Toolbox: Tax treatment for overseas super benefits

A number of planning issues arise from the Australian income tax treatment of transfers and cashing of superannuation benefits from UK funds by Australian residents.

In the past month, two developments have occurred which have an impact on the tax treatment, in response to recommendations made last year by the Senate Select Committee on Superannuation.

Firstly, theAustralian Taxation Office(ATO) has released ruling TR 2003/12, which clarifies the ATO’s interpretation of the current law affecting cashing and transfer of UK (and other overseas) superannuation benefits in a number of respects.

Broadly, it provides guidance on a number of issues including:

* If a FIF tax liability has arisen in respect of a benefit accruing in an overseas fund, generally:

a) the tax liability arising upon the cashing or transfer of the benefit to another fund may be reduced (that is, treated as non-assessable non-exempt income) having regard to the amount of the benefit that has already been assessed under the FIF regime; and

b) the pension payments from a UK fund to an Australian resident that would otherwise be included as assessable income may be treated as ‘non-assessable non-exempt income’ (that is, essentially, free of income tax) to the extent the amounts have previously been included in the client assessable income under the FIF regime.

* If an amount is transferred from a UK super fund to another fund (whether in the UK or Australia) the ATO’s view is that the amount ‘properly payable’, as referred to above, means the amount of vested benefits on the day it is actually paid out or transferred.

* If a client becomes an Australian resident at a time when they have an interest in a UK fund, then returns to the UK and ceases to be an Australian resident, then later becomes an Australian resident again, the ‘residency start date’ referred to above is the first day of the first Australian residency period. It would seem that there is no concession made for the time subsequently spent in the UK.

However, the Government, in its response to the Senate Committee Report, noted that this is an area that requires further examination.

* The ATO has recognised there are sometimes difficulties in obtaining the relevant information from the overseas fund to determine the amount that is properly payable (that is, the vested benefit). The ATO has suggested that where the information cannot be obtained from the fund itself, it may be appropriate to engage the services of an actuary. If the amount is insignificant, the taxpayer can contact the ATO in order to determine a reasonable figure.

* In order to determine the tax liability, it is necessary for the relevant amounts to be valued in Australian dollars. The ruling clarifies that where the overseas benefit is transferred to an Australian fund, the relevant exchange rate is the day the amount is received by the Australian fund or, where the amount is paid directly to the taxpayer, the day the funds are actually received in Australia.

If the benefit is transferred from one foreign fund to another foreign fund, the conversion rate is the exchange rate applicable at the end of the year of income.

Secondly, the Government has announced that it proposes to amend the law with respect to the transfer of benefits from an overseas fund to an Australian fund.

If the proposals become law, this will broadly mean that, where a client transfers their entitlement in the UK to an Australian super fund, the amount calculated as assessable income will be liable to be paid by the receiving fund trustee (at the fund rate of 15 per cent) rather than the client (at their marginal rate).

This means that, typically, the applicable tax rate will be less. Also, it solves the problem of the client having to source the funds to pay the tax: the fund receives the money and the fund pays the tax.

In addition, the Government will explore ways to amend the legislation to enable the growth of a benefit which is attributable to the period a person has been an Australian resident to be more easily determined.

One aim will be to alleviate difficulties in obtaining valuations of overseas benefits at relevant dates. Another will be to achieve the appropriate result for a client who becomes an Australian resident at a time when they have an interest in a UK fund, then returns to the UK and ceases to be an Australian resident, then later becomes an Australian resident.

It’s worth noting that the Government had rejected the Senate Select Committee’s recommendation to increase the six-month exemption to a two-year exemption.

In its response, the Government indicated the six month exemption already provides a concession and an extension of this period is not warranted, particularly in light of the proposed amendments as outlined above to provide for the tax liability to be paid by the receiving fund.

The Government’s response, however, does not address a number of issues, including:

* Presumably the amount assessed to the fund will not be treated as a surchargeable contribution (just as a non-vested transferred amount is not now), although this is not made explicit.

* It would seem that if the benefit in a UK fund is cashed by an Australian resident, any tax liability will continue to be the individual’s at their marginal rate.

* The announcement does not clarify whether, if the client has been assessed as having an FIF tax liability in respect of the accrual that is now being assessed in the fund’s hands, the fund will be able to offset to the extent of that FIF liability.

The amendments will apply from the date the legislation is amended. This means clients in this position may need to consider the benefits of awaiting the legislative change and delaying the transfer (to ultimately benefit from a potentially lower rate) against the likelihood of further growth of the relevant benefit (and therefore a larger assessable amount) between now and the date of amendment.

We note that the Government has flagged that it will conduct industry consultations on the issue prior to tabling the amendments, and these have not commenced in earnest. We therefore expect it will be many months before the amendments are dealt with by Parliament.

Also, while the amendment is not likely to be contentious, the risk of it not being amended must also be taken into account.

David Shirlow is head of technical services, Macquarie Financial Services.