Main issues for UK migrants transferring to an Australian SMSF

CHANGES IN 2017
This article includes the proposed changes in UK law from 6 April 2017 relevant to UK migrants and Australian ex-pats who wish to transfer their UK pension money to Australia. To search the page for the changes, look for "6 April 2017".
If you want to look at the proposed changes yourself you can go to:-
Finance Bill 2017: draft legislation overview documents
HMRC: draft legislation
HMRC: overseas pension schemes changes

Changes in Australian law from 1 July 2017 are also covered in this article.


This article also applies to Australian ex-pats returning from the UK
  1. To transfer or not to transfer?
  2. The need for a QROPS
  3. Australian QROPS now limited to age 55+
  4. How to set up a 55+ QROPS
  5. Keeping your UK pension money until you are 55
  6. The transfer: how financial caps apply
  7. What you can transfer
  8. Australian tax payable on the transfer into the QROPS
  9. Timing of the transfer into the QROPS - the six month window
  10. Will your pension be liberated?
  11. Withdrawal restrictions and the incidence of UK tax
  12. "Five year plus" deemed domicile and UK Inheritance tax
  13. Reporting requirement of a QROPS, and the "ten year plus" rule
  14. Renotification of compliance to HMRC
  15. HMRC online system for QROPS abandoned
  16. Investment restrictions with the UK sourced money
  17. Special rules applying if your UK fund is already paying a pension, or if you are already entitled to benefit from a UK drawdown pension
  18. Priority of withdrawals if UK sourced pension money is mixed with Australian sourced money

To transfer or not to transfer?

This depends on many factors and it is best to get totally informed about the implications. There is some information on this page, but it is not advice one way or the other.

The need for a QROPS

You won't be able to transfer your UK pension fund to an Australian superannuation fund without incurring substantial tax liability unless the receiving fund is a Qualifying Recognised Overseas Pension Scheme (QROPS) under the UK rules. This applies whether you are transferring to your own Self Managed Superannuation Fund (SMSF) or to a superannuation fund run by others.

Australian QROPS now limited to age 55+

Since 6 April 2015 the only Australian funds which we can confidently say can be a QROPS are those which restrict membership or the receipt of UK sourced pension money to those aged 55 and above.

In summary, since 6 April 2015 as a result in a change to UK pension law, in order for a fund to be a QROPS, the benefits payable to the member under the fund from UK sourced pension money must not be payable before the member reaches the age of 55 unless the member has retired on ill-health grounds.

The problem for Australian superannuation funds was that under Australian superannuation law earlier withdrawals are permitted in various circumstances, the better known ones being severe financial hardship and compassionate grounds. But this meant that Australian funds were non-compliant with this new requirement. In June 2015 HMRC decided that no Australian fund could comply with the new requirement even if they had amended their constitution (trust deed) to comply. However in mid-August 2015 HMRC accepted that an Australian fund which restricted membership to those aged 55 and above would comply. See a full description of what happened (opens in new window).

How to set up a 55+ QROPS

Since 6 April 2015 some additional care has been needed into order to set up an Australian QROPS.

Firstly a correctly drafted trust deed is required, one which will satisfy HMRC. This would prohibit a release of funds when not permitted under UK law (age 55 or retirement on ill-health grounds). Generally, it would also prohibit membership of the fund to those who have reached the age of 55, so that all members of the fund must be 55 or over (some variation of this may be permitted, requiring special drafting of the trust deed).

Secondly it is important to bring to the attention of HMRC that your fund is using a correctly drafted trust deed. Until new forms are introduced by HMRC (probably from 6 April 2017), this has to be done by sending a copy of the deed to HMRC with a covering letter. My deed is known to HMRC and was used by the very first successful 55+ QROPS applicant in the post 6 April 2015 regime (and the vast majority of the others since then).

The over 55 QROPS works with brand new funds, as well as with existing funds, including those which have been removed from the QROPS list (now called the "ROPS notification list").

Since you can have as many SMSFs as you like, some people have a separate fund dedicated to receiving the UK pension money (this may help the fund to comply with the investment restrictions and the withdrawal restrictions). On the other hand, each fund will have auditors' fees. There will also be accountants' fees unless you do this yourself.

For a new fund, my packs enable you to establish your own SMSF with a trust deed known to HMRC. The pack also advises on how to complete Form APSS251 and how to submit this to HMRC, and then how to transfer UK pension moneys or assets to the fund. See the qrops 55+ set up packs.

For existing funds there is a pack available to enable you to amend its trust deed, and to apply for the fund to go on the ROPS notification list. The pack has an amending deed, covers how to complete Form APSS251 and how to submit it to HMRC, and then how to transfer UK pension moneys or assets to it, see existing smsf to qrops 55+ pack.

In all cases, it is important to keep the fund in operation at least till it receives its first notice of compliance from the ATO (after the first audit).

