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Re: PCLS THE TAX FREE LUMP SUM FROM A UK QROPS

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Newbie

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Please can someone tell me if the PCLS ie that initial 25% of a UK QROPS Pension (tax free in UK) is taxable in Australia?

 

I have been attempting to get an answer to this now for many months. I have spoken to the ATO on numerous occasions often being passed from one person to another. I initially phoned their Super line only to be advised they couldn’t help and passed onto someone else, who also failed to provide me with an answer. Finally, I was advised by another person at the ATO to apply for a CallBack, which I duly did, citing my issue but I never did get the call back and so the issue remains unresolved.

 

I started drawing down my QROPS earlier this year on a monthly basis. My adviser asked if I would like to take the PCLS of 25% out of the fund. I asked him if this was tax free in Australia (knowing it was fre of tax outside), he replied that it was and so I took it. However, my accountant now says that I am liable for Australian tax on this amount and as such has been included in my tax return. I await the bill!

 

I appreciate I am liable for tax on any lump sums and any drawdown from the remaining 75% but would really appreciate it if someone could advise if this PCLS is taxable or not. I can’t believe I am the only person in Australia in this situation, someone somewhere must have come across this and had the issue resolved. Having said that the ATO people I have spoken to know nothing about it. Thanks in advance for your assistance.

 

J

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ATO Certified

TaxTime Support

Replies 3

Hi @John4

 

Welcome to our Community.

 

@macfanboy is correct. You may want to consider getting a private ruling. While you are correct in saying that your scenario isn't unique, your particular circumstances will be.

 

If you receive a lump sum from your foreign super fund, generally speaking, you’ll be liable to pay tax on your applicable fund earnings. Your applicable fund earnings is the growth in your foreign fund while you’ve been an Australian resident (for tax purposes).

 

For more information about tax on transfers from foreign super funds, refer to our website.

 

The fact that you are only receiving 25% of your UK pension as a lump sum or that it is tax free in the UK doesn't change how it will be taxed in Australia. In turn, you will need to calculate the applicable fund earnings that apply to the lump sum or ask us to do it for you.

 

The following threads provide some information that you should find useful. The original post in the first thread appears to describe something similar to your scenario. The second thread contains some useful links:

 

Hope this helps.

 

Thanks,

 

ChrisR

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Taxicorn

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Perhaps this article can help you

 

https://www.canstar.com.au/superannuation/uk-pension-transfer-super/

 

Having a quick read through it looks as if the 25%will be added to your assessable income.

Newbie

Replies 6

Many thanks for your prompt reply. I had seen this previously but sadly it doesn’t address the issue specifically and consequently does not answer my question.

 

Hopefully someone at the ATO can enlighten me with a “Yes it is liable to tax in Australia” and provide me with documented evidence (something my adviser could not do to prove it was tax free) or “”No,  due to double taxation agreements or whatever we honour the fact that it was a “PCLS 25% UKTax free” and is consequently  tax free in Australia””.

 

A straightforward answer to a simple question would be gratefully appreciated.

 

J

Taxicorn

Replies 1

Probably best to get a private ruling.

 

 No,  due to double taxation agreements or whatever we honour the fact that it was a “PCLS 25% UKTax free” and is consequently  tax free in Australia. ----- That's not how double taxation agreements work, they avoid you being taxed twice.

Newbie

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Many thanks. I have considered this but I can’t for the life of me believe that this is unique to me. There are thousands of brits here in Australia and I’m sure others have come across the problem/issue before. Someone somewhere in the ATO will have had to deal with this issue previously.

 

J

Best answer

ATO Certified

TaxTime Support

Replies 3

Hi @John4

 

Welcome to our Community.

 

@macfanboy is correct. You may want to consider getting a private ruling. While you are correct in saying that your scenario isn't unique, your particular circumstances will be.

 

If you receive a lump sum from your foreign super fund, generally speaking, you’ll be liable to pay tax on your applicable fund earnings. Your applicable fund earnings is the growth in your foreign fund while you’ve been an Australian resident (for tax purposes).

 

For more information about tax on transfers from foreign super funds, refer to our website.

 

The fact that you are only receiving 25% of your UK pension as a lump sum or that it is tax free in the UK doesn't change how it will be taxed in Australia. In turn, you will need to calculate the applicable fund earnings that apply to the lump sum or ask us to do it for you.

 

The following threads provide some information that you should find useful. The original post in the first thread appears to describe something similar to your scenario. The second thread contains some useful links:

 

Hope this helps.

 

Thanks,

 

ChrisR

Newbie

Replies 2

Thank you @ChrisR for taking the time to reply but with respect you are just regurgitating information from your website.

 

My circumstances are not unique, as exemplified by the fact that previous requests for clarification have seemingly been made in the past with numerous people replying in interest. From the threads I can see that it seems the issue had not been resolved for those people.

 

To me and I suspect to many other people it is a simple question..Is the PCLS from a UK private pension when received by an Australian tax resident taxable in Australia or not?

