of their Lifetime Allowance equivalent to the standard Lifetime Allowance at that time.


A pension commencement lump sum:

W can only be paid while the member is under the age of 75

W is 25% of the total value of the entitlement

W cannot exceed 25% of the individual’s Lifetime Allowance

W is tax-free if received by a UK resident, and

W will be taxable at personal marginal tax rates if received by an Australian resident for tax purposes.

If a scheme pays a member a higher lump sum, any excess over the permitted level will not be a pension commencement lump sum and will be treated as an unauthorised payment.

Pension incomeA registered pension scheme is only permitted to provide its members with pension benefits that comply with the UK pension rules. If a pension benefit does not comply with these rules, any payment made will be an unauthorised member payment, and will be dealt with and taxed accordingly.

Money-purchase scheme options

The precise options available to a member will depend on the scheme rules. A money-purchase scheme may provide the member with pension income in any of the following ways:

W an unsecured pension (up to age 75 only)

W an alternatively secured pension (from age 75 only), or

W a secured pension.

Unsecured pensions (up to age 75 only)

Unsecured pensions are paid either:

W direct from the scheme through income withdrawal (similar to Australia’s allocated pensions), or

W indirectly through the purchase of a short-term annuity contract or a series of such contracts from an insurance company.

The maximum level of annual income that may be paid from an unsecured pension in a pension year is calculated at commencement of such a pension.

W The maximum annual pension amount is 120% of the prevailing annuity rate at time of commencement.

W There is no minimum amount of unsecured pension to be paid in a pension year.

An unsecured pension may only be paid from a money-purchase scheme while the member is under the age of 75. Once the member reaches their 75th birthday, the pension must be provided through a secured pension, or as an alternatively secured pension direct from the scheme.

Alternatively secured pensions (from age 75 only)

An alternatively secured pension is the continuation of income withdrawal beyond the member’s 75th birthday. It will be subject to more restrictive rules on the maximum pension that can be paid and a more rigid and frequent review of that limit.

The initial maximum annual pension payable from an alternatively secured pension is calculated at commencement, which is almost always the member’s 75th birthday.

With an alternatively secured pension, the maximum pension that can be paid is set at 70% of the prevailing annuity rate.

Secured pensions

Secured pensions must have some form of guarantee that they will be paid for the life of the member, and are pensions paid either:

W as a scheme pension (direct from a scheme), or

W through the purchase of a lifetime annuity.

Defined benefit schemes

A defined benefits arrangement may only provide the member with a pension paid as a scheme pension.

To be a scheme pension, the pension must:

W be paid for the life of the member

W be paid at least annually

W not be capable of being reduced year on year (except in limited circumstances), and

W be paid by the scheme administrator (or by an insurance company chosen by the scheme administrator).

Death benefits

Death before pension age

W A lump sum death benefit may be paid to any surviving dependants. Any lump sum paid in excess of the LTA will incur a Lifetime Allowance charge at the rate of 55%.

W A spouse may be paid a pension from an occupational scheme. Almost all final salary schemes pay a 50% spouses pension.

W A lump sum death benefit or UK pension income received by an Australian resident will be assessable income for the Australian resident.

W A lump sum bereavement payment payable from a State Pension is not assessable to an Australian resident for tax purposes (see ATO ID 2002/1028 for further explanation).


Death after pension age

The death benefit options after pension age vary according to the choices the member made in retirement, and whether death occurs before or after age 75.

If death occurs under age 75: If an annuity was purchased, there will possibly be no benefits available to the surviving spouse. If unsecured pension income was chosen, the spouse will have three options:

W continue to draw the unsecured income

W take a lump sum, taxed at 35%, or

W purchase an annuity.

If death occurs on or after the age of 75: If an annuity was purchased, there will possibly be no benefits available to the surviving spouse. If alternative secured income was chosen:

W a lump sum will not be available to the spouse

W the spouse may continue to draw the unsecured income, and

W the spouse may purchase an annuity.

Which benefits may be transferred to an Australian QROPS?Generally, all UK pensions except State Pension and State Second Pension contracted in benefits may be transferred to an Australian super fund that is a QROPS.

ExceptionsOne notable exception relates to benefits held in some Teachers’ pensions. The majority of UK pensions used to be occupational. The UK laws used to require an employer to freeze an employee’s pension until retirement upon the employee terminating employment. In 1986 these rules were changed; however, the rule has been kept in place for Teachers’ pensions, where the teacher terminated employment prior to 1986. Teachers who continued teaching after 1986 are able to transfer their pension benefits.