Please note that HMRC is careful to say that inclusion in the ROPS notification list does not guarantee that a fund is in fact a QROPS. This means that there is no guarantee that a transfer to a fund on the list will not attract UK tax. In the pack, I advise that in my professional opinion if you use my trust deed and follow the steps in the pack and as a result the fund appears on the ROPS notification list, then a transfer of UK sourced pension money can be made to your fund without incurring UK tax. Please note however, that no lawyer takes the responsibility of guaranteeing a particular outcome. For that, you would need an insurance policy. Having said that, hundreds of such transfers have now taken place since September 2015 and so the over 55 QROPS can now be regarded as tried and tested.

Keeping your UK pension money until you are 55

There is no difficulty in keeping your money in the UK pension system until you are age 55.

If your UK pension money is in a personal pension scheme (defined contribution scheme, now known as a money purchase scheme) then it can be invested in the way permitted by such a scheme. Many such schemes are in managed funds, or the money can be in a SIPP (self invested pension scheme). One real advantage in keeping the money in such a scheme is that under UK pension and tax law, earnings within the scheme are tax free. When you transfer the money to Australia however, those earnings (since the date when you became tax resident in Australia) will be taxable under Australian law either at your marginal rate of tax or, if you make an election for the fund to pay the tax, at 15%. This assumes the transfer is done more than 6 months after you became Australian tax resident. If within 6 months, then there would be no Australian tax to pay see the six month window and Australian tax payable on the transfer into the QROPS. Please note that whilst the money is in a managed fund or SIPP it does not have to be kept in pounds. The important thing is who holds the money, not which currency it is in.

If your UK pension money is in a salary based (defined benefit) scheme then you will have to decide whether to keep it in that scheme or to transfer it out to a SIPP or similar and keep it there until you reach age 55. There will be many factors affecting this decision. One will be whether the current Cash Equivalent Transfer Value (CETV) is a particularly good one because of current low UK interest rates. Another will be whether there is any age limit in the salary based scheme which restricts your ability to transfer out of the scheme (you need to check this with the scheme manager). A third will be whether it is prudent to transfer out of such a scheme at all, bearing in mind it will usually be inflation proof and provide benefits to your spouse or family on your death. And a further consideration will be whether the scheme is currently properly funded by the employer or whether it will continue to be properly funded. Another factor will be whether it is possible that transfers from the scheme may be prohibited in the future by a change in UK law. Finally it may be that in order to transfer the money to Australia at the age of 55, you will need to split it into different funds in order to achieve the transfer without exceeeding the non-concessional contribution limit (see just below). If so, then you will need to do this by transferring to a SIPP anyway at some point.

The transfer: how financial caps apply

When deciding whether a transfer is prudent, and how it can be done, you need to be aware of the UK lifetime allowance, the Australian total super fund balance cap and the Australian annual non-concessional contribution cap and how this is affected by your age. Another important factor is how long it has been since you have been a UK tax resident.

The UK lifetime allowance

A transfer into the QROPS will trigger a test of your total pension funds against the UK "lifetime allowance" (this reduced to 1 million on 6 April 2016, unless you can apply for an exemption). The rate of tax payable to HMRC is 25% on the excess (although the rate of 55% applies to lump sum payments, this would seem not to apply because the money is not being paid to the member of the fund).

The Australian caps - why do they apply?

The Australian caps apply because transfers from a UK pension fund to an Australian superannuation fund are not treated in the same way as a rollover within the Australian superannuation regime from one fund to another. Instead they are treated as non-concessional contributions because they enlarge the amount in the fund and are not concessional contributions (ie. they are not from a source where the contributor can claim tax relief).

The Australian total super fund balance cap

From 1 July 2017 members with a total super fund balance of $1.6 million or more as at 30 June in the previous tax year, will be unable to make any more non-concessional contributions. This means that no transfer of money from a UK pension fund could be made in respect of that member.

The Australian non-concessional annual contribution cap

The annual cap for such contributions in the year to 30 June 2017 is $180,000.1 If you are under age 65 on 1st July of the tax year in question, you can use up to three years' cap all at once making a limit in the year to 30 June 2017 of $540,000 over a three-year period (the "bring forward limit").2 If you do invoke the bring forward provisions, it does not mean you can contribute more than an average of the cap each year. For example, if you have never made any previous non-concessional contributions to your fund, and on 1 July 2014 you are under the age of 65 and you contribute $490,000 on that date, then you can contribute $50,000 on 1 July 2015. Then you would have to wait until 1 July 2017 before you could make any more non-concessional contributions. The caps and rules are subject to change: please check the current situation with the Australian Tax Office (ATO).
1 This reduces to $100,000 from 1 July 2017.
2 This reduces to $300,000 from 1 July 2017 (there are tapering transitional provisions if the bring forward provisions were invoked prior to the change).

You need to consider the non-concessional annual contributions cap with three more things in mind.

The first is that if any part of the amount transferred from a UK pension fund to an Australian superannuation fund becomes that fund's assessable income, then that part does not count towards the cap. What part of the amount transferred becomes the fund's assessable income? Well, it is the amount assessable to tax based on the growth of the UK pension fund since you became an Australian tax resident which you have elected on form NAT 11724 shall be paid by the fund. See Australian tax payable on the transfer into the QROPS below how this may be calculated. You can see from that section that you can elect on form NAT 11724 for the fund to pay the tax on it, instead of you paying it personally. If you make that election the growth element (or that part of it that the election covers) becomes the fund's assessable income and does not count towards the cap.

