Taking the sting out of overseas super

There would be few financial practices that would not have at least one client with superannuation money held in an offshore account.

This is because many Australians have worked overseas at some stage in their life, or even moved from another country to reside permanently in Australia.

Such circumstances provide an opportunity for planning groups to help clients transfer superannuation money from overseas to Australia, increasing their funds under management as well as providing a greater value-add service to the client.

While most people think it is difficult to have overseas superannuation money transferred to an Australian super fund, according to BT Fund Management’s head of technical services Alyson Clarke, it is in fact not as hard as it might seem.

“In the past, there was the belief that if the superannuation fund didn’t have everything in compliance, then they couldn’t do it,” she says.

This is because in the past, it was a lot harder to get superannuation money out of the UK, where most transfers occur from.

However, from January this year, the UK rules were relaxed, creating a lot more opportunity for financial planners to help their clients access their pension money.

A client must first decide they want their superannuation money transferred to Australia. This decision is best made with the assistance of an accountant who will help the client evaluate the tax considerations of the transfer.

Secondly, the client must send a letter to the overseas superannuation fund requesting the release of the funds and supplying relevant paperwork, including account details and employer contacts in that country.

The fund must then confirm the client has been contributing to the fund as well as provide information regarding the trust deed and how the money is to be released.

Ultimately the decision to release the money is made by the transferring pension fund. Clarke says in the case of do-it-yourself pensions funds or self-managed superannuation funds, it can be harder to get the money released.

That said, Clarke says over the past six years BT has had a 99 per cent success rate with requests for transferring pension fund money to Australia. Most of these requests are adviser driven, with BT receiving around 7,000 requests last year to assist the transfer process.

The wild card in this process is the length of time it will take.

“I’ve seen transfers take longer than six months, but then I’ve also seen them take two months or two weeks,” Clarke says.

While this part of the application and approval process is fairly straightforward, the circumstances of how the money is treated once it hits Australian shores is currently an issue for review.

At present under section 27CAA of the Income Tax Assessment Act, if the transfer of superannuation money from offshore to Australia occurs within six months, the money is not taxed.

However, if the process takes longer than six months, any growth that has occurred to these funds since the date the money was transferred to Australia is included as assessable income.

But is six months long enough for people to get their superannuation organised given that it may not be a logistical priority at such a chaotic time as relocating to another country?

According to Clarke, the six months time frame is mostly an issue with investors who hold pension fund money in the UK.

This is partly because an increasing number of people transfer money from the UK. Further, the US 401(k) system enables people to cash out at any time.

The drawback, however, in the US is that if people cash out of their pension plan early and are under 55 years of age, they are taxed at their marginal rate of tax plus 10 per cent. People aged 55 years or older are taxed at their marginal rate of tax.

Singapore is more similar to the Australian retirement system, while New Zealand has no superannuation system.

The issue of the taxation of transfers from overseas superannuation funds is central to the current Senate Select Committee’s review of superannuation.

Expected to make its report when Parliament resumes on August 19, the committee has received 46 submissions from a wide range of sources on facilitating the smoother transfer of superannuation monies from overseas funds to Australia.

A common theme in many of the submissions is the desire to lengthen the six-month time limit for completing a transfer as well as taxing transfers at a flat rate of 15 per cent.

It is believed that taxing the transfer at a flat rate of 15 per cent would bring the tax treatment of the super monies in line with benefits accumulated in Australia. That is, the way transfers are treated in moving money from a resident non-complying fund to a complying fund.

The inability of individuals to access the transferred funds to meet their tax liabilities is another bone of contention for many.

Currently, transferred funds cannot be accessed to pay the tax liability should it be incurred because of the preserved status of those monies.

“This tax liability has to come out of your own pocket,” Clarke says.

She says the system needs to address these time frame issues to both encourage and help people consolidate their overseas superannuation money.

Clarke says given that it is not unusual for five to 10 years to pass before people seek to consolidate their overseas money, the six month time limit is far too stringent.