A client who joined a Teachers’ pension prior to 1986, but their date of leaving employment is after 1986, will be able to transfer their benefits.

Qualifying recognised overseas pension scheme (QROPS)What is a QROPS?A qualifying recognised overseas pension scheme is one that is:

1 an overseas pension scheme3

2 is recognised,4 and

3 meets certain other conditions5.

For a scheme to be classed as an overseas pension scheme it:

W must not be a registered pension scheme

W must be established outside the United Kingdom

W must be regulated as a pension scheme in the country in which it is established, and

W must be ‘recognised for tax purposes’ by the country or territory in which it is established.

Australian superannuation funds can be recognised schemes since they are overseas pension schemes established in a country or territory with which the UK has a Double Taxation Agreement that contains exchange of information and non-discrimination provisions. They must however meet the other conditions.

Several other conditions are also required to be a QROPS. A scheme manager must:

W have notified HMRC that the scheme is a recognised overseas pension scheme and have provided evidence of that if required

W have informed HMRC of the name of the country or territory in which the scheme is established

W have provided any other evidence required by HMRC

W have undertaken to notify HMRC if the scheme ceases to be a recognised overseas pension scheme, and

W have undertaken to provide HMRC with certain information on making payments in respect of certain scheme members.

3 Section 150(7) Finance Act 2004 and The Pension Schemes (Categories of Country and Requirements for Overseas Pension Schemes and Recognised Overseas Pension Schemes) Regulations 2006 [SI 2006/206].

4 Section 150(8) Finance Act 2004 and The Pension Schemes (Categories of Country and Requirements for Overseas Pension Schemes and Recognised Overseas Pension Schemes) Regulations 2006 (SI 2006/206).

5 Section 169 Finance Act 2004 and Regulation 3 of The Pension Schemes (Information Requirements – Qualifying Overseas Schemes, Qualifying Overseas Schemes and Corresponding Relief) Regulations 2006 [SI 2006/208].


QROPS mandatory reporting requirementsThe scheme manager of a QROPS is required to notify HMRC when it makes a payment, or is treated under certain provisions as making a payment (including transfers), in respect of a relevant member. A QROPS is only required to report payments for a member who:

W is residing in the UK when the payment is made (or treated as made)

W although not residing in the UK at that time, has been residing in the UK earlier in the tax year in which the payment is made (or treated as made) or in any of the five tax years immediately preceding that tax year, or

W although residing in Australia, has resumed UK tax residency in the interim.

ExampleJudith has lived in Australia since 5 May 2006 when, in her particular situation, she stopped being a UK resident. On 1 July 2007, Judith transfers her UK pension into her Australian super fund, which is a qualifying recognised overseas pension scheme. Judith wants to know when she can roll the funds that are transferred into her QROPS fund to her Self Managed Super Fund (SMSF) (which is not a QROPS) without a UK tax penalty.

6.4.06

1 2 3 4 5 6

6.4.07 6.4.08 6.4.09 6.4.10 6.4.11 6.4.12

5.5.06 Australian Resident

1.7.07 date of transfer

The trustees of the QROPS fund will have to report any rollovers that occur from Judith’s account to HMRC. This obligation will exist for any rollovers made up to and including 5 April 2012. For example, if Judith rolled funds over in financial year six, Judith was still a UK resident within the five previous tax years.

Judith can roll her funds over to her SMSF without UK tax penalties applying from 6 April 2012, assuming she does not resume UK tax residency at any point during the period from 5 April 2006 until 6 April 2012.

If Judith went back and lived in the UK for nine months in financial year three and then returned to Australia, then she could not roll over her funds from her QROPS fund without UK tax penalty until 6 April 2014.

The scheme manager must provide HMRC with the following information:

W the name and address of the relevant member, and

W the date, amount and nature of the payment.

Where a non-pension payment, such as a transfer, is made the scheme manager must provide the information to HMRC by 31 January following the end of the tax year in which each payment is made.

How do you know whether an Australian superannuation fund is a QROPS?The member, or their financial adviser, can check with HMRC whether the overseas scheme is a qualifying recognised overseas pension scheme. HMRC provides a list of qualifying recognised overseas pension schemes (that agree to having their names published) on the HMRC internet site at:

HMRC list of qualifying recognised overseas pension schemes www.hmrc.gov.uk/pensionschemes/qrops-list.htm

Payments from a QROPSAny future payment from a QROPS, relating to a recognised transfer from a UK pension scheme, which is a type of payment which would not have been authorised from a UK registered scheme will give rise to a member payment charge. Member payment charges include the unauthorised payments charge (40%) and the unauthorised payments surcharge (15%) as detailed below. These charges are only payable by the resident or recently resident individual (that is, a member who was a UK resident in any of the five tax years immediately preceding the tax year of the payment).