The second thing to bear in mind is that if you are going to send the money in separate tranches, then each tranche should be from a separate fund so that there is nothing left in the fund after the transfer. This is important to enable you to elect for your superannuation fund to pay the tax on any increase in value of the tranche since you became an Australian resident. This is because the election cannot be made unless the transfer extinguishes the fund being transferred. So the fund must either be reduced in some way or split into separate funds and each fund transferred separately. The usual way to split the fund is through a UK SIPP. There are several SIPP providers who are now used to offering this service. This won't be as important if there has been little growth in the fund since you became as Australian tax resident (because in that case you may not need to make the election).

This applies until 1 July 2017:-

The third thing to bear in mind is that care needs to be taken if you are organising a transfer into an Australian superannuation fund of UK pension money which exceeds the applicable non-concessional contribution cap. This is more important now that the annual cap is about to be drastically reduced. Under Australian law a superannuation fund is not permitted to accept a single amount which is in excess of the non-concessional contribution cap at all. Strangely, if there are a series of amounts which are all less than the cap, but which in aggregate exceed the cap, then the superannuation fund can accept them all as contributions.*

* See the ATO's ID 2007/225. See also ID 2008/90 and 2009/29.

If an Australian superannuation fund is not permitted to accept the amount (because it is a single amount over the applicable cap) it has 30 days to return the money to the "entity or person that paid the amount" and if it does not do so it could face an administrative penalty and be directed by the ATO to repay the money. This could either mean payment back to the UK pension scheme or to the member. In most cases it will be difficult to send the money back to a UK pension scheme because the scheme probably couldn't accept it, so it would have to be paid to the member. Doing this will have tax consequences because it would effectively be a lump sum payment from the UK pension to the member (because the fund has been unable to accept the transfer). Such lump sum payments are outside the double taxation agreement and would therefore be chargeable to UK tax and also to tax in Australia as a lump sum payment from a foreign superannuation fund (although it may only be the growth element that is taxed). There would, however, be double taxation relief.

If however, each tranche is less than the applicable cap, but the aggregate of tranches is more than the cap, then the fund could accept the transfers.

If the Treasury Laws Amendment (Fair and Sustainable Superannuation) Regulations 2017 are passed as currently drafted then from 1 July 2017 the following applies:-

It is now possible for an Australian superannuation fund to accept a non-concessional contribution which exceeds the applicable cap.

In these circumstances there are comprehensive provisions which deal with the consequences. The ATO issues an "excess non-concessional contributions determination" upon processing the fund's annual tax return for the year in question and invites the member to complete a Form 74824 (Excess Non-concessional Contributions Election Form).

The member is given three options on this form.

Option 1 is to elect to release the excess to the member. If this is done, the amount the member should receive from the fund is the amount of the excess over the cap plus 85% of the "associated earnings" amount. The associated earnings amount is a notional amount calculated by the ATO and contained in the ATO's excess non-concessional contributions determination. It is calculated on the assumption that the excess amount is in the fund from the start of the financial year until the date of the determination, and that its earnings are at the rate of the ATO's General Interest Charge (GIC) calculated on a daily compounding basis. The release of 85% of this amount is because on the same notional basis, the fund would pay 15% tax on the same associated earnings. The 85% is the associated earnings amount is added to the member's assessable income and so the member must pay tax on this amount at the marginal rate of tax. The member gets a 15% non-refundable tax offet to represent the tax notionally paid by the fund.

There are two examples on the ATO's website:

Example 1 - Reginald
R, who has a marginal tax rate of 37%, exceeds the non-concessional contributions cap by $100,000. The ATO issues an excess non-concessional contributions determination which shows an associated earnings calculation of $19,000. The determination calculates the total release amount of $116,150 ($100,000 plus 85% x $19,000). R elects option 1 on form 74824: "release amounts from superannuation".

Therefore R receives $116,150 from his super fund. The ATO adds $19,000 to his personal assessable income, increasing his personal tax bill by $7,030, however R can use a tax offset of $2,850 (15% of $19,000), so the net additional tax to pay is $4,180.

Example 2 - Belinda
B exceeds the non-concessional contributions cap by $100,000. On 1 November following the tax year in which the excess contribution is made, the ATO issues an excess non-concessional contributions determination which shows an associated earnings calculation of $13,814. The determination calculates the total release amount of $111,742 ($100,000 plus 85% x $13,814). B elects option 1 on form 74824: "release amounts from superannuation".

Therefore B receives $111,742 from her super fund. The ATO adds $13,814 to her personal assessable income, however she can use a tax offset of $2,073 (15% of $13,814).

You can see that the calculations of the associated earnings in these two ATO examples differ and currently this remains unexplained, so they should be regarded as providing a rough guide only. In Reginald's case, it can be seen that roughly a $100,000 excess contribution would be taxed at just over 4% where the member's marginal tax rate is 37%. Extrapolating from this example, for a member with a marginal tax rate of 45%, a $100,000 excess contribution would be taxed at 5.7% as a rough calculation. Belinda seems to have done a lot better. I would welcome some real life examples to post here.

