Tax savings on overseas super transfers

Following changes introduced into tax legislation in June 2004, significant cashflow problems previously arising from transferring overseas superannuation can now be avoided.

These new rules may allow your clients to elect to have the growth in the value of their fund taxed at 15 per cent by the Australian superannuation fund. So, the growth does not need to be included in a personal tax return and the tax can be paid for by the Australian superannuation fund (normally at a substantially lower tax rate than personal tax rates).

Consider the example of Danny, who returned to Australia in September 2003 after a two-year working holiday in the UK.

Pre-July 1, 2004

When Danny previously emigrated from the UK to Australia in January 1998, his UK super was worth £50,000. By the time he transferred his super to Australia in 1999 it had grown by £10,000 (that is, $24,200).

Because the process of transferring the super took longer than six months, Danny was required to include the $24,200 in his tax return and was sent a tax bill for over $10,000 (as this was assessed against his personal marginal tax rate). He could not access his super as he was too young, and he did not have the money to pay the tax bill. Consequently, he took out a personal loan.

Danny is keen not to be caught by the same problem this time. During his two-year working holiday he accrued £15,000 of superannuation. He has tried to transfer the superannuation within six months but this has been difficult due to the paperwork and approvals required in the UK.

Post-July 1, 2004

Thankfully for Danny, the new rules allow him to elect to have the growth in the value of the overseas fund taxed at 15 per cent by the Australian superannuation fund after transfer. This means Danny does not need to include this overseas super growth in his own personal tax return and his Australian superannuation fund will pay the tax on his behalf and deduct it from his Australian super fund account balance.

The new rules apply to transfers on or after July 1, 2004, so assuming that the UK fund eventually transfers Danny’s superannuation across in October 2004, Danny sends an election form to his Australian superannuation fund telling them to deduct the tax from his superannuation fund balance.

The Australian superannuation fund receives the funds from the UK together with an election from Danny. The election declares $6,000 growth in the value of the UK fund since September 2003.

The Australian superannuation fund deducts $900 tax ($6,000 x 15 per cent) and saves Danny having to disclose this in his end of year tax return. Danny is on the top rate of marginal tax and in making the election has saved over $2,000 of tax and Medicare levy. It has also helped his cash flow.

Advantages and disadvantages

It is important to consider the advantages and disadvantages of transferring superannuation from overseas.

Many overseas personal superannuation funds (as opposed to employer-sponsored super funds) are impacted by the Foreign Investment Fund (FIF) rules. Where this is the case, tax is paid on the growth portion of the overseas super fund by the individual on an annual basis even though the balance is still held overseas. If your clients are impacted by FIF legislation, it is important to recommend they seek tax advice as this is a complex area of legislation.

If the money is transferred from overseas then making the election will generally provide the best result as there will be very few individuals in this situation who have a marginal tax rate of less than 15 per cent.

Practical issues to consider

Advisers should be aware that although 15 per cent tax is deducted, there is no additional surcharge liability. In fact, by having the growth portion of the transferred overseas superannuation taxed in the name of the Australian superannuation fund, the client’s adjusted taxable income is not increased. This may help to reduce the surcharge liability (compared to having it taxed in the client’s name).

The election to be taxed within the Australian superannuation fund is only available if all of the benefit is transferred from overseas. This may cause a problem when, for example, the UK fund will not release the Protected Rights portion of the fund.

If the client had rolled over all but the Protected Rights portion into another UK personal fund prior to transferring the funds into the selected Australian superannuation fund, they could be considered to have transferred all of the benefits from that personal super fund across to the Australian superannuation fund and therefore would be allowed to make an election.

The Australian Taxation Office (ATO) has issued a sample version of the election form to assist in the process. There is no requirement to use this sample form but if you use a different form you must ensure that the information on the form is adequate. The sample form is available from the ATO web site.

In some cases, the UK fund will release the Protected Rights component of the fund. If this is the case, a standard form available from the Inland Revenue in the UK is generally required to be completed.

Kevin Smith is head of technical services of BT Financial Group .