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Self Managed Super Fund (SMSF) Article
Bringing Your Super Home
By Tony Negline.
This article may be out of date.
9th September 2009
Moving money from an overseas super fund into an Australian domiciled superannuation structure in an increasingly common transaction.
One key reason for the interest in transferring money into Aussie super funds is their tax-free status after age 60.
The most common source country of overseas transfers, by a wide margin, is the United Kingdom. Hong Kong, Singapore, New Zealand and the United States are also popular source countries.
When transferring money from an overseas super fund there are many factors to consider. Unfortunately it seems that many people concentrate solely on the tax impacts that will happen to an overseas super benefit in Australia.
This however is only part of the story. The other side of the story involves the tax and other costs to withdraw the benefit and the opportunities foregone by leaving it in a foreign country.
An investor's residency status and the normal contribution thresholds are the two key issues which determine most of the tax treatment for an overseas super benefit transferred into the Australian super system.
Let's look at the issue of residency first. Residency refers to Australian income tax laws.
This does not necessarily have anything to do with residency under immigration law. A person can be a resident for tax purposes but not a permanent resident of Australia for immigration purposes.
A person will probably be a resident of Australia for tax purposes if they reside or are domiciled in Australia or if they have been in Australia during more than 183 days in a year of income unless the individual can satisfy the Tax Office that their permanent or usual place of abode is outside Australia and the person does not intend to live permanently in Australia.
In may cases a person's living arrangements in another country are often relevant and the nature of their Australian immigration permit.
Now lets look at how the contribution rules apply to transfers of overseas super schemes.
A lot of people get confused on this point because some parts of the tax laws call these "transfers" which are generally treated differently to contributions.
As overseas super benefits are classed as contributions anyone aged at least 75 cannot move foreign super fund monies into the Australian super system. A person aged at least 65 but under 75 must satisfy a minimum work test (at least 40 hours in up to 30 consecutive days).
Before a super fund can accept any overseas super benefit for a member they will need that member's Tax File Number.
When an overseas super benefit is deposited into an Australian super fund, the super fund's trustee will need to work out the Applicable Fund Earnings (AFE). In simple terms the AFEs are the earnings of an overseas benefit which have accrued since an investor became an Australian income tax resident.
For an investor who has an overseas super benefit contributed into an Australian super fund less than 6 months after foreign employment terminated then their AFE will be zero. In many cases the AFE will be zero for those who have been an Australian income tax resident for less than six months at the time their foreign super fund money is paid into the Australian super system.
AFEs are subject to tax. An investor can elect to elect to pay anywhere between 0% and 100% of this tax themselves at their marginal tax rate. Whatever tax an investor does not personally pay will have to be paid by their super fund at 15%.
The ATO have created a special form for this election but an Aussie super fund cannot pay this tax if you remain a beneficiary of the overseas super fund which paid money into Australia.
The portion of an overseas super benefit, which is represented by contributions and earnings that have to be paid if you leave the retirement scheme, is reported to the ATO as a Non-Concessional Contribution (officially these payments are called "non-assessable foreign fund amounts"). The AFEs will also be included here unless an investor has elected to have the super fund pay the tax on this amount.
As this portion of an overseas benefit is deemed to be a NCC it will be counted towards an investors' Non-Concessional Contribution limit. If an overseas super benefit causes an investor to exceed their NCC limit then their super fund will have to return the excess portion to the overseas super fund.
Any amount from an overseas super benefit above what legally has to be paid is not a NCC but will be a Concession Contribution and is taxed accordingly. Officially these amounts are called "assessable foreign fund amounts".
Lets look at an example which the ATO have provided on its website:
Marianne is 62 and transferred $420,000 into her Australian super fund several years after she became a resident for Australian income tax purposes. Her Non-Concessional Contribution limit is currently $450,000 (this means she has not made any other NCCs which would be counted against this limit).$400,000 of the benefit had vested in her at the date of transfer and of this amount $50,000 has been deemed to be Applicable Fund Earnings. The remaining $20,000 was added to her account balance by her employer at the time of transfer to Australia.
What happens if an investor personally receives a benefit from an overseas super fund or directs the fund to pay somewhere other than the Australian super system (for example against their home mortgage)? In this case the Applicable Fund Earnings and Assessable Foreign Fund Amounts must be included in person's own tax return and tax would be paid at their marginal rate.
Issues which should be considered when transferring retirement benefit money into the Australian super system include:
- the rules of the source country in relation to foreign super transfers to an Australian super fund including access, exit taxes, early release penalties (both tax and fund administration)
- the exchange rates as the money arrives in Australia
- if some or all of the retirement benefits funds are left in the Foreign Super Fund what would be the tax treatment on that fund in Australia (for example will the Foreign Investment Fund rules apply)
- the Australian taxation treatment of the funds
- the sum of money that would be transferred
- the investor's age
- the investor’s capacity to meet the ongoing fees for the preferred structure
- the investor’s capacity to meet all tax bills especially initial tax obligations
- the likelihood of the investor being able to meet the ongoing compliance obligations in both the source country and Australia if the overseas super is transferred
- the entitlements foregone in the source fund
This email is general in nature only and does not constitute or convey specific or professional advice. Legislation changes may occur quickly. Formal advice should be sought before acting in any of the areas discussed. Be aware that the information in these articles may become innaccurate with time. Responsibility is disclaimed for any inaccuracies, errors or omissions. Particular investments are neither invited nor recommended and hence this publication is not "financial product advice" as defined in Section 766B of the above legislation. All expressions of opinion by contributors are published on the basis that they are not to be regarded as expressing the official opinion of any other person or entity unless expressly stated. No responsibility for the accuracy of the opinions or information contained in the contributor's articles is accepted by any other person or entity. Copyright: This publication is copyright. If you wish to reproduce this article you require a license, which can be purchased here, to do so.