Option 2 is to elect to pay excess non-concessional contributions tax. The fund must pay to the member this amount of tax payable but may keep the remainder of the contribution. The excess non-concessional contributions tax is on the excess over the cap at the top marginal tax rate (currently 49% but falling to 47% from 1 July 2017).

Option 3 is to state that the member's super fund balance (in all super accounts) is nil. This has the same consequences as option 1 except that the fund is unable to pay any money to the member (this might happen if the transferred money has already been paid to the member and the member has no other super accounts).

Since under any of these options the member is receiving personally some UK sourced pension money, the effect of UK law should also be considered here. Whether special arrangements need to be made will depend on whether the member has the necessary period of non-UK tax residence. See withdrawal restrictions and the incidence of UK tax below.

The Australian age limit

You cannot make "member contributions" (your own contributions) into a superannuation fund after the age of 65 unless you are working. See the table in my article "Australian Super - how it works" for more information about this. Since a transfer from a UK pension fund to an Australian superannuation fund is treated as a non-concessional contribution, if you are over 65 you can only make such a transfer if you satisfy the work test.

Also you will be unable to take advantage of the enhanced "bring forward limit" for transfers from that age (see "The Australian non-concessional cap" above).

Once you reach 75 you will not be able to make any transfers from a UK pension fund to an Australian superannuation fund because you are not permitted under Australian law to make non-concessional contributions after that age.

What you can transfer

You can transfer your entitlement in a personal pension scheme, whether a self invested personal pension (SIPP), or managed pension fund. Normally the transfer is in the form of money. But, depending on the terms of the scheme it may be possible to transfer the assets underlying the scheme in specie, that is without selling the assets. Typically stocks and shares can be transferred in this way. After the transfer, such stocks and shares can be held in a stockbrokers' account in the name of the fund's trustee. For other types of assets you need to check whether the transfer is permitted by Australian rules about acquisition of assets from related parties.

In the case of an occupational pension scheme (one funded by your employer), then you will be able to ask for the Cash Equivalent Transfer Value (CETV), which is a lump sum amount representing the value of your scheme. If you are within one year of the normal pension age however, you may lose the right to transfer the cash equivalent of the scheme. You can find out about this by asking the scheme administrator. In particular you need to find out when you will lose the right to transfer.

In addition to this, salary based (defined benefit) schemes offer substantial additional benefits, for example increases for inflation and a pension to your spouse on death which benefits will inflate the CETV. Should you consider transferring the money from such a scheme you will need advice about the prudence of this. The provision of such advice is now a UK legal requirement unless the value is small.

From 6 April 2015 the UK government restricted transfers from unfunded public sector defined benefit (salary based) occupational pension schemes. These are the pension schemes in the NHS, Armed Forces, Civil Service, Police, Teachers, Fire-fighters and some others. This restriction has been done by an amendment to section 95 of the Pension Schemes Act 1993 which stops transfers out from such schemes to other schemes holding the pension benefits as cash or assets. Note also that there is also a new power to cap the Cash Equivalent Transfer Value for funded public sector defined benefit schemes. This is said to be to protect the public purse, if required.

There are special rules if your UK pension fund is already paying you a pension or if you are already entitled to benefits from a UK drawdown pension. See below for these special rules.

Mechanics of the transfer

This is achieved by completing the forms provided by the UK pension fund. Normally you will not need any additional help to do this, and in my pack there is guidance as to what to expect and how to achieve the transfer.

Note that when transferring money into the QROPS, there is no need to change its currency. The transfer is effected by changing its ownership, not its denomination. So it can be retained in foreign currency if desired.

Australian tax payable on the transfer into the QROPS

Since the bulk of the money or assets transferred from your UK pension fund to the Australian superannuation fund is regarded as a non-concessional contribution, the fund will not have to pay tax because it received the transfer (unless the money transferred was above the applicable non-concessional contribution cap, as to which see above).

However, if the amount transferred has increased in value since you started your Australian tax residency (unless the transfer was within 6 months of your Australian tax residency - see below), there will be a taxable element as far as Australian tax is concerned. If you think of it, if you had transferred the money into an Australian superannuation fund on the day of your arrival in Australia, any increase in the value of the fund would have been taxed at 15% since then (in Australia a superannuation fund in its accumulation phase pays 15% tax on its income).

There are various rules which apply to the tax calculation. Firstly, if the money has increased in value because of contributions, then this part of the growth will be ignored.

In the case of a defined contribution (money purchase) scheme then provided there have been no contributions since the date of permanent residence the calculation is the difference between the amount transferred and the value of the fund at the time of permanent residence. The modern approach of the ATO (based on ATO ID 2015/7) is that only the exchange rate at the time of receipt is to be used in this calculation. This means that if the money was held in the fund in a foreign currency, the calculation should be done in that foreign currency and then converted to Australian dollars at the exchange rate at the time of transfer. However, the ATO may be willing to consider using differential exchange rates in an appropriate case where this would be fairer.

