Our experience indicates many people are surprised to learn that transferring your UK pension to Australia will usually have tax implications.
Perhaps you’re a British Expat now living in Australia, or you’ve worked in the UK for a period? Are you approaching retirement age & thinking of transferring your UK pension pot to Australia?
This is a major decision about your financial security in retirement, a complex area with frequent rule changes & therefore specialist advice is advisable.
Our article deals only with the Australian tax consequences of transferring your interests to an Australian super fund or to yourself.
In General
In broad terms, an Australian resident taxpayer will be assessable on the growth component of the sum transferred – known as Applicable Fund Earnings (AFE).
This applies regardless of whether the lump sum is paid to you or transferred to a complying Australian super fund.
The six-month rule
There is a small window if the money or assets are received within 6 months of the start date of your Australian tax residency.
None of your foreign super interest is treated as AFE if it is transferred to Australian within six months of:
- you becoming a resident of Australia; or
- your foreign employment terminating
If you transfer funds from a foreign super fund to yourself, none of the transfer will count towards your superannuation contribution caps.
If transferred to a super fund, Australian tax is only payable on the amount of the transfer in excess of the non-concessional contribution cap.
UK Pension transfers completed after six months
What is the situation for amounts transferred after six months of you becoming an Australian tax resident?
Amounts transferred to you personally
If the lump sum from the foreign super fund is paid to you then the assessable amount of the payment and any applicable fund earnings must be included in your individual income tax return as assessable income and will be taxed at your marginal rate.
The remainder of the transfer will not be subject to income tax.
Assessable foreign fund amount
Any amount of a foreign fund transfer that exceeds the amount that was vested in you at the time of transfer must also be included in your individual assessable income.
Amounts transferred to a complying Australian super fund
Where a UK pension transfer is received by an Australian fund six months after the member becomes an Australian tax resident, tax will be payable on the AFE component of the transfer.
Who pays the tax?
Provided certain conditions are met, you may be able to make an election (s 305-80 ITAA 97) to have the AFE taxed within the super fund. This may be advantageous as the super fund tax rate is 15%.
To make the election you must:
- have been resident in Australia for more than six months or have terminated your employment more than six months ago; and
- transfer the whole of the foreign fund interest directly to a complying Australian super fund.
Where the election is made, the AFE will not count towards either the concessional or non-concessional contribution caps.
If a s 305-80 election is not made, the AFE amount must be included in the member’s individual income tax return & will be taxed at their marginal tax rate.
Further, where no election is made the AFE will count towards the non-concessional cap of the individual.
The balance of the amount transferred will generally not be taxed on transfer & will be treated as a non-concessional contribution, subject to caps.
Assessable foreign fund amount
Any amount of a foreign fund transfer that exceeds the amount that was vested in you at the time of transfer is included in the fund’s assessable income & counts towards your concessional contributions.
For more information regarding contribution caps see:
Applicable Fund Earnings (AFE) Explained
So what is the AFE amount & how is it calculated?
Broadly, the AFE is the earnings or growth on the foreign pension pot while the person was an Australian tax resident.
Therefore if your interest in the foreign pension fund has increased in value since your Australian residency commenced (unless the 6-month rule applies), there will be a taxable element for Australian tax purposes.
There are various rules to be applied when determining the AFE & these depend on the type of pension scheme – a defined contribution (money purchase) scheme or a defined benefit (final salary) scheme.
Defined contribution scheme
The AFE is generally easier to calculate for these schemes. Assuming there have been no contributions or rollovers from other funds since becoming an Australian tax resident, it is the difference between the amount transferred & the value at the time of your Australian tax residence, which can usually be ascertained from the fund administrator.
Defined benefit scheme
Calculating the AFE for these schemes can be more problematic as the pension fund will not be able to provide a value of your interests in the scheme (vested amount) at the time of your Australian tax residence.
Further, Australian tax legislation does not prescribe a method of valuation or calculation of those vested amounts & the Australian Taxation Office (ATO) has not provided specific guidance on the methodology to be applied either.
The generally accepted approach is to discount the current value of the pension fund using UK inflation indicators – the RPI & CPI.
Alternatively, you may seek a Private Binding Ruling (PBR) from the ATO.
Assistance with the tax implications of your UK Pension Transfer
If you’ve read this far you’ve likely realised just how complex the Australian tax implications of transferred your UK pension interests may be.
Making contributions, rolling over from another pension fund, transfers to UK SIPPS & multiple periods of Australian tax residency all add to the complexity.
Having a clear understanding of the Australian tax consequences is a crucial element when considering such a transfer.
Integrity Impressions have been engaged in this area for some time now & are trusted by various financial advisors to undertake tax advice & AFE calculations on behalf of their clients contemplating transferring their UK pension pot to Australia.
Our procedures & processes are well established to ensure our advice & calculations are performed in a seamless & timely manner.
Who can we help?
- Individuals seeking to transfer their UK pension interests who have not engaged a financial advisor, or whose financial advisor is not licenced to provide tax advice; have an accountant/tax agent who is not experienced in providing AFE calculations & advice
- Financial Service Providers/Advisors (AFS Licence holders) who are not registered with the Tax Practitioners Board (TPB) as Tax (financial) advice providers
Are you concerned our tailored, individual advice & calculations will cost you 000’s?
Not at Integrity Impressions. We are experienced in this complex area & have devoted time & resources to ensuring our process is coherent & well structured, meaning we can deliver this advice in an extremely cost-effective manner.
We agree an affordable, fixed-price fee before engaging with you.
For more information regarding our Tax Consulting & Advisory services see:
In Summary
Tax is just one of many vital considerations when proposing to transfer your UK Pension Fund to Australia. The process is not straightforward & legislation in this area can be difficult to navigate & subject to change.
This article is provided as an overview & is for general information purposes only. It should not be relied upon or considered a substitute for seeking advice from appropriately qualified professionals.
Integrity Impressions cannot provide you with Financial Advice in respect of your proposed transfer. For this, you should seek & engage an authorised financial advisor experienced in this area.
Neither can we provide you with UK tax advice – you need to consult a UK tax agent registered with HMRC.
We hope you’ve enjoyed our article: Transferring your UK Pension – The Tax Implications.
Important Information:
The above is provided for information purposes only and is a general overview of the factors that should be taken into consideration when choosing a business structure and is not a substitute for specific advice.
Whilst every attempt has been made to ensure this content is accurate at the time of publishing, the law may change over time. Therefore, we cannot guarantee the content’s currency at a future time.
Nothing in this article should be construed as taxation advice, legal advice or financial advice.
Integrity Impressions will not be held responsible for any loss suffered by any person or entity for the inaccuracy of information or any errors or omissions in its contents, regardless of the cause of such inaccuracy, error or omission.
For professional advice relevant to your specific needs and circumstances, we suggest you contact your Registered Tax Agent, your Legal Advisor or Business Advisor as appropriate.
