Managing your overseas superannuation can be time consuming and complicated by foreign taxation laws as well as currency movements. Therefore I am not surprised that many people I encounter choose to transfer their superannuation savings from their foreign superannuation fund into their Self Managed Superannuation Fund (SMSF) once they become an Australia resident. Of course there are other reasons why people do this. Receiving a tax-free pension from their SMSF after they turn 60 instead of paying marginal tax rate, if the same pension is received directly from their foreign superannuation fund, is obviously much more desirable.
Before you make any decision to transfer your superannuation savings from your foreign superannuation fund into your SMSF, you will need to check with your foreign superannuation provider as to whether there are any restrictions, conditions and international tax implications.
Under the income tax law, a lump sum payment or transfer of benefit made from a foreign superannuation fund to a person who is an Australian resident is exempt from tax if it is made within six months of the person becoming an Australian resident. If the payment is received more than six months after the person gains residency then the applicable fund earnings from the foreign superannuation fund will need to be included in the person’s income tax return as income and assessed for tax at their marginal tax rate. The remainder of the lump sum is not assessed for tax.
The “applicable fund earnings” are the earnings that have accrued to the person in the foreign superannuation fund since the person became an Australian resident. It is the growth in the value of the person’s overseas benefit from the date they became an Australian tax resident to the date of the lump sum payment.
If the person directs the amount of the lump sum from the foreign superannuation fund to be paid into their SMSF, then they can choose to have all or part of the applicable fund earnings from the foreign superannuation fund included in the assessable income of the SMSF. The amount will be taxed at the concessional rate of 15% in the SMSF. The applicable fund earnings will not count towards any contribution limit because it is considered normal growth within a superannuation fund, not a contribution. It will form part of the taxable component upon withdrawal of a superannuation benefit when it is eventually paid to the member of the SMSF. The remaining amount of the transfer will be treated as a non-concessional contribution and will form part of the tax-free component when paid out as a superannuation benefit to the member. The remaining amount will count towards the person’s non-concessional contribution limit of $150,000 – $450,000 (2013/2014) or $180,000 -$540,000 (2014/2015).
If the person chooses to transfer the lump sum into their SMSF, then the amount of the applicable fund earnings that they include in their assessable income will be reduced by the amount included in the assessable income of the SMSF. However, to be assessed under this provision, the whole of the lump sum payment from the foreign superannuation fund must be paid directly into their SMSF and the person can no longer have an interest in the foreign superannuation fund immediately after it is paid to their SMSF.
The person can choose for all or part of the applicable fund earnings to be included in the assessable income of their SMSF. The choice made must be stated in writing using form NAT 11724, which is available from the Taxation Office. If it is not stated in writing (using this form), then the person will need to pay tax at their marginal tax rate and the whole of the transfer into the SMSF will be treated as a non-concessional contribution.
To calculate the applicable fund earnings, you must first determine the following amounts:
- The amount in the foreign superannuation fund vested in you just before the day you first became an Australian resident (the start day).
- The part of the payment attributable to contributions to the foreign superannuation fund made by or in respect of you from the start day.
- The amount in the foreign superannuation fund vested in you when the lump sum was paid (before any deduction for foreign income tax).
The sum of the amounts specified in (1) and (2) are then subtracted from the amount referred to in (3) as part of the calculation. The amount is then multiplied by the proportion of the total number of days you were an Australian resident during the period from the start day to the day the lump sum is paid.