It is wrong to calculate the growth element of final salary (defined benefit) scheme by taking the cash equivalent transfer value at the time of transfer and deducting from this the cash equivalent transfer value at the time of permanent residence. This is because there are a number of elements involved in the change in value: final salaries in the employment, changes in periods of qualifying service, the age of the employee, the health of the employee, inflation, index linked stock returns at the time of valuation, the effect of scheme's rules and the extent to which the scheme is funded. These elements may be unrelated to "growth", and it is only the growth that is taxable. They may also be only notional at any one point in time. Instead, the modern approach of the ATO is to apply tax based on inflation since the date of permanent residence.

Liaison with the ATO about the tax to pay can either be by direct contact (see the ATO site for this) or by obtaining a private ruling.

Who pays the Australian tax arising on the increase in value? You can pay the tax at your marginal rate of tax or you can elect in writing on form NAT 11724 to have the fund pay the whole or a proportion of it at 15%. Whether you make that election may depend on whether you have any taxable earnings in Australia in the year in question, and whether you could make use of any tax loss if the value has gone down.

There are three further things to note about the election. Firstly, there is a requirement in section 305-80 of the Income Tax Assessment Act 1997 that in order to make the form NAT 11724 election all the money in the UK pension fund must be transferred. This means that if the money is transferred in tranches because of the non-concessional contributions cap, each tranche must extinguish the fund sending the money. See the transfer: how financial caps apply for a discussion on whether you may have to send the money in tranches.

Secondly, making the election can affect the amount counted towards the contribution cap. The amount you elect as assessable income of the fund does not count towards the contribution caps. As an example, suppose your UK pension fund was worth $170,000 at the time you became tax resident in Australia. When you transfer it to your Australian superannuation fund it is worth $200,000. This means that the amount assessable to tax is $30,000. Then, provided you elect on form NAT 11724 for the fund to pay tax on this element (that is, $30,000 x 15%) for the purpose of the contribution cap, the actual contribution that year is regarded as $170,000 and not $200,000.

Thirdly, the election can create a "taxable component" in the fund. If you intend not to withdraw from the fund until the age of 60 then this is not an issue. But any taxable component in the fund withdrawn prior to the age of 60 (on being permitted to do so, for example on retirement or transition to retirement) may be taxable on receipt. This is because by section 295-200(2) of the Income Tax Assessment Act 1997 these monies are added to the assessable income of the fund. Lumps sums are only taxable on receipt if they exceed the low rate cap, which is $195,000 for the 2016/17 tax year, but income streams are treated differently.*



*
From 1 July 2017 tax will be payable on any type of withdrawal before the age of 60, where there is a taxable component in the fund.

Timing of the transfer to the QROPS - the 6 months window

Provided the money or assets transferred are received by the Australian superannuation fund within six months of the start of your tax residency in Australia the increase in value of the fund to the time of transfer will not be taxed.

When does the six month period start? For migrants into Australia, it is when the migrant arrives with the intention of staying permanently (Tax Ruling 98/17). For returning Australians, it is when they return to live in Australia. For those who arrive on temporary visas it will depend on various factors (see Tax Ruling 98/17). And on my reading of the legislation, the date of transfer is the date of receipt of the money and not the date of transmission, so if your fund has done well, you need to get the timing right.

There is a similar 6 month window in the case of an Australian tax resident who has worked overseas. Then if a superannuation lump sum is paid upon the termination of that employment, the 6 months starts at the date of termination. There are certain other conditions which need to be satisfied for this tax exemption to apply.

There is also a 6 month window in the case of an Australian tax resident who personally receives a lump sum from a foreign pension fund. If this is properly regarded as a lump sum, then only the growth element since becoming an Australian tax resident is taxable (as the taxpayer's top rate of tax). However there is no tax if it is paid within six months of becoming tax resident.

Will your pension be liberated?

The following table compares the pension regimes in the two countries in so far as they apply to money in a private pension account (in other words the following does not apply to a salary based scheme for example a final salary scheme or defined benefit scheme).

  Australia United Kingdom
Is there tax relief on contributions? Yes Yes
Is there a limit on contributions? Yes Yes
Does the fund pay tax on contributions at the time of receipt? Yes, normally at 15%* No
Does the fund pay tax on its income? Yes, normally at 15% while in accumulation phase, zero when in retirement phase Largely no
What proportion can be taken as a lump sum, when permitted? 100% 100%
Are withdrawals taxed? After the age of 60, no Yes, except for the first 25%


*
However an Australian superannuation fund will not pay tax on a transfer-in from a foreign pension scheme because this is classed as a "non-concessional" contribution. Tax will be payable on the increase in value of the lump sum transferred-in since the start of Australian tax residency if the transfer is after the 6 month window: see timing of the transfer into the QROPS - the six month rule and Australian tax payable on the transfer into the QROPS.
As you can see from the above, the main difference between the two regimes is that whereas in the UK the fund pays no tax on the contributions nor on its income during the accumulation phase (before a pension is taken), in Australia the fund does pay tax on these. Once a pension is taken, however, this is reversed: in the UK most of the pension receipts are taxed, but in Australia (after the age of 60) they are not.

