This is another shocking example of unfair taxation rules around this subject creating double taxation of income. I am not a financial adviser so please do your own research and/or get proper advice, but I wonder if your friend could return to Australia very soon for a short stay and cash his superannuation while there. Then declare his UK residency begins when he returns to the UK . That would mean his UK stay since March could just have been a holiday. As long as he is deemed resident in Australia when he cashes in his Super, HMRC should not be interested in his income outside the UK. Check the residency rules as they apply in your case. Best of Luck to you.
Perhaps our friends at HMRC might indicate if this idea is legitimate. Thank you HMRC Admin folks.
Hi HMRC Admin 3,
Thank you for your rapid response, which I have been carefully considering. I would appreciate the opportunity to explore this scenario a little more deeply.
Firstly could I offer some background re Australian Superannuation. This is regulated by Australian Taxation Office (ATO) and is managed around legislated rules designed to encourage individuals to save for their retirement, thus lifting pressure from the State Pension.
Contributions can take a number of different forms. These include workers statutory contributions paid by employers and employees, which are taxed on the way in. There are also voluntary contributions an individual can make from his own after-tax income, to build the fund value, which are not taxed again on the way in. All contributions are subject to strict limitations.
Withdrawals are also carefully regulated. However once a person reaches legislated pensionable age and conditions, funds can be withdrawn in one or more payments, income tax free, and of any value up to the entire fund balance. This can be in irregular lump sums from the Accumulation account with no minimum annual withdrawal. However typically the Accumulation account would be converted into a Pension account and a regular pension paid out subject to a minimum annual %, while additional drawings can be made at any time of any amount remaining in the fund.
The Superannuation Fund (not the individual) is taxed on the growth in the Accumulation phase by ATO. Hence both contributions and growth have been taxed prior to commencing a pension. Once the Pension phase begins there is no further tax on the fund growth or on eligible pensions, so no tax on the way out.
Therefore a pensioner moving to UK and assuming UK tax residence would be concerned to find his superannuation pension may become taxable by HMRC. It may be equitable to tax the fund growth, but should a beneficiary need to make a capital sum withdrawal (e.g. for medical costs, or by depleting the fund over time) he would find his own after-tax savings being taxed a second time by HMRC. This would be double taxation by ATO and HMRC jointly and not relieved by the Double Taxation Agreement as far as I can see.
My initial question however related to a person whose superannuation account is in the Accumulation phase and not the Pension phase. Hence this fund has its growth taxed by ATO but the beneficiary of pensionable age can withdraw capital sums as required of any amount up to the fund balance at any time. Your initial response stated "where a lump sum payment is taken out this would be taxable only in Australia". It concerns me that the singular "Lump Sum" withdrawal used in a UK pension context is quite different from multiple irregular lump sum withdrawals from Superannuation.
It seems to me that Australian Superannuation in the Accumulation phase is similar to a bank savings account where growth is taxed but capital (which has already been taxed before investment) can be withdrawn without further tax liability. This is supported by your initial response.
Given the special rules which surround UK Pensions and Australian Superannuation, and their differences in approach, I am concerned that any individual who moves to UK may in fact fall into a tax trap from which there is no possible extrication. If HMRC should in fact apply tax to multiple lump sum withdrawals from the Superannuation Accumulation fund which existed at commencement of UK Tax residence, the individual cannot correct that situation. Ideally I would like to obtain a binding ruling (such as the ATO can supply) but I am not aware of a facility from HMRC. Is there one?
If you remain sure of your original response having considered this further detail, please could you advise me which rulings and legislation I should refer to for verification. If your initial response needs to be clarified in any respect I look forward to hearing back from you.
Thank you for your time and consideration..
An Australian tax resident of many years may soon to become a UK tax resident. He has accumulated an investment in regulated Australian Superannuation for his retirement funding. This was created from savings, i.e. from income which was already taxed.
In Australia he is allowed lump sum withdrawals up to the whole balance. No pension income stream is in payment. The Superannuation Fund is taxed by Australian Taxation Office on the fund growth.
What tax liability, if any, would arise upon assuming UK tax residency regarding the investment capital value?
What tax would arise upon making lump sum withdrawals as a UK tax resident bearing in mind this is from his own after-tax savings?
What tax would arise on the annual growth in the capital value if the investment?