This means it will be taxed at your personal tax rate less a 15 per cent tax offset because the contribution would have been included in the taxable income of the super fund.
This gives you two choices in terms of the excess.
The first is to have 85 per cent of the excess refunded from the super fund. Why 85 per cent is refunded is due to the requirement to pay 15 per cent tax on concessional contributions. To have this amount refunded, you will need to tell the ATO which will then contact your fund with a release authority to pay the amount to you.
While a second choice would seem to be to leave the excess in the fund and have it counted against your non-concessional contributions cap, this is not the best option.
That’s because once you have more than $1.7 million in super, says Colley, you cannot make any non-concessional contributions to super.
Any amount counted as excessive non-concessional will have two options as to how it will be treated.
You could have this plus 85 per cent of an interest rate penalty refunded from the fund with this penalty amount included in your taxable income and taxed at your personal tax rate less 15 per cent.
Or worse still, you can leave the excess non-concessional contribution in the fund where it will be taxed at 47 per cent.
As you have already paid personal tax rates on the excess concessional contribution, says Colley, there seems little point in then having it counted against your non-concessional contributions cap and paying more tax at a penalty rate.
Question: I moved to Australia three years ago from the UK to see if I liked the thought of living here. I’ve decided to stay and am looking into what is involved in transferring my retirement savings here? I like the idea of a self-managed fund, but will it be easier to transfer this to a public fund or an SMSF? Grant.
A: It may be possible to achieve a transfer of your UK retirement savings to an Australian superannuation fund without any adverse UK transfer charge applying if the Australian fund is recognised by Her Majesty’s Revenue & Customs (HMRC) – the UK tax authority – as a Qualifying Recognised Overseas Pension Scheme (QROPS).
Under current UK pension rules, an overseas fund will only be eligible for QROPS status if its governing rules preclude UK-sourced pension money being payable to the member before they are 55, says William Fettes, a senior associate with DBA Lawyers in Melbourne.
The usual payment rules that apply to Australian super funds do not apply to a QROPS. These may allow a member to access benefits before age 55 for financial hardship, compassionate grounds and temporary incapacity, as well as the COVID-19 $10,000 special payments.
Australian funds must therefore operate with special age-based membership restrictions that apply to QROPS status which prevent accessing super before 55 unless the member has been permanently incapacitated due to ill-health before that age.
One method of achieving this, says Fettes, is to establish an SMSF with a special trust deed containing appropriate restrictions or otherwise by varying the deed for an existing SMSF.
In this way, the SMSF can obtain QROPS status and UK pension scheme money can be transferred free of UK tax and such UK criteria as a lifetime allowance cap (currently £1,073,100 – $1,911,138). You must also be an Australian tax resident at the time of the transfer and for five continuous UK tax years after.
Although there were previously several Australian retail or public-offer funds offering QROPS services, there are not many suppliers in this market. It means you need to see whether you can find a non-SMSF supplier as it appears many are using SMSFs with appropriately drafted QROPS-compliant documents. You will also need to consider the application of Australian tax law provisions and applicable contributions caps.
Generally, a transfer from a qualifying UK pension scheme is recognised as a transfer from a “foreign superannuation fund” (FSF) for the purposes of Australian tax law.
This means the transfer will be subject to Australian income tax on the part of the lump sum that is described as “applicable fund earnings” (AFE).
Typically, AFE represents the growth in the fund from the date you became an Australian tax resident. This amount is then subject to tax in Australia unless the transfer occurred within six months of residency or cessation of foreign employment which would not be the case for you given you have been here for three years.
While the starting point for AFE is your marginal tax rate, if you complete a written election under section 30580 of the Income Tax Assessment Act 1997, it can potentially be taxed in an Australian super fund at the usual 15 per cent concessional tax rate.
Fettes recommends you seek advice from an expert in this area as it is a complex one.
To make an effective election, it is critical no amount is left in the foreign fund after the transfer is made and the relevant paperwork is completed before lodging your personal tax return for the financial year of the transfer.
The non-AFE component of the lump sum being rolled over to the Australian fund will generally count as a non-concessional or after-tax contribution subject to your contribution cap.