If your pension money remains in the UK pension system, then all payments from the UK pension to you as an Australian tax resident will be subject to tax as determined by the Double Taxation Convention. Under the Convention, for Australian tax residents, "pensions" are only taxable in Australia. Lump sums paid from a UK pension fund are probably not "pensions" and are therefore chargeable to tax both in the UK and in Australia (although in Australia if it is properly regarded as a lump sum it is only the growth element that is taxed).

Withdrawal restrictions and the incidence of UK tax

After the transfer of the UK sourced pension money to an Australian QROPS, it is then within the Australian superannuation system and will be covered by the Australian rules.

But the UK sourced pension money will also be covered by UK tax provisions until the member has been continuously non-UK tax resident for a period. After that period, a transfer of the money to a non-QROPS or a payment to the member can be done without incurring UK tax. Note that the investment restrictions continue to apply after the period.

What is the period? For transfers where the money was received by the fund before 6 April 2017 the period is five clear UK tax years of non-UK tax residency. For transfers where the money was received by the fund on or after 6 April 2017 the period is ten clear UK tax years of non-UK tax residency. Since a UK tax year runs from 6 April to 5 April, potentially a member might have to wait up to six or eleven years respectively for the period to expire. If you revert to UK tax residency, the period would start again.

You need to be careful about the start date of your tax residency and that you have not become tax resident in the UK again inadvertently. Since 6 April 2013 there has been a new test for tax residence in the UK - see the RDR3 test. You should bear in mind that it is possible to be tax resident in two countries at once.

How do UK tax provisions affect transfers and withdrawals within the period?

Transfers to other super funds if the relevant period of clear UK tax years of non-UK tax residency have not yet passed

A transfer by the Australian fund of UK sourced pension money to a another QROPS is permitted (it is an authorised payment and no tax will arise). But a transfer to a non-QROPS is not permitted and UK tax will be chargeable (it is an unauthorised payment).

Payments to the member if the relevant period of clear UK tax years of non-UK tax residency have not yet passed

In any case where a payment of UK sourced pension money is made by the Australian fund to the member who is not yet aged 55, nor retired due to ill-health (nor in other circumstances permitted by UK law after 6 April 2017) such a payment will be unauthorised and will be subject to UK tax.

Where a member has reached 55, whether a payment of UK sourced pension money made by the Australian fund to the member attracts UK tax without special arrangements is currently uncertain. This is because the types of payments which can be made from UK sourced pension money changed on 6 April 2015, and it is unclear how the Double Taxation Convention applies to such payments. A payment from UK sourced pension money will fall into one of these categories:-

  1. Designation of assets and money for a pension arrangement with or without a one-off lump sum connected to the pension arrangement1
  2. A pension arrangement providing for payments for life2
  3. Lump sums not connected with the making of pension arrangements3
1 In UK terminology the pension arrangement is called a "Flexi-Access Drawdown Fund" and if there is a lump sum of this type it is called a "Pension Commencement Lump Sum"
2 Depending on its terms and who is paying it, this is called a Scheme Pension or a Lifetime Annuity
3 These are called "Uncrystallised Funds Pension Lump Sums"
The UK tax result would appear to be that:-


*
This assumes that such payments are outside the Double Taxation Convention because they are lump sums and not "pensions". There is some suggestion to the contrary in the Pension Tax Manual (PTM113210) but this refers to Double Taxation Conventions very generally and cannot be relied on for the UK-Australia DTC.

To be absolutely sure that a payment to the member is made in the correct category some formalities are required. Also an obligatory notice to the member and a report to HMRC is required. I can provide advice on these matters, including the necessary paperwork.

Where a member has made transfers into the QROPS fund which exceed the non-concessional contributions cap, as has been seen above the member may opt to receive the excess from the fund plus 85% of the notional applicable earnings arising from the excess contribution. Where the member is 55 or over, but has not yet completed the relevant period of clear UK tax years of non-UK tax residency, then the member will need to ensure that the payment is made in the correct category as listed above. Again I can provide advice on these matters, including the necessary paperwork.

"Five* year plus" deemed domicile and UK Inheritance tax

Whether UK Inheritance Tax is payable on death is governed by "domicile" rather than tax residence. Under UK Inheritance Tax law it will take those who have had a long term UK domicile at least five* clear UK tax years to lose that domicile after the ending of UK tax residence (there is a period of "deemed domicile" after migration). It could be longer than this if the migrant cannot prove an intention to reside out of the UK indefinitely. Also domicile will revert to UK for those who become UK tax resident again. Unless there is a specific provision in the trust deed, a member's account balance in a superannuation fund will not form part of the member's estate on death because the trustee has a discretion to whom it should be paid. This means it would not be taken into account for UK Inheritance Tax purposes. However in Australia, a binding death benefit nomination (BDBN) is often used to direct the trustee to pay the account to a particular person or persons on the member's death. If a BDBN is made it removes the trustee's discretion and causes the account balance to fall into the member's estate. This means that it would be taken into account for UK Inheritance Tax purposes after all. For this reason, migrants should be careful when making a BDBN before they have definitely lost UK domicile or deemed domicile if their total estate is above the current UK Inheritance Tax threshold. And if there is any risk of a reversion to UK domicile then any BDBN should be reviewed.


