For Expats returning from the United States (US) to Australia when considering the potential transfer of their US pensions funds to Australia there are a number of tax implications to assess. Our guide covers US Pension transfer or withdrawal to Australia – 401(k), IRA, Roth IRA, 403(a), 403(b) and the Australian tax implications attributable to the transfer of US pension funds [401(k), IRA, Roth IRA, 403(a), 403(b)] hinges on whether in the eyes of the Australian tax law, the US fund qualifies as a “foreign superannuation fund”.
Foreign superannuation fund
Where a foreign fund qualifies as a “foreign superannuation fund” then you can access various forms of tax relief and tax concessions:
If funds are received within 6 months of residency & foreign fund qualifies as a foreign superannuation fund
- If funds are received within 6 months of becoming an Australian tax resident:
- if your foreign fund allows: you can elect to receive the fund personally
- if your foreign fund only allows transfers to your Australian superannuation fund then:
- where your Australian Superannuation Fund receives a super lump sum directly from a foreign super fund, you can choose to have some or all of the taxable part of the lump sum treated as taxable income of your fund. The correct ATO election form is here.
- “Applicable Fund Earnings“ are disregarded which means that nil Australian tax will be paid
If funds are received after 6 months of residency & foreign fund qualifies as a foreign superannuation fund
- If fund are received after a period of 6 months of becoming an Australia tax resident:
- you can elect for your Australian Superannuation Fund to pay the tax on any “Applicable Fund Earnings”
- Applicable Fund Earnings means the growth in the fund from the date of becoming resident in Australia until the funds are transferred to Australia
- if your US pension fund allows: you can elect to receive the US pension funds personally and pay tax personally on the “Applicable Fund Earnings”
- if your US pension fund requires the transfer to be made only to your Australian superannuation fund then:
- you can choose to have some or all of the taxable part of the lump sum treated as taxable income of your fund
- in some cases, you can chose to either receive the foreign funds personally or elect for your Australian superannuation fund to receives the funds
Not a foreign superannuation fund
Where a foreign fund does not qualify as a “foreign superannuation fund” then the foreign fund is generally taxed as follows:
- in some cases, personal contributions or employer contributions can be treated as non-taxable
- earnings are often taxable – however, there are a number of tax minimisation strategies that we can apply
- a look back approach is needed to assess the nature of each of the components of your US pension fund to determine which components are taxable and which components are non-taxable in Australia
Practical meaning of ‘foreign superannuation fund’
Broadly, from a practical perspective, an assessment needs to be made whether a foreign fund’s rules align or do not align with the Australian Superannuation regulations. This step will assist in determining whether a foreign fund meets the definition of a foreign superannuation fund. This assessment needs to be done an an individual fund basis as each fund is different from next fund. The same is true for each US pension fund, the assessment is required on a fund by fund basis.
Foreign income tax offset
Where foreign tax is paid/withheld at the source, you can claim a foreign income tax offset (foreign tax credit) in your Australian Income Tax Return. If this foreign tax paid is less then $1,000 then a full claim of the foreign tax credit in available. If the foreign tax paid more than $1,000 then the claim for foreign income tax credit is subject to the “foreign income tax offset limit”. Excess foreign tax credits are non-refundable and are disregarded/foregone.
ATO commentary on claiming foreign income tax offsets is available here.
Example – 401(k) withdrawal to Australia
Consider the following example:
John is an Australian citizen and a flight engineer. John left Australia in 2000 for the US to fulfil his dream of working abroad. After 20 years in the US, John and his large family have decided to return to Australia to live on a permanent basis. John has had his eye on the Australian property market and knows that he will need to transfer his US 401(k) pension to Australia in order to afford a deposit to buy a home for his family. John’s 401(k) Fund allows direct withdrawal of funds. John’s 401(k) has USD $400,000 US. John elects to transfer his 401(k) at an exchange rate of 1 AUD: 0.75 USD. John’s total pension in AUD is $533,333. The US Inland Revenue Services (“IRS”) deducts withholding tax of AUD $106,666 (USD $80,000) and transfers the net balance of $426,667 to John’s Australian bank account.
Australian Tax Treatment
John has to determine whether he has a tax liability in Australia as a result of transferring his 401(k). The first step is consider whether John’s Fund would be considered an “foreign superannuation fund” in the eyes of the Australian tax law. After seeking expert tax advice from an Expat Tax Accountant, based on certain characteristics that are specific to John’s 401(k) plan, John is advised that his 401(k) does not meet the definition of a “foreign superannuation fund”.
John’s next step is to determine which components are taxable and which are non-taxable.
Non-taxable and taxable components can include:
- various categories of capital items
- a specific proportion of contributions from John’s employer and himself personally
- certain categories of earnings that are specific to John’s Fund
John realises that there are a number of potentially reportable items and also a number of variations in the way these items can be reported so he consults with his Expat Tax Accountant.
In John’s Australian Income Tax Return, he is required to enter the taxable value of his 401(k). John’s Expat Tax Accountant begins the consultation with the following components:
- gross 401(k) proceeds $533,333
- withholding tax $106,666
John’s Expat Tax Accountant is able to apply a number of tax minimisation strategies to reduce his taxable income to $470,000. Also, John’s expert Accountant is able to claim withholding tax to $110,500.
If we assume that John does not have any other taxable Australian income and holds qualifying Private Health cover then John uses TXM’s Tax Calculator to work out his Australian tax liability here.
John’s tax liability is calculated follows:
- Gross Tax payable $194,132
- Less: Withholding Tax (IRS) ($110,500)
- Tax Liability (ATO) $83,632
How we can help you
Our team of experts at TXM can help you in assessing:
- whether your foreign fund meets the definition of a ‘foreign superannuation fund’ under Australian tax law
- which components are taxable (if any)
- which components are non-taxable (if any)
- for any amounts that are taxable, identify and apply industry leading tax minismation strategies to either reduce the tax liability to zero or to the lowest tax rate possible.
We have completed a significant number of US pension transfers and have the skills and expertise to significantly reduce any Australian tax. Reach out to us for an obligation free telephone discussion.
Important: The above commentary is for information purposes only and does not constitute tax advice upon which you can rely. If you are seeking formal tax advice, please make contact with us and we will respond promptly. TXM Chartered Accountants provides nil warranty for any loss or damage caused as a result of relying on the above information.