The 40% unauthorised payments charge could be triggered if a UK pension is transferred to an Australian superannuation fund that is a QROPS, and then within five years (see below):

W the amount is rolled over to another non-QROPS Australian super fund

W if greater than 25%, is taken as a lump sum upon retirement, or

W if greater than the Lifetime Allowance, is paid as a lump sum upon death.

The 40% unauthorised payments charge will only apply where the member was a UK resident in any of the five tax years immediately preceding the UK tax year of the payment.

For people who remain Australian tax residents, payments from their Australian superannuation fund will be free of UK member payment charges after the funds have been in Australia for five entire UK tax years.

However, the member will remain potentially subject to these charges for five entire UK tax years after any time they resume UK tax residence.


What happens if the fund is not a QROPS?A transfer from a registered UK pension scheme to a non-UK pension scheme that is not a qualifying recognised overseas pension scheme is not a recognised transfer. Such a transfer is an unauthorised member payment and subject to UK tax.

UK taxation of unauthorised member paymentsUnauthorised payments charge – 40%A member incurs a UK tax charge of 40% on the amount of any unauthorised member payments.

Unauthorised payments surcharge – 15%If a transfer to a non-UK pension scheme that is not a QROPS and any other unauthorised payments to the member in a 12-month period exceed 25% of the member’s fund, the member is liable to an unauthorised payments surcharge of a further 15% of the payment.

Scheme sanction charge – up to 40%A scheme sanction charge of up to 40% may also apply for which the scheme administrator is liable. If the scheme administrator has deducted the member’s tax charge from the transfer payment and paid the tax charge to HMRC on the member’s behalf, the scheme administrator may reduce the amount of the scheme sanction charge by the lesser of:

W 25%, or

W the amount of member’s tax charge deducted as a proportion of the transfer payment.

Taxation of assessable growth and excess non-concessional contributionsTax charges imposed on the Australian QROPS are regarded as Scheme Administration Member Payments (SAMP) and are not an unauthorised payment.

Where the transfer takes place more than six months after the individual becomes a tax resident in Australia and the individual elects for the fund to be taxed at 15% on assessable growth, the payment of this tax by the fund is a SAMP and is not an unauthorised payment.

If the non-concessional cap is exceeded (assuming the super fund accepts the payment), any tax payable on the excess at 46.5% will be classed as an unauthorised payment and the member must declare the unauthorised payment through a UK self assessment return.

For more information refer to UK Pension Schemes newsletter at http://www.hmrc.gov.uk/pensionschemes/ps-newsletter36.htm

How will HMRC collect the tax?The HMRC Non Resident Recovery Unit’s main objective is to make direct contact with individuals residing abroad and establish the reason why they have tax or tax returns outstanding. The sole purpose of the unit is to bring individuals’ tax records up to date through communication, cooperation and education.

If an individual is not willing to accept responsibility for their UK tax affairs, HMRC have various options regarding enforcement including, as a last resort, referring the debt to the tax authorities of the country of residence.


Australian tax yearNote that the Australian tax year commences on 1 July and ends on 30 June each year.

Contribution rulesThe recipient of a UK pension transfer to a QROPS approved Australian superannuation fund must meet the Australian superannuation contribution rules, since the transfer is considered to be a contribution. This means the member must:

W be under age 65, or 65 years of age or older and be able to meet the work test

W quote a Tax File Number (TFN)

W not contribute over the fund cap limit.

Work testThe work test requires the individual to be gainfully employed for at least 40 hours within 30 consecutive days in the financial year of a contribution.

TFNsAn Australian superannuation fund must have the member’s Australian TFN on record to accept a contribution such as the transfer of foreign superannuation. If the fund does not have the member’s TFN, the contribution must be returned within 30 days and may include an adjustment for fees, costs and market movements.

Fund capped limitAn Australian superannuation fund cannot accept a single contribution in excess of the non-concessional cap (2009–10 non-concessional cap: $150,000 for people age 65 or over and up to $450,000 for people under age 65 using the two-year bring forward rule). If a single transfer of a foreign superannuation fund exceeds the non-concessional cap, the Australian fund trustee must return the transfer within 30 days and may include an adjustment for fees, costs and market movements.

Australian taxation of transfers of UK pensionsIn addition to considering the UK tax impositions on a transfer of a UK pension, the Australian tax imposed on the UK pension must be considered. It is important to note that an Australian tax liability may arise, whether or not the pension is transferred into an Australian superannuation fund.