*
The period used to be three years. The five year period applies to events after 5 April 2017: amendment to section 267 of the Inheritance Tax Act 1984 (by the Finance Act 2016).

Reporting requirement of a QROPS and the "ten year plus" rule

Note that these reporting requirements apply to all QROPS whenever they were established. They also apply to former QROPS, so you cannot avoid the requirements by asking that your fund is no longer a QROPS.

The reporting rules are currently as follows:-

  1. You must inform HMRC on form APSS251A within 30 days of a change of details of the fund eg. name and address, change of trustees.
  2. You must inform HMRC on form APSS251B within 30 days if the fund ceases to be a recognised overseas pension scheme.
  3. You must inform HMRC on form APSS253 within 90 days of a payment from a QROPS (or former QROPS) from money transferred into the fund from a UK pension if it is made either
    • within 10 years of that transfer or
    • to someone who is a UK resident in the tax year of the payment or
    • to someone who has been UK resident in any of the previous 5 tax years of the payment.
  4. If payments are by way of pension, only the first payment needs to be reported.

For the reporting requirements, see the aptly named Pension Schemes (Information Requirements - Qualifying Overseas Pension Schemes, Qualifying Recognised Overseas Pension Schemes and Corresponding Relief) Regulations 2006. This has been amended several times.

Renotification of compliance to HMRC

A QROPS now has to re-notify HMRC at five-yearly intervals that it continues to meet the conditions for a QROPS. If a QROPS fails to re-notify, it will lose its status as a QROPS.

When is the first time this will need to be done?

This depends on the date of the letter from HMRC granting QROPS status. For QROPS whose letter date is 1 April 2010 or later, then it will on the fifth anniversary of the letter and every five years anniversary after that. For QROPS whose letter date is before 1 April 2010, then it will be a date notified to the QROPS, but it will not be before 6 April 2016 or later than 31 March 2017.*

HMRC will send a reminder to the QROPS - this may be post or it may be sent by email but the requirement to re-notify is not conditional upon receiving the reminder. It is therefore essential that a QROPS should ensure that it has given its current postal address and email address to HMRC. If they change then HMRC can be notified on form APSS251A.

HMRC online system for QROPS abandoned

HMRC have decided to abandon the QROPS online system. However, it would appear that the new forms for use from 6 April 2017 will be online forms. Apart from that, it would appear that all contact will need to be by post or email.

Investment restrictions with the UK sourced money

The part of your Australian superannuation fund which is referable to money or assets transferred into the fund from the UK is called the "taxable asset transfer fund" (TATF).

If the TATF is used to invest in those type of assets which would not have been allowed had this money remained in a UK pension fund ("taxable property") then they are subject to substantial additional UK tax. This would apply for example to residential property, holiday homes, timeshares, fine art, antiques, fine wine, jewellery, boats, cars etc.

Therefore you need to be careful when considering trying to use your Australian superannuation fund to invest in such assets. You will need to consider both the Australian rules of investment and the UK ones. This applies however long you have been continuously resident in Australia. The rules apply to all QROPS and former QROPS. They don't apply to a non-QROPS into which the UK sourced money has been legitimately rolled over, unless (from 6 April 2017) that fund is a non-UK registered scheme.  

Special rules applying if your UK fund is already paying a pension or if you are already entitled to benefits from a UK drawdown pension

In these circumstances your rights in the pension fund are said to have "crystallised". Subject to the Australian age and financial limits the fund can still be transferred. But certain rules apply to the transfer.

In some cases, such as if you are in receipt of a UK scheme pension (where you are receiving pension payments for life), the receiving scheme must mirror the arrangement and provide benefits "like for like".

In other cases, such as if the transferred money is in a member's drawdown pension fund or flexi-access drawdown fund, then there are two important rules. Firstly, the money must be transferred into an arrangement in which no other sums or assets are held. This can probably be achieved within an Australian SMSF by having a segregated account (if permitted by the trust deed). Secondly, the current HMRC view is that the whole fund must be transferred. This could interfere with the need to split the fund into separate funds in order to be able transfer the money in a tax efficient way.

Australian tax residents who have reached the age of 55 but have UK pension money which is still within the UK pension regime might be tempted to take 25% of the UK pension money "tax free" as a "pension commencement lump sum". However, it will have two consequences. Firstly, the growth element since Australian tax residency will be taxed (and payable by the member at the member's top personal tax rate) unless the transfer was within six months of tax residency: see the six month window. This is because in Australian law it is regarded as a lump sum received by the member from a foreign pension fund. Secondly, the lump sum payment will result in the remainder of the UK pension money going into a UK drawdown pension arrangement. Depending on the amount in the fund, this could cause problems with the transfer (because it may need to be split - see above, and this would be more difficult to do). Also a segregated account will be required within the fund when the transfer takes place.  

