Aussie Expats in The US – IRA Case In Australia Clarifies Options

 

5429c32b425f183f61bf7316_new-york-city-skyline13/08/2015 - As financial advisers to Australian expats on a daily basis we deal with the issue of whether or not you can move your overseas pension or retirement accounts back to Australia and if so what is the most tax effective way. With over 200,000 Australians living in the United States we have seen a large increase in enquiries from expats in the US about their options for IRA’s, 401K’s and a myriad of other retirement savings accounts available to them so when a recent ruling was handed down by the Commissioner in the Administrative Appeals Tribunal of Australia (AATA) I thought a post would shine a light on the situation.

In this case the taxpayer was a former US resident who became an Australian resident for tax purposes in 1987. In 1988 the taxpayer started a IRA from roll-overs from his US employers pension fund. Recently the taxpayer sought a private ruling that a payment to be made from his IRA to Australia would either be paid from a “foreign superannuation fund” (or a scheme in the nature of superannuation upon retirement for the purposes of making a choice under s305-80 of the ITAA 1997) to an Australian complying superannuation fund. The taxpayer sought this ruling to gain access to the tax concessions available to overseas transfers. These concessions allow an individual to transfer an amount held in a foreign superannuation fund directly to an Australian complying superannuation fund. Further the individual would then be able to elect to have part of the payment (the growth component) treated as a taxable contribution to the Australian super fund under section 305-80 of the ITAA 1997. By making this election you are able to have the tax on the growth paid by an Australian complying super fund at a rate of 15%, rather than the taxpayers marginal tax rate.

In considering the application the Commissioner had to consider two main issues:

  • Was the tax payers IRA a superannuation fund? - the Commissioner formed the view that the IRA did not qualify under s10 of the SIS Act 1993 as “an indefinitely continuing fund” and “a provident, benefit, superannuation or retirement fund”. The reason being was that even though there were certain similarities between the US and Australian retirement schemes there were also a number of large differences, the main one being that under the US scheme part or all of the account could be withdrawn at any time prior to retirement at the discretion of the IRA holder which as you would be aware is at odds to the Australian super scheme. Due to the flexible nature of the IRA the SIS Act 1993 states that a provident fund, benefit fund or retirement fund will not be a superannuation fund or foreign superannuation funds as defined in s995-1 of the ITAA 1997 should it allow for these flexible structures.
  • Was the IRA a scheme of the payment of benefits in the nature of Superannuation on retirement? - the Commissioner held that for a payment of benefits in the nature of superannuation upon retirement the IRA would have to have the same essential qualities and features of payments of superannuation benefits on retirement. The IRA scheme would need to have had features in place where simple withdrawals at any time would not be available (like under the Australian super scheme) which as we know from the previous point is a feature under the IRA scheme.

After taking into account these two points the AATA has held that a US IRA scheme is not a foreign superannuation fund (or a scheme payment in the nature of superannuation) for the purposes of concessional tax treatment under s305-80 of the ITAA 1997.

With the ever changing landscape of overseas pensions and retirement accounts its important to take into account all the moving parts, especially when there are multiple jurisdictions in the equation.