Superannuation lump sums transferred from foreign superannuation funds into Australia are taxed in Australia at varying rates depending on the following factors:

W when the transfer is received in Australia (before or after six months of residency)

W whether the member makes an election regarding ‘applicable fund earnings’ (AFE) (see page 18)

W the size of the transfer in relation to contribution caps, and

W the age of the member in the financial year the transfer is received (this will affect contribution caps and work test requirements).

Australian treatment of UK pension transfers


Contribution capsFrom 10 May 2006, the Government has placed caps on the concessional tax treatment of contributions that may be made to an Australian superannuation fund for a member’s benefit. The relevance of these caps to UK pension transfers is discussed in the taxation section below.

Generally, no part of the transfer of foreign superannuation counts towards a person’s concessional cap6.

Transfer occurs

Amount that counts toward member’s non-concessional cap

Amount taxed to individual at Marginal Tax Rate (MTR)

Amount taxed at 15% in Australian super fund

< 6 mths of becoming an Australian tax resident

100% of gross transfer amount

Nil Nil

> 6 mths if election made at time of transfer (ATO NAT 11724)

Gross transfer amount – applicable fund earnings

Nil

applicable fund earnings (see page 18)

> 6 mths if no election made at time of transfer (ATO NAT 11724)

100% of gross transfer amount

applicable fund earnings

Nil

Treatment of transfers completed within six months of becoming an Australian tax resident

SummaryA UK pension transfer that is completed within six months of becoming an Australian tax resident is treated as follows:

W It is preserved in the fund until a condition of release is met.

W 100% of it is a non-concessional contribution.

W No Australian tax is imposed on the individual upon transfer of non-concessional contributions that are not in excess of the non-concessional cap.

W No Australian tax applies within fund upon receipt of non-concessional contributions below the non-concessional cap.

W Earnings on the transfer are taxed at 15% within the fund until converted to a pension. Earnings in the accumulation phase will form part of the taxable component upon eventual withdrawal from the superannuation system.

W Non-concessional contributions form part of the tax-free component and are non-assessable upon withdrawal in retirement.

If a UK pension transfer is received by an Australian superannuation fund within six months of the member becoming an Australian tax resident (please see section on Australian residency), Australian tax is only payable on the amount of the transfer in excess of the non concessional cap.

A transfer of a UK pension into an Australian superannuation fund will be preserved in the fund until a condition of release is met by the member.

The transfer will be treated entirely as a non-concessional contribution7 by the member and counts toward the member’s non-concessional cap. Accordingly, it will not be included in the assessable income of the Australian superannuation fund and will not incur contributions tax8 but may incur excess contributions tax, discussed below.

Non-concessional contribution caps100% of a UK pension transfer received within six months of Australian residency is a non-concessional contribution. If the member exceeds their relevant non-concessional contribution cap through multiple non-concessional contributions, the excess will be taxed to the individual at 46.5%. Any single non-concessional contribution in excess of the non-concessional cap must be returned within 30 days by the fund trustee and may include an adjustment for fees, costs and market movements.

Time of contribution Age Non-concessional cap

1 July 2007 and future years

65 and over $150,000 per financial year*

Under 65 $450,000 in a 3-year period, using the 2-year bring forward rule

* The non-concessional cap is set at six times the concessional cap. The concessional cap is indexed to Average weekly ordinary time earnings (AWOTE) each year, and when appropriate is increased in $5,000 increments.

Upon eventual withdrawal in retirement, the transferred amount will not be subject to tax.9

Earnings on any of the transferred amount will form part of the taxable component of the members super benefit. From 1 July 2007, the taxable component paid to a member aged 60 and over is not subject to tax. Members under the age of 60 will be taxed on any earnings withdrawn.

6 One exception is where an amount is transferred to the fund from a foreign superannuation fund and it exceeds amounts vested in the member at the time of the transfer. The excess may count as a concessional contribution.

7 Section 292-90 ITAA 1997.

8 Section 307-210 ITAA 1997.

9 Section 292-200(1) ITAA 1997.


Treatment of transfers completed after six months of Australian residency

SummaryA UK pension transfer that is completed after six months of Australian residency, is treated as follows:

W The UK pension is preserved in the fund until a condition of release is met.

W It is a non-concessional contribution except for the ‘applicable fund earnings’ (AFE) (see page 18).