Priority of withdrawals if UK sourced pension money is mixed with Australian sourced money

It is sometimes suggested that within an Australian superannuation fund, if UK sourced pension money is mixed with Australian sourced money then HMRC will regard any withdrawals as from the UK money first. This however, is a misunderstanding of the rule*. Since UK legislation cannot extend to control a non-UK resident's use of their money sourced from outside the UK, the rule can only apply to the UK sourced money and sets a priority of withdrawals from that money, depending on how it got into the fund. In practical terms, in most cases this is not a concern.


*
Regulation 4 of the Pensions Schemes (Application of UK Provisions to Relevant Non-UK Schemes) Regulations 2006.

Jeremy Gordon
19 February 2017

Copyright © Jeremy Gordon
DirectDocs® is a registered trade mark in Australia.

This article only applies to UK registered pension schemes and Australian self-managed superannuation schemes regulated by the Australian Tax Office. It applies to UK migrants to Australia, and to Australian ex-pats returning to Australia from the UK.

Disclaimer - legal advice
This article does not arise from any instructions from you and it is not legal advice given to you. You should check for yourself as to the legal issues for UK migrants and returning Australian ex-pats transferring their pensions to Australian SMSFs. If you follow the information on this page, you do so at your own risk.

Disclaimer - financial product advice
This article provides factual information only and is not intended to give a recommendation or opinion about a financial product or class of financial products. It particular it should not be taken to be advice about the prudence of establishing an SMSF in Australia and transferring to it money held in another pension scheme or in another form of investment. You should satisfy yourself about this.

Sources:
(the links open in new window)
HMRC main QROPS page
HMRC QROPS scheme management page
For the UK provisions: The best source of these is the website of HMRC which carries the Pension Tax Manual which is relied on by Revenue staff. This contains the effect of the up to date rules and regulations.
Here are main relevant pages of the manual which you can search for, or you can browse through the whole manual:-
PTM113210 - re: application of tax charges to non-UK schemes.
PTM102000 - re: transfer to a QROPS
PTM112100 - re: what makes a scheme a QROPS
PTM112700 - re: QROPS reporting requirements
PTM112800 - re: former QROPS reporting requirements
PTM125000 - re: taxable property (restricted investment)
PTM107000 - re: transfers of scheme pensions
PTM104000 - re: transfer of drawdown pensions
PTM063300 - re: uncrystallised funds pension lump sum
IHTM01000 - re: Inheritance Tax
For the UK Legislation:
Go to UK legislation and look for the Finance Act 2004. The relevant parts are Part 4 of the Act and Schedules 28, 29, 29A and 34. Part 9 of the Income Tax (Earnings and Pensions) Act 2003 is also relevant. These have been amended several times. You can request the latest version of this legislation online but unfortunately it is not kept up to date.
The relevant regulations are available from the same site, but they are even less likely to have been updated to display recent amendments.
The relevant ones are:-
Pension Schemes (Categories of Country and Requirements for Overseas Pension Schemes and Recognised Overseas Pension Schemes) Regulations 2006 - 2006 No. 206
Pension Schemes (Application of UK Provisions to Relevant Non-UK Schemes) Regulations 2006 - 2006 No. 207
Pension Schemes (Transfer of Sums and Assets) Regulations 2006 - 2006 No. 499
Pension Schemes (Information Requirements - Qualifying Overseas Pension Schemes, Qualifying Recognised Overseas Pension Schemes and Corresponding Relief) Regulations 2006 - 2006 No. 208
Pension Schemes (Taxable Property Provisions) Regulations 2006 - 2006 No. 1958
Sorry, without using an online law library or buying an up to date law book, it is very difficult to obtain the legislation as amended.
Also there is:-
Form APSS251 (QROPS application form).
The best source for Australian superannuation schemes is the ATO site where you can search for the online documents:-
"Tax treatment of transfers from foreign super funds".
Form NAT11724 (to report a transfer from a foreign super fund into an Australian super fund when tax is payable on the source fund's income and you want your fund to pay that tax).
These ATO documents are also very useful:-
"Self-managed super funds"
"Key superannuation rates and thresholds"
"If you go over the non-concessional contributions cap"
These documents are usually very clear and up to date.
For Australian legislation go to Comlaw and search for the relevant statute or regulation. Comlaw contains up to date versions of the legislation which can be viewed or downloaded.
Warning!
There is a lot of outdated (and often undated) material which appears on search engines' results.

Australian super - how it works
SMSF - the legal framework
SMSF - human or corporate trustee?
SMSF - custodian (bare) trustee packs
Stockbrokers charge clause problems
10 good reasons to use my documents
Buy my documents now

UK Migrants and returning Australian ex-pats!
Qrops compliant documents and smsf advice
Pack to set up a QROPS compliant SMSF and transfer UK pension moneys or assets click here
Pack to obtain QROPS status for your existing SMSF and transfer UK pension moneys or assets click here

Jeremy Gordon is a barrister practising in Queensland and in the UK. He can be contacted by email using
or by mail at PO Box 354 Corinda QLD 4075. Or he can be contacted through his uk practice Chambers of Bernard Richmond QC, Lamb Building, Temple, London EC4Y 7AS, tel: 020 7797 7788. The conditions applying his work in Australia are here (opens in new window). For conditions applying to his work in England and Wales please ask.