I have a client who has lived and worked in Australia for approximately 25 years up until 2018, when he returned to the UK (born in the UK to UK parents). He is now UK resident and domiciled (UK domicile of origin resumed if ever lost) and will remain so as he intends to live permanently in the UK.
He has an Australian superannuation fund worth say approximately £300,000. The superannuation fund does not appear to be a recognised overseas pension scheme (it is not on HMRC's list). I do believe it meets the conditions set out in PIM112200 to be treated as an overseas pension scheme. Therefore, s.573 ITEPA 2003 applies and charges the overseas pension to UK income tax.
My query is how his income from this fund is treated if drawn down. If taken as a pension/annuity, Article 17 of the UK-Australia double tax treaty gives sole taxing rights to the UK. Therefore, if the whole of the amount is used to purchase an Australian annuity, the total amount of the annuity received each tax year would logically be subject to UK income tax.
If he were to take the whole amount as a lump sum, per the provisions of Article 17 of the DTA, the whole amount would be taxable in the UK. I believe the lump sum itself is within the scope of s.574A ITEPA 2003. S.574A(3) Steps 2 and 3 (Step 1 is not relevant in this instance) would then apply with the amount chargeable to income tax reduced as set out below.
My reading of s.574A(3) step 2, read in tandem with EIM75550 (the scheme was not an EFRBS prior to 6 April 2017) is that if the value of the fund was say £200,000 as of 6 April 2017, the initial reduction in the amount chargeable to UK tax would be £200,000 leaving £100,000 as being chargeable to UK tax. This is then reduced by the 25% rule at s.574A(3) Step 3 leaving £75,000 exposed to UK taxation? I also believe a similar scenario would arise if the funds were withdrawn as lump sum payments every couple of years with this resulting in slightly larger cumulative amounts being chargeable to UK tax as the fund grows in value as the Step 2 relief is capped at the 6 April 2017 value.
However, I have also read that HMRC may not view a lump sum pension payment as being a pension or annuity as defined by the DTA. Can you confirm whether this is the case please? I cannot see why it wouldn't be when a one-off withdrawal from a UK pension scheme of the entire amount within the scheme would be taxed as pension income with 25% of the amount withdrawn being tax free (assuming gross amount in pension scheme is less than the lifetime allowance). If this is the case, can you point me to the relevant legislation/HMRC guidance please on why it is not within the scope of the DTA?
Furthermore, on another forum (https://community.hmrc.gov.uk/customerforums/pt/71f3d477-d1a4-ea11-8b71-00155d977d2f), it has been indicated that if a lump sum withdrawal is made, this is taxable solely in Australia. This contradicts several articles I have read which specifically state the lump sum payment would be chargeable to UK taxation by s.574A ITEPA 2003 (which is also my understanding). If this is the case, can you please provide the backing for the opinion that Australia has sole taxing rights on such a lump sum payment?
Many thanks in advance for your assistance with this matter