W Applicable fund earnings will be either:

W non-concessional contributions if no election is made, or

W assessable income of the fund if the member makes an election under section 305-80 (ATO NAT 11724). The applicable fund earnings elected to be taxed within the fund will not count toward either the concessional or non-concessional contributions cap.

W Australian tax on applicable fund earnings will be imposed on an individual at their marginal tax rate if no election is made.

W Australian tax on applicable fund earnings will be imposed on a super fund at 15% if an election is made.

W Earnings within the super fund are taxed at 15% until converted to a pension.

W Non-concessional contributions are tax-free and non-assessable upon withdrawal in retirement.

If a UK pension transfer is received by an Australian superannuation fund after six months of the member becoming an Australian tax resident (please see section on Australian residency), Australian tax may be payable on the applicable fund earnings (see page 18).

The amount of Australian tax payable is determined by specific Australian tax rules:

W section 27CAA ITAA 1936 for transfers prior to 1 July 2007, and

W subdivision 305-B of ITAA 1997 for transfers from 1 July 2007.

Foreign superannuation funds were termed ‘eligible non-resident non-complying superannuation funds9 under 27CAA. From 1 July 2007 they are simply referred to as ‘foreign superannuation funds’.

9 Section 292-90 ITAA 1997.

Non-concessional contribution part of transferFor most UK pension transfers, the majority of the amount transferred will be classified as a non-concessional contribution. 100% of the transfer will be non-concessional if an election is not made to have the ‘applicable fund earnings’ (see page 18) taxed in the fund and the transfer does not exceed the member’s vested amount at the time of the transfer. The individual will be taxed directly at their marginal tax rate on the applicable fund earnings in this case. Non-concessional contributions are not included in the assessable income of the super fund and are therefore not subject to contributions tax in the fund upon transfer but subject to the non-concessional cap.

Assessable part of transfer

305-80 election is made

A member may elect (under section 305-80 ITAA 1997) to have applicable fund earnings from the transfer taxed within the super fund.

The advantage of making an election is that the fund tax rate is 15%. If the election is not made, the individual is personally liable for tax on the applicable fund earnings at their marginal tax rate which may exceed 15%.

If the election is made to have applicable fund earnings from the transfer taxed within the super fund, the applicable fund earnings will not count toward either the concessional or non-concessional contribution limits. The applicable fund earnings will incur 15% contributions tax upon transfer into Australia and will form part of the taxable portion of the fund benefits. Upon withdrawal in retirement, this taxable component will be assessable for members under the age of 60. From 1 July 2007, all super benefits paid to a member aged 60 or over are not subject to tax.

305-80 election is not made

If a section 305-80 election is not made, the applicable fund earnings will be taxed at the member’s marginal tax rate. The member will be personally liable for the tax. The applicable fund earnings in this case will be classified as non-concessional contributions subject to the non-concessional cap.


Applicable fund earningsReason for the taxGenerally, transfers of UK pensions to Australian superannuation funds are taxed on the UK earnings (known as ‘applicable fund earnings’) while the person was an Australian resident.10 The effect of these rules has not changed with the 2007 Simplification of Super.11

The taxation of the UK earnings may sometimes be seen as an unfair liability. However, the Australian Tax Office (ATO) views it as a concession, and explains the interaction of this tax (section 27CAA/Subdivision 305-B) with the Foreign Investment Fund (FIF) rules (see page 20) as follows:

“Under the FIF rules, overseas earnings of an Australian resident are taxed annually on an accrual basis. Under 27CAA, a concession is granted in that earnings are not taxed annually but the tax is deferred until payment is made from the fund. Provided any payment from the overseas fund is made within six months of the individual becoming resident then Section 27CAA will not apply – this is a further concession on the FIF rules.”12

Calculating applicable fund earningsApplicable fund earnings13 are defined in section 307-75 and are generally the earnings on the foreign superannuation fund while the person was an Australian resident. Applicable fund earnings will not count towards either the non-concessional or concessional caps of the individual if the election is made by the member under section 305-80 as explained on page 17. If no election is made under section 305-80, then the applicable fund earnings will count towards the non-concessional cap of the individual.

There are two methods for calculating applicable fund earnings according to the member’s pattern of Australian tax residency.

10 Previous section 27CAA ITAA 1936, rewritten as section 305-60 ITAA 1997.11 Paragraph 2.86 of Explanatory Memorandum to Tax Laws Amendment

(Simplified Superannuation) Bill 2006.12 ATO Submission to Senate Inquiry into Taxation Treatment of Transfers from

Overseas Superannuation Funds, 2002.13 Section 307-75 ITAA 1997.

