Over the years we’ve advised a number of young professionals (and retirees as well) who have returned home after spending time abroad and let’s just say, navigating the complexity that is foreign asset transfer can be tricky.
In this article we provide foreign asset insights, mostly relating to UK pension funds, but wish to make the point that complexity exists across just about all foreign asset repatriation processes, and to succeed you’ll need qualified financial advice and guidance.
Australians have an innate wanderlust that often starts out as a couple of months sabbatical, then after a decade or two, is something that makes them reflect on how quickly those years slipped by.
Of course, during that time they put down roots, find employment and accumulate assets that typically include foreign bank accounts, property, international shares, superannuation and pension accounts.
The basics of transferring cash from an overseas bank account to an Australian one is reasonably straight forward. However, not everything will be so easy.
Foreign property can’t come with you for obvious reasons, and money from foreign superannuation or pension funds will likely have strict rules affecting its repatriation.
Depending on the country of origin and its legislation, there can be restrictions on the portability of superannuation and pension funds. This will also extend to tax on the funds leaving the country of origin and sometimes the fund itself can have its own peculiarities.
For example, pension funds in the UK are considered “tax-relieved” which is part of the complexity that can make it difficult to transfer funds offshore. Contributions to funds are not taxed, but withdrawals are.
It’s the opposite in Australia, as contributions are taxed then when individuals meet preservation age, they can withdraw funds tax free in the form of a pension.
In the UK the minimum pension age is 55 and generally, it’s not possible to transfer funds offshore before achieving this milestone age.
How the UK pension has been classified is also significant as only funded private pensions can be moved. (Unfunded pension schemes usually affect those who have been employed in public service such as teachers.)
There can be further restrictions based on the value of the fund and whether it is defined as a benefit scheme or money value as the rules differ.
Tax residency also comes into play and there is a timeframe for changing your residency for tax purposes. It should be noted, this process is more involved than just changing your residential address.
The key benefit of establishing tax residency is for establishing the most appropriate and favourable tax outcomes for individual circumstances. This can include avoiding issues including paying double tax. That is, paying tax on contribution on the way into your super fund and then again on its way out as a cash withdrawal.
Then there are the costs!
Transferring foreign pension funds can be expensive. Especially if the account balance is relatively low. For example, if you’re not a tax resident of the country you wish to transfer your UK pension funds to, an overseas transfer charge of 25% can be imposed.
This of course raises the question of whether you should move the fund at all. The answer will depend on your individual circumstances.
An important part of transferring a UK pension to Australia involves selecting an appropriate QROPS – Qualifying Recognised Overseas Pension Scheme - or establishing a SMSF.
QROPS meet the UK governments requirements for accepting authorised transfers from a UK pension scheme. This is important because transferring to a non-qualifying overseas pension scheme just isn’t an option as it can incur a UK tax charge of 55%.
Establishing a SMSF which complies with the UK’s strict requirements, is also an option. While a SMSF can provide flexibility in how the funds held are managed within it, they too have complexity and management can be onerous as you (as the trustee) will be required to meet the ATO’s strict compliance reporting requirements.
While complicated and difficult to understand, foreign pension laws are designed to prevent tax avoidance and uphold the fundamental purpose of the funds which is to provide income in retirement.
Estate planning
While superannuation and pensions are designed to fund livelihoods in retirement, they are also important considerations in estate planning. UK pension funds (and other foreign superannuation schemes too) can differ considerably in the treatment of an individual’s beneficiaries.
Aside from foreign pensions, a well-considered estate plan should also explore whether other foreign assets are covered by an Australian Will or if additional trust structures are required.
While complex, this should not deter those returning to Australia from realising the benefits of their wealth generated while living and working overseas. There are numerous advantages particularly if you’ve maintained your Australian tax residency. Among them tax efficiencies that depending on circumstances place the individual in a more favourable tax position as well as control over your estate planning.
However, as you’ve read here, foreign pension and asset transfer is complex.
There is a raft of criteria and obligations that must be met often on both sides, not to mention the cost and time involved and qualified advice and guidance is the key to navigating this particular maze.
To learn more about financial planning involving transfer of foreign asset and pensions, please contact Matthew Lane or Alec Winter on 07 3720 1299 or email admin@wealthfundamentals.com.au
Lane Moses Pty Ltd ABN 56 092 186 117 trading as Wealth Fundamentals and its advisers are Authorised Representatives of Fortnum Private Wealth Ltd ABN 54 139 889 535 AFSL 357306.
The information (including taxation) contained within this document does not consider your personal circumstances and is of a general nature only - unless otherwise stated. Wealth Fundamentals strongly suggests that you should not act on it without first obtaining professional advice specific to your circumstances. This information is based on our understanding of legislation at the time of writing. Such legislation may be subject to change. This publication cannot be reproduced in any form without the express written consent of the author.