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Problems in Transferring Retirement Funds to Australia

February 2003

Various tax issues have surfaced where a person builds up Australian superannuation fund as a non-resident. Typically, an expatriate Australian returning to Australia or a business migrant or retiree migrant arrives in Australia and at some later time, such as when he or she retires or otherwise becomes eligible to get non-Australian retirement benefits released, needs to decide what to do with the overseas entitlements arising either on retirement or at retirement age.

Problems are reduced if the benefit is transferred within 6 months of becoming an Australian resident. Alternatively, Baldwins can advise on suitable tax frameworks and structures for investing the funds in Australia. Where a payment can be characterised as an "exempt non-resident foreign termination payment", and is not included in the taxpayer's Australian assessable income (section 27CD of the Income Tax Assessment Act 1936 ("the 1936 Act")), it may not treated as an Eligible Termination Payment for Australian superannuation tax purposes. However, if transferred to another superannuation fund, and subjected to Australian tax along the way, some part of it can sometimes be received as an undeducted contribution with no impact on the taxpayer's Reasonable Benefit Limit.

Greater difficulties can exist for taxpayers who return to Australia and assume Australian residency beyond the 6 month limit. In some scenarios, years may pass before they reach preservation age and consider their options. The payment might be excluded from the definition of an "Eligible Termination Payment", but be subject to the draconian section 27CAA of the 1936 Act as the relevant taxing provision. In effect, the growth in value of the fund from the time the taxpayer became an Australian resident is liable to be caught by Australian taxation.

On 25 July 2002, the chairman of the Australian Senate Select Committee on Superannuation presented 18 recommendations to the President of the Senate in relation to dealing with the adverse Australian tax impacts on the tax retirement benefits of foreign retirees in Australia. Nothing has happened yet, but some of the recommendations included:

• extending the amount of time that benefits could be transferred to Australia free of tax from 6 months to 2 years (with a discretion for more time where appropriate for undue and uncontrollable delays in transferring benefits);
• amending section 27CAA so that where a lump sum is transferred from a non-resident non-complying superannuation fund to an Australian complying superannuation fund, any amount calculated would be included in the fund's assessable income, rather than in the assessable income of the individual concerned.
  The report also recommended that a fund in this scenario be permitted to release funds sufficient to meet any tax liability it incurs from receiving the benefit; and
• the Australian Taxation Office issue a ruling on the administrative operation of section 27CAA, including the meaning of an amount "properly payable" to the taxpayer (prior to the time of becoming an Australian resident). The report expressed concerns that it is difficult to calculate the difference between the value of the fund at the time payment is made as against its value when the taxpayer had become a resident, making compliance administratively difficult.

What about Australia’s laws which impose Australian income tax on Foreign Investment Funds?

The Senate Committee recommended that the law be changed so that double taxation with the Foreign Investment Fund ("FIF") regime is avoided. Employer-sponsored non-resident non-complying superannuation schemes are excluded from the FIF regime. However, a double tax liability could arise for other types of off-shore superannuation schemes that may not be excluded from the FIF regime.

The report suggested that section 23AK of the 1936 Act be amended to clarify that any tax payable under section 27CAA be reduced by any tax payable under the FIF provisions (to avoid double tax).

Australia’s onerous CFC and FIF regimes are undoubtedly to be re-examined in totality by Federal Treasury in the current review of Australia’s intended tax regime, the report for which is due for release by the Federal Government soon. It was originally due late last year and expected by the end of January 2003.

Contact Baldwins for professional advice in this complex area of law pertaining to the interplay of Australian and foreign income tax laws or retirement arrangements for individuals. Baldwins has extensive international links and we advise clients in a diverse range of international legal issues.

For further information, contact Joe Lederman at BALDWINS, Australian Lawyers & Consultants.

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