Method 1 – If the member has been an Australian resident at all times

F TRelevant period

F = date of fund membership with UK fund

T = date of transfer of UK fund to Australian super fund

Relevant period is from date F to date T.

The member is resident of Australia during all of period F to T.

The applicable fund earnings will be calculated as:

Gross amount of the UK transfer (before any UK tax)

− contributions made to the UK fund in the relevant period

− transfers from foreign super funds into the UK fund in the relevant period

+ any previously exempt fund earnings (see explanation on page 19)

Example of Method 1Trevor works in the IT industry on a contract basis in Australia. He occasionally works under contract for UK firms in London. Therefore, he has always managed to maintain his Australian tax residency status. Through Trevor’s employment in the UK, he has accumulated funds in a UK pension plan that he joined on 3 June 2000 (date F) which he now wishes to transfer to Australia.

Trevor transfers the UK fund to an Australian super fund (which is a QROPS). At the date of transfer (T) on 12 January 2007, the fund is worth £18,000 (A$44,100). Contributions to the fund over the relevant period (3 June 2000 to 12 January 2007) amounted to £13,000 (A$31,850). Trevor also consolidated £2,000 (A$4,900) from another UK fund into this UK fund prior to transfer. The amount that would be counted as a ‘previously exempt amount’ from that consolidation was £200 (A$490) (see page 19).

The taxable applicable fund earnings for Trevor’s transfer are calculated as:

Gross amount of the UK transfer (before any UK tax): $44,100

− contributions 31,850

− transfers 4,900

+ previously exempt fund earnings 490

Applicable fund earnings A$7,840


Method 2 – if the member has not been an Australian resident at all times

F TR Relevant period

F = date of fund membership with UK fund

T = date of transfer of UK fund to Australian super fund

R = date of Australian residency

Relevant period is from date R to date T.

The member is not a resident of Australia during all of the period F to T.

The applicable fund earnings will be calculated as:

Gross amount of the UK transfer (before any UK tax)

− amount of UK fund vested in the member just before date R

− contributions made to the UK fund in the relevant period

− transfers from foreign super funds into the UK fund in the relevant period

× proportion of total days during the relevant period when member was an Australian resident

+ any previously exempt fund earnings (see explanation below)

Example of Method 2Penny is a 40 year old geologist from the UK. She moved to Perth on 1 July 2000. She was a tax resident of Australia from 1 July 2000 (R). Her mother fell ill and she moved back to the UK for 12 months in 2002, where she worked and resumed tax residency in the UK. She later returned to Australia in 2003, resuming Australian tax residency. Penny received her permanent residency status in January 2007 and has decided to transfer her UK pension to an Australian super fund.

Penny has accumulated a sizeable UK occupational pension. The funds are transferred on 15 April 2007 (T) when they are valued at £50,000 (A$122,500). Penny has never held any other UK pension interests. Back on 1 July 2000, Penny’s fund was valued at £30,000 (A$73,500). Contributions of £5,000 (A$12,250) were made to the fund in 2002 when Penny was working in the UK.

The taxable applicable fund earnings for Penny’s transfer are calculated as:

Gross amount of the UK transfer (before any UK tax): $122,500

− amount of UK fund vested in the member just before date R 73,500

− contributions made to the UK fund in the relevant period 12,250

− transfers 0

36,750

× Australian residency days for the relevant period/total days for the relevant period (2115/2480)

31,341

+ previously exempt fund earnings 0

Applicable fund earnings A$31,341

Previously exempt fund earnings

An unintended consequence of section 27CAA was that a transfer from one overseas superannuation fund to another overseas superannuation fund used to trigger assessment of the applicable fund earnings to an Australian tax resident. The rules since 1 July 2004 make these transfers exempt until they are eventually transferred into Australia. These ‘previously exempt amounts’ are only included in assessable income in Australia upon transfer of the fund into Australia.


Section 305-80 election – ATO NAT 11724To elect to have applicable fund earnings taxed at 15% within the Australian superannuation fund (rather than the member incurring a personal tax bill at their marginal tax rate), all of the member’s interests in the UK fund must be transferred.14

The election must be in writing.

Election form

The 305-80 election is completed using the ATO approved form NAT 11724. This can be found on the ATO website www.ato.gov.au by entering ‘11724’ in the search box.

Anomaly

This may be of concern to an Australian resident who has an interest in a UK fund that exceeds their non-concessional contribution cap. A member may not want to transfer their entire interest in a UK fund due to the contribution cap. If they don’t transfer the entire amount, they are not eligible to make the election for the growth on the portion they do transfer. If they do transfer the entire amount, the excessive portion must be returned by the Australian fund trustee within 30 days. This anomaly has arisen only from 1 July 2007 with the introduction of the contribution caps.

