The Australian tax treatment of an overseas pension fund or superannuation fund is a complex area from an Australian tax perspective.
Firstly and most importantly, it is necessary to consider if the overseas pension fund would satisfy the definition of a ‘Foreign Superannuation Fund’ for Australian tax purposes as the Australian tax treatment is different depending on whether the overseas pension fund satisfies the definition of a ‘Foreign Superannuation Fund’. In our experience, UK funds may satisfy the definition, while United States IRA’s retirement plans generally do not.
Very broadly, the ATO’s view is that for an overseas pension fund to be classified as a superannuation fund for Australian tax purposes, it must exclusively provide for the payment of superannuation benefits upon retirement, invalidity or death of the individual. Where withdrawals are permitted from the overseas pension fund prior to retirement age, it will likely not satisfy the definition of superannuation for Australian tax purposes. It is common that a Private Ruling is required from the ATO in order to confirm if the foreign fund satisfies the definition of superannuation for Australian tax purposes.
Where the foreign fund does in fact meet the definition of a foreign superannuation fund, individuals moving to Australia generally have 6 months in which they can withdraw their foreign superannuation without the lump sum distribution subject to Australian tax.
However, an individual who receives a lump sum payment more than 6 months after commencing Australian tax residency will be taxed on the earnings or growth of the foreign pension from the date of commencing Australian tax residency until the date of receipt of the lump sum payment. The earnings or growth in this period would be subject to Australian tax at the individual’s marginal tax rate.
Further, an individual may elect for the foreign pension to be transferred to a Australian complying superannuation fund with only the growth/earnings component since commencing Australian tax residency taxed at 15% in the Australian superannuation fund. The remainder of the transferred balance is the tax-free component and not taxed in the superannuation fund.
However, where the foreign pension fund does not satisfy the definition of a ‘foreign superannuation fund’ for Australian tax purposes, broadly the ATO will treat a distribution from the fund as payment from a foreign trust. In this instance, the earnings and growth of the foreign fund since the date the pension fund was established would be subject to Australian tax at the individual’s marginal tax rate. It is also not possible to transfer the pension to an Australian complying superannuation fund.
Please do not hesitate to contact us if you are considering transferring your overseas pension to Australia or receiving a payment from your foreign fund.