This newsletter is about the tax implications of the decision by a member of a UK registered pension scheme to move their fund to an Australian qualifying recognised overseas pension scheme (QROPS) rather than leave the fund in a registered pension scheme in the UK.
The transfer is treated as a contribution to the Australian QROPS under the Australian tax rules and therefore Australian tax charges may arise.
We have been asked whether the payment by a QROPS of any of the Australian tax charges that can arise as a consequence of a transfer from a registered pension scheme can make the transferring individual liable to an unauthorised payment (UP) charge. That depends on the nature and incidence of those charges under the Australian pensions tax relief system that was introduced on 1 July 2007. We have therefore been liaising with the Australian Taxation Office (ATO) to find out how its charges apply and to clarify the interaction between UK and Australian tax legislation.
The guidance applies also to transfers of UK tax-relieved funds made from overseas pension schemes that are not UK registered.
A transfer from a registered pension scheme to an Australian QROPS is an authorised payment under the Finance Act 2004 and is therefore not subject to an unauthorised payments charge or surcharge. But individuals can become liable to a UP charge/surcharge by virtue of schedule 34 to FA 2004 if a payment made by the QROPS out of the funds that they have transferred (their 'relevant transfer fund'):
The following general principles apply in relation to the charges in Australia:
It is our understanding that a transfer of a UK fund to an Australian QROPS is subject to a non-concessional contributions cap in Australia to the extent that the transferred amount is not taxable in the hands of the Australian fund. That cap is currently $150,000 a year. But for a person under the age of 65 this cap is subject to a bring forward process that allows up to three years worth of cap to be utilised ie $450,000.
Where the transfer takes place more than six months after the person becomes resident in Australia, the individual can elect to have the transfer, or any part, treated as the assessable income of the Australian QROPS. If the individual makes an election the fund is taxed at 15 per cent on its assessable income. The payment of this tax by the fund is a SAMP.
To the extent that any transfer does not exceed the non-concessional contributions cap (so that there is no charge in Australia) or it is charged to tax on the Australian fund, there will be no payment that constitutes a UP in the UK.
Where the non-concessional contributions cap is exceeded, Australia charges the excess to tax at a rate of 46.5 per cent on the individual. A sum equal to this tax charge has to be withdrawn from the scheme. The payment can either go direct from the scheme to the tax authority to cover the tax charge or it can be paid to the individual. In either circumstance, the payment out of the scheme will constitute a UP under FA2004 if the individual is resident in the UK or has been resident in the UK in that UK tax year or any of the previous five UK tax years. This is because the money paid from the QROPS is to, or in respect of, the member because it either goes directly to the member or satisfies the member’s personal tax liability. The release of that money is an unauthorised payment because it has not gone towards the provision of an authorised lump sum or pension and it is not a SAMP.
Where there is an unauthorised payment the individual is liable to a 40 per cent UP charge on the amount paid, and to a 15 per cent UP surcharge if more than 25 per cent of their relevant transfer fund is withdrawn. That is subject to the individual being resident in the UK when the payment is made or having been resident there in the current UK tax year or in any of the last five tax years. Such an individual is required to complete a UK self-assessment return by 31 January after the end of the UK tax year in which the unauthorised payment is made.
The individual cannot offset the Australian tax liability arising on the transfer against the UP charge arising on the withdrawal of funds to meet their liability. Paragraph 6 of Schedule 34 FA2004 provides relief for tax paid in the other country where both the UK and the other country have taxed the same payment out of the scheme. In the scenario described in this article, Australia is taxing the transfer to the scheme that is in excess of their contribution cap as opposed to a payment out of the scheme. The UK is taxing the payment that comes out of the scheme to meet the Australian tax charge. So the same payment is not being taxed in both jurisdictions and the provisions of paragraph 6 of Schedule 34 do not apply.
There is an obligation on the Australian QROPS manager to report to PSS all payments made in respect of members out of their relevant transfer fund if they are resident in the UK or have been resident there in the current UK tax year or in any of the previous five tax years. That applies whether or not the payments constitute unauthorised payments. Having considered the Australian tax charges that apply when a transfer is made from a UK registered pension scheme to an Australian QROPS, we can advise that the payment of 15 per cent tax that the Australian QROPS pays in respect of applicable fund earnings does not need to be reported to HM Revenue & Customs (HMRC). Any reports that are required can be made on a form APSS 253 which can be downloaded from the HMRC website. There is no tax liability on the QROPS under FA 2004 if it makes an unauthorised payment.
There is further guidance on transfers to overseas schemes, and on the FA 2004 tax charges that can arise following transfers to QROPS, in the Registered Pension Schemes Manual at RPSM13102000 and RPSM14100000 onwards.
If you have any questions about anything to do with tax rules for pensions and you cannot find the answer in the Registered Pension Schemes Manual, you can contact us by email, phone or write to us using the details found on our contact page.