Australian residency‘Resident of Australia’15 means a person who resides in Australia and generally includes a person:

W whose domicile is in Australia

W who has been in Australia, continuously or intermittently, during more than one half of the financial year

W who is a member of the superannuation scheme established by deed under the Superannuation Act 1990, or

W who is an eligible employee for the purposes of the Superannuation Act 1976.

The following tax rulings provide guidance as to when a person is an Australian resident.

W Taxation Ruling TR 98/17: Income tax: residency status of individuals entering Australia

This ruling provides further guidance on who is a resident of Australia. The ruling applies to most individuals entering Australia but does not apply to Australian resident individuals returning to Australia after a temporary stay overseas where the individual remained an Australian tax resident while they were overseas.

14 Section 305-80 (1)(d) ITAA 1997.15 Section 6(1) ITAA 1936.

W Taxation Ruling IT 2650: Income tax: residency – permanent place of abode outside Australia

The purpose of this ruling is to provide guidelines for determining whether individuals who leave Australia temporarily to live overseas, for example, on temporary overseas work assignments or on overseas study leave, cease to be Australian residents for income tax purposes during their overseas stay.

Leaving the pension in the UKAustralian residents are taxed on their Australian and overseas earnings16.

Foreign Investment Fund rulesUnder the Foreign Investment Fund rules17 overseas earnings from a Foreign Investment Fund18 (FIF) or Foreign Life Assurance Policy19 (FLP) of an Australian resident are taxed annually on an accrual basis, subject to some exceptions. A FIF is generally an investment in a foreign company or trust, and a FLP is generally a foreign life insurance policy (which includes annuities issued by foreign life insurance companies). Some UK pensions fall under these rules.

If a UK pension falls under the FIF rules, the earnings on the UK pension interest held by an Australian resident are assessable in Australia each tax year on an accrual basis. Accrual basis means earnings are counted even if they have not been realised.

The FIF measures may apply to an Australian resident’s interest in a UK pension (subject to some exceptions) if:

W the taxpayer had an interest in the UK pension at the end of the year of income (from 30 June 1993 onwards), and

W the taxpayer was an Australian resident at any time in that year of income.

Small investor exemption20

An Australian resident taxpayer is exempt from the FIF rules if the total value of all of the taxpayer’s interests in FIFs and FLPs is A$50,000 or less.

Exemption for interest in an employer sponsored superannuation fund21

An Australian resident taxpayer is exempt from the FIF rules where the FIF or FLP is a foreign employer sponsored superannuation fund. To satisfy the conditions, the fund must be maintained by the employer, or an associate of the employer, for the benefit of its employees. The taxpayer must

16 Section 6-5(2) ITAA 1997.17 Part XI ITAA 1936 (sections 469-624).18 Section 481 ITAA 1936.19 Section 482 ITAA 1936.20 Section 515 ITAA 1936.21 Section 518 ITAA 1936.


be either a former or current employee. Therefore, UK occupational schemes are exempt from the FIF rules.

Where an individual transfers funds out of an employer sponsored superannuation fund (eg occupational) to another institution which provides a pension transfer policy (eg personal or stakeholder), such a policy is not taken to be an employer sponsored superannuation fund where the fund or policy is not maintained by the employer, or an associate of the employer22. In these circumstances, it should be noted that the exemption does not apply even though the funds may have been transferred from an employer sponsored superannuation fund that would otherwise have met the requirements for FIF exemption.

In summary, it will only be UK pensions in excess of A$50,000, which are not occupational pensions that will be caught under the FIF rules.

22 ATO, TR 2003/12: Application of Section 27CAA and the Foreign Investment Fund measures to the transfer of benefits in a non-resident employer sponsored superannuation fund to an individual pension transfer policy maintained overseas by an Australian resident, para. 24.

Foreign tax creditsIncome derived by Australian resident taxpayers from most sources in and out of Australia is assessable. However, a credit will often be allowed under the terms of Division 770 of the ITAA 1997 for foreign tax paid on the foreign income, up to the amount of Australian tax payable in respect of that income.

Such a credit would not be allowed in cases where, under the relevant Double Tax Agreement between Australia (the country of the person’s residence) and the country from where the pension is paid, the pension was exempt in that latter country. The Australia-UK Double Tax Agreement has such a provision.

If the other country (for example the UK) imposed tax in a case which was contrary to the Double Tax Agreement, it would result in double taxation to the taxpayer. The taxpayer can present a case to the ATO to resolve the case by mutual agreement with the competent authority of the other State.


