|DRAFT UK FINANCE BILL 2017|
|The UK Government plans to increase the "five year plus" period referred to below to ten years for transfers which happen from 6 April 2017. Transfers prior to that date will not be affected by this change. |
There will be various other changes clarifying the law in this area and affecting the information given below. This page will be revised soon.
For the time being see:-
Finance Bill 2017: draft legislation overview documents
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. Having wavered on the point, HMRC finally decided that no Australian fund could comply with the new requirement. 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.
Firstly a correctly drafted trust deed is required, one which will satisfy HMRC. This would not only prohibit a release of funds when not permitted under UK law (age 55 or retirement on ill-health grounds) but also prohibit membership of the fund to those who have reached the age of 55. This means that all members of the fund must be 55 or over.
Secondly it is important to bring to the attention of HMRC that your fund is using a correctly drafted trust deed. This cannot be done merely by using the APSS251 form offered by HMRC nor by using the online system. Instead it requires a copy of the deed to be sent 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).
Many people will have existing funds or even former QROPS for which they would like to obtain QROPS status under the post 6 April 2015 regime. Here are the various possibilities:-
|Type of fund||Comment|
|Brand new fund||Since in Australia you can have as many SMSFs as you like, it is not a problem to start a new fund. It must limit membership to those aged 55 and above.
In fact, having a separate fund will assist to keep the UK sourced money separate from Australian sourced superannuation contributions, which may help the fund to comply with the investment restrictions.
On the other hand each fund will have auditors' fees. There will also be accountants' fees unless you do this yourself.
|Existing fund now applying to go on the QROPS list||Assuming all members are 55 or above, it is possible to amend the trust deed to restrict membership to members of 55 or over and HMRC will be prepared to put it on the QROPS list.|
|Existing fund which was a QROPS prior to 6 April 2015 (no longer a QROPS because of the new rules)||Assuming all members are 55 or above, it is possible to amend the trust deed to restrict membership to those aged 55 or over to enable the fund to be relisted.|
My packs enable you to establish your own SMSF which contains a trust deed which HMRC have already accepted as sufficient to enable the fund to be placed on the QROPS list. 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.
If you already have an SMSF then there is a pack available to enable you to amend your fund, and to apply for it to go on the QROPS list. The pack covers how to amend the trust deed, 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.
Please note that all HMRC material now makes it clear that inclusion in the list of QROPS 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 QROPS 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 list of QROPS, 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.
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.
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. 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 whether to pay the tax on that assessable amount personally or have the fund pay the tax on it. If you elect for the fund to pay the tax on it, then it 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 a separate fund. 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 (if you miss the six month's window). 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.
The third thing to bear in mind is that organising a transfer of UK pension money into an Australian superannuation fund which exceeds the applicable non-concessional contribution cap is largely an untried and untested area, but will come to the fore now that the annual cap has been 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 it has 30 days to return the excess 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. The question arises whether a payment to the "entity or person that paid the amount" means the UK pension scheme or the member. In most cases it will be difficult to send the money back to a UK pension scheme because the scheme is unlikely to be able to accept it, so it would have to be paid to the member. Care should be taken with this because it would be subject to Australian tax as a payment from a foreign superannuation fund.
If the excess over the non-concessional contribution cap is accepted by the Australian superannuation fund then there are comprehensive provisions which deal with the consequences. The member can choose to have the fund release the excess to the member, and then tax is payable to the ATO by the member at the member's marginal rate of tax on a notional amount (the "associated earnings") derived from the excess non-concessional contribution in the fund. This calculation assumes that the excess amount is in the fund for the whole financial year and that its earnings are at the rate of the ATO's General Interest Charge (GIC). A rough calculation of this tax can be made therefore before a decision is made about exceeding the limit. If the member chooses to keep the excess in the fund then it is taxed at the top marginal income tax rate.
Whether anything which happens to the UK sourced pension money after the QROPS transfer is affected by UK law depends on whether the member has been a non-UK tax resident for five clear tax years: see below.
Deciding which option is best for you will depend on a number of circumstances therefore. Where the amount to be transferred from a UK pension scheme to an Australian superannuation fund which is on the QROPS list exceeds the available non-concessional contributions cap, and where the member is over 55 and has been a non-UK tax resident for at least five clear UK tax years, here is a recap of the realistic options (advice may need to be taken which option is suitable and whether there is a risk of Australian or UK tax or penalties arising):-
You will also 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.
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.
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.
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 view of the ATO (stated in the notes to form NAT 11724) is that the amount you elect as assessable income of the fund does not count towards the contribution caps. As an example, suppose your defined contribution UK pension fund was $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.
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 Australian tax residents who have 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.
|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%|
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.
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.
This means that after the five clear UK tax years have passed, transfers of the UK sourced money to other funds or to the member are covered only by the Australian superannuation rules.
If the five clear UK tax years have not yet passed, UK tax will arise if the UK sourced pension money is transferred to a non-QROPS (this would be an unauthorised payment). Member's withdrawal is also affected by both rules within this time. In fact, since 6 April 2015, in respect of pension money which is not tied to a salary based scheme, UK rules of withdrawal have been more relaxed than the Australian rules. The UK rules now allow withdrawals from age 55 but the Australian rules only allow some of the money to be withdrawn from the "preservation age" (which is gradually changing from 55 to 60) or all of it upon retirement or age 65 (see my page Australian super - how it works).
If the member does withdraw UK sourced money within the five year period, then it is important to ensure that the withdrawal is done properly to avoid it being UK taxable. Firstly it is important to ensure that the withdrawal is permitted by UK pension and lump sum rules (otherwise it will be an unauthorised payment). Care needs to be taken. The following are authorised categories of withdrawal in this context:-
Whilst it is early days with these provisions and advice needs to be taken about these matters, UK tax result would appear to be that:-
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"
This is the result of adding sections 636A(1A) and (1B) of the Income Tax (Earnings and Pensions) Act 2003 (which contains the 25% tax free - 75% taxable provisions) to the "member payment provisions" in Schedule 34 of the Finance Act 2004.
To ensure that a withdrawal is made in the correct category some formalities are required. Also an obligatory notice to the member and a report to HMRC is required. Advice should be sought on these matters.
A UK pension paid to an Australian tax resident will be subject to tax in Australia. So whilst keeping the UK pension money in the UK might make it accessible earlier, it might not be tax advantageous to do this. It depends on your overall financial position.
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).
The reporting rules are currently as follows:-
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.
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 30 April 2015 or later than 31 March 2017.*
HMRC will send a reminder to the QROPS - this may be post or it may be sent electronically 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 address to HMRC. If this has changed then HMRC can be notified on form APSS251A. It is also a good idea to register for the new online system (see below). Since all QROPS will be invited to use the new system, this will be a good test to see if HMRC has the correct address for your QROPS. If you receive no information about the new online system, then the address may be wrong, and you may miss the deadline for renotification.
The start of the renotification scheme has now been postponed until 6 April 2016
HMRC have recently introduced a new online system for your QROPS. This contains links to all QROPS documentation and also to a new site which you can use to manage the scheme including compliance with reporting requirements.
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.
These are complications which ought to be avoided if possible. It is one reason to avoid the temptation of taking 25% of your UK pension money "tax free" while it remains in the UK pension system (that would result in the remainder of the UK pension money going into a drawdown pension arrangement). Also if you are Australian tax resident at the time of receiving the 25% payment, you will have to pay Australian tax on this money because it is regarded as a receipt from a foreign pension fund.
As for how the new flexi-access drawdown pensions which apply in the UK from 6 April 2015 can interact with Australian QROPS within the 5 year residence period see this.
6 December 2016
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