Blogs

By Mark Ellem

Changes made to the law in the UK governing the transfer of entitlements held in a UK pension fund to an Australian superannuation fund, has placed a halt on such transfers. Individuals who have transferred their UK pension entitlements to an Australian superannuation fund since 6 April 2015 are at risk of having those benefits taxed as high as 55% in the UK. Australian superannuation funds previously listed as a Qualifying Recognised Overseas Pension Scheme (QROPS) will find that they have been removed from the QROPS list.

What was allowed up to 6 April 2015?

Prior to the changes to the UK law, which were made on 6 April 2015, an individual who had superannuation in the United Kingdom, e.g. a UK Pension Fund, was able to transfer their entitlements to an Australian superannuation fund. This included a transfer to an SMSF.

Care needed to be taken as there were taxation consequences where the entitlement in a UK Pension Fund was transferred to the Australian superannuation fund after the individual had ceased being a resident of the UK for 6 months. Taking into consideration past experiences with UK Pension transfers, it is difficult to affect the transfer within the 6 month window.

Basically, the growth in the value of the UK Pension Fund, since the individual ceased being a resident of the UK, up to the value of the transfer amount, is assessable as Australian income of the individual. However, the individual can elect for the assessable amount to be included in the assessable income of the Australian superannuation fund who received the transfer. This election is generally made as it is the Australian fund that received the UK Pension Transfer and consequently has the cash to pay the tax. Further, the tax will be at 15% (the fund’s tax rate) rather than the individual’s marginal tax rate, which could be higher.

Further, the amount that is not treated as assessable will be counted against the individual’s non-concessional contribution cap. Again, care needed to be taken with the transfer and currency exchange rates to ensure that the relevant non-concessional contribution cap was not exceeded.

Prior to receiving the UK pension transfer, the Australian superannuation fund was required to register as a Qualified Recognised Overseas Pension Scheme (“QROPS”). This was a relatively straight forward process which involved completing the relevant form and lodgement with the UK Revenue & Customs (Tax) Office. An SMSF was able to register as a QROPS and many superannuation funds included on the QROPS list were SMSFs. The Australian superannuation fund had (and continues to have) reporting requirements to the UK Revenue & Customs (Tax) Office in relation to specific events. It is the change to these events that had effectively put a stop on UK pension transfers to an Australian superannuation fund.

What are the changes?

Basically the change to the UK law that has caused the issue is that a member of a UK pension fund is now permitted to take their pension entitlement as a lump sum, that is, a full commutation. Previously, an individual member receiving a pension from a UK fund was only entitled to take 25% of their entitlement as a lump sum. As a result of this change there is now a restriction on the withdrawal of benefits prior to age 55. The only acceptable circumstances for a withdrawal prior to age 55 is where the individual is retiring due to ill-health in accordance with the UK requirements. This restriction is required to be included in any superannuation fund to which benefits are transferred, including an Australian superannuation fund.

This is a problem for Australian superannuation funds. Under the SIS rules, a person can be paid an entitlement from their superannuation fund in circumstances where they are under age 55 and the payment is not a result of the member retiring due to ill-health (our Total and Permanent Disablement – TPD). For example, such a benefit could be paid as a result of:

• Temporary incapacity;
• Payment on ‘compassionate grounds’;
• Payment as a result of ‘financial hardship’;
• Payment as a result of compliance with an ATO Release Authority, e.g. excess non-concessional contributions; excess concessional contributions; Division 293 tax.

Consequently, where such payment events are allowed under the governing rules of the Australian superannuation fund there would be a violation of the new 6 April 2015 UK requirements and the individual would be at risk of being liable for UK penalty tax of up to 55% of the amount transferred from the UK pension fund. It is understood that transfers that occurred prior to 6 April 2015 will not be affected.

There have been suggestions that a superannuation fund’s trust deed be amended to effectively mirror the required UK restrictions, however, there remain some questions as to whether such amendments will satisfy the UK Revenue & Customs office. At the end of the day, unless the receiving fund is placed on the list of QROPS, any transfer of UK benefits to an Australian superannuation fund is at risk of being subject to the high UK penalty tax.

This looks like a wait and see issue for the time being and hope that the Australian and UK Governments can come up with a workable solution (I do not suggest any holding of the breath!)