Further information sourcesRegistered Pension Schemes Manual – HM Revenue & Customs – http://www.hmrc.gov.uk/manuals/rpsmmanual/

Guides On Different Types Of Pensions – The Pension Service – Part of the Department for Work and Pensions – www.thepensionservice.gov.uk/resourcecentre/planningahead.asp

Australian Senate Committee Inquiry into the Taxation of Overseas Superannuation (2002) – www.aph.gov.au/Senate/committee/superannuation_ctte/completed_inquiries/2002-04/overseas_transfers/index.htm

Australian Taxation Office resourcesGuidanceTax treatment of payments from overseas superannuation funds from 1 July 2004 – www.ato.gov.au/super/content.asp?doc=/content/47419.htm

FormsThe 305-80 election is completed using the ATO approved form NAT 11724. This can be found on the ATO website www.ato.gov.au by entering ‘11724’ in the search box.

UK Pensions ATO IDsThe following ATO IDs are available at: law.ato.gov.au.

ATO ID 2001/3 Undeducted Purchase Price (UK AFPS)

ATO ID 2002/1028 Assessability of United Kingdom Lump Sum Bereavement Payment

ATO ID 2003/178 Assessability of arrears of pension received as a lump sum from the United Kingdom

ATO ID 2003/1077 Assessability of UK Armed Forces pension received by an Australian resident

ATO ID 2004/809 Assessability of UK Armed Forces pension received by an Australian resident on or after 1 July 2004

ATO ID 2005/255 Assessability of pension income received by a dual resident of Australia and the UK

ATO ID 2006/161 Foreign source income exemption: pension – temporary residents

ATO ID 2006/162 Taxing rights over United Kingdom sourced pension income under the United Kingdom Convention where taxpayer is a temporary resident of Australia

ATO ID 2006/163 Foreign source income: pensions – choice to apply exemption for temporary residents

ATO ID 2006/212 Temporary residents of Australia: residency status under the Australia-United Kingdom Double Taxation Convention

ATO ID 2007/108 Income Tax Residency foreign trust and pension income

ATO ID 2008/6 Assessability of UK War widows pension temporary resident

ATO ID 2008/7 Assessability of UK War widow supplementary pension

ATO ID 2007/108 Income Tax Residency foreign trust and pension income

ATO ID 2008/113 Superannuation Transfer from foreign superannuation fund to complying superannuation fund

ATO ID 2008/145 Periodic compensation payments received by a non-resident individual and the Pension Article of the UK Convention


GlossaryPrivate Pension Scheme Glossary – http://www.hmrc.gov.uk/manuals/rpsmmanual/RPSM20000000.htm

Department of Work and Pensions Glossary – http://www.thepensionservice.gov.uk/atoz/home.asp

Advisor Services 13 18 36 [email protected]

Pension Transfers Direct

Technical queries from advisers regarding the UK pension system may be forwarded to Pension Transfers Direct at: (08) 9485 1064 or [email protected] or [email protected] .

Pension Transfers Direct is not a related party of Colonial First State Investments Limited ABN 98 002 348 352 or a subsidiary of the Commonwealth Bank of Australia ABN 48 123 123 124 (‘the Bank’). You and your clients should consider seeking expert taxation advice in relation to UK pension transfers; however, this is not a recommendation to seek, or an endorsement of, the advice provided by Pension Transfers Direct. Colonial First State or the Bank are not responsible for and do not accept any responsibility for any loss or damage from reliance on any statement, information or advice provided by Pension Transfers Direct.

The information contained in this brochure is prepared by Colonial First State Investments Limited ABN 98 002 348 352, AFS Licence 232 468 (Colonial First State). It is based on Colonial First State’s understanding of the relevant Australian and UK laws including Government publications as at 14 October 2009. Whilst reasonable care has been taken in the preparation of this brochure, no person including Colonial First State or any member of the Commonwealth Bank group of companies accepts responsibility for any loss suffered by any person arising from reliance on this information. As laws are subject to change, you and your clients should refer to our website at colonialfirststate.com.au and seek expert taxation advice for the most up-to-date information.

This brochure provides general information only and is not financial advice. It does not take into account your individual objectives, financial situation or needs. You should assess how the information affects you and consider taking advice before making or advising on an investment or superannuation decision. For information about any financial product, you should refer to most up-to-date Product Disclosure Statement (PDS) available by contacting the product issuer. You and your clients should read the PDS before making an investment or superannuation decision.

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