 

There should not be a need for private rulings, the process of which requires me to provide all my pension details. I have already provided these details to the ATO for the UPP calculation, which is of course unique to me. I cannot fathom what use this information can be in deciding whether I pay tax or not on the PCLS in a private ruling.

 

I have declared the PCLS on my tax form (as a lump sum) and have recently received the bill. I’d rather not pay this bill but with the ATO failing to advise me on a simple question I will have no choice.

 

best wishes 

 

John4

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ATO Certified

TaxTime Support

Replies 1

Hi @John4

 

Thanks for your reply.

 

The reason why we are providing you with information from our website is because you will be required to declare the applicable fund earnings portion (the assessable amount) of the super lump sum on your tax return. The information on our website explains how that works.

 

What our website doesn't detail is how to calculate the applicable fund earnings when you have only transferred some of your foreign super balance as a lump sum. That is why we recommend that you submit a private ruling so that we can calculate it for you.

 

You are correct about there being no need to submit a request for a private ruling. If you (or your accountant) are confident in being able to work out the applicable fund earnings, submitting a private ruling request isn't necessary.

 

The issue that you appear to be having is that you just want a yes or no answer to a question that you assume is a simple one. The reality is that it isn't a simple question but the following information will hopefully make it easier for you to calculate the declarable amount.

 

Applicable fund earnings are the earnings on your foreign super interest which have accrued since you became a resident of Australia. How it is calculated depends on whether you were an Australian resident at all times during the period to which the lump sum relates.

 

For example, if your foreign super account balance was $200,000 on the day prior to becoming an Australian resident and $300,000 when the lump sum was paid, the applicable fund earnings would be $100,000. This assumes that there were no additional contributions made or periods on non-residency during that time.

 

If you were transferring the entire $300,000 balance to Australia (as a lump sum or to an Australian super fund) you would need to declare $100,000 (the applicable fund earnings amount) on your tax return. Of course based on your situation, that isn't necessarily what you would do because you have only taken 25% of the balance as a lump sum.

 

This is where it becomes more complex, hence the advice to apply for a private ruling. We have two ATO Interpretive Decisions (ATO IDs) that you can access from our legal database that provide different answers depending on your circumstances. You can view them here:

  • ATO ID 2012/48 - Superannuation lump sum paid from a foreign superannuation fund to an Australian resident where an annuity may be paid subsequently
  • ATO ID 2012/49 - Superannuation lump sum paid from a foreign superannuation fund to an Australian resident at the same time as an annuity commenced

 

The amount that you will need to declare on your tax return will depend on which ATO ID applies to your circumstances (assuming either applies). The key difference between them is whether the pension started at the same time as the super lump sum being paid or not.

 

Using our example, if the lump sum was paid at the same time as when the pension started, only 25% (the percentage of the balance paid as a lump sum) of $100,000 (the applicable fund earnings) would need to be declared on your tax return. In turn, you would declare $25,000.

 

Using the same example, if the lump sum was paid with the pension starting at a later date, the entire applicable fund earnings amount of $100,000 would need to be declared unless that amount was more than the lump sum amount paid. In turn, only $75,000 would be declarable.

 

As mentioned before, the calculation becomes more complex again if there are periods of non-residency or additional contributions were made since you became an Australian resident. A private ruling request detailing all of this information would help us calculate it for you.

 

Also, it is worth mentioning that taking a super lump sum can alter the undeducted purchase price (UPP) that you can claim for your pension payments. Depending on when your lump sum was paid, you may want to check that question 12 of your request for determination of the deductible amount for UPP of a foreign pension or annuity form was completed correctly.

 

Hope this helps.

 

Thanks,

 

ChrisR

Newbie

Replies 0

Thank you @ChrisR

 

What I am reading from this is that the answer to my question is that ATO does not honour the PCLS per se and that the PCLS is taxable in Australia based on the formulas and income calculations you outline below. This may mean that all the PCLS might not have to be declared and such amount is determined as based on the fund earnings since residency was obtained. All good.

 

Unfortunately for me my records are incomplete and I do not have any records of my pension value at the time of my obtaining residency in 2007. I only have valuations from 2016. So I think in my case as I have no proof of value I have to declare all the money I received as a lump sum (which I have) and pay the tax for which I have just received my assessment. Would that be a fair assessment of the situation from my viewpoint?

 

all the best

 

John

ATO Certified

TaxTime Support

Replies 1

Hi @John4

 

Thanks for your reply.

 

Your understanding is correct. The fact that it is tax free in the UK isn't relevant to how it needs to be declared in Australia. As @macfanboy said, double tax agreements are generally designed to prevent payments from being taxed twice.

 

We recommend that you get in touch with your UK pension provider to see if they can determine what your account was worth immediately prior to becoming an Australian resident. Considering that 2007 was only 12 years ago, it is reasonable to assume that they will be able to find those details, even if it takes them a while.

 

Without that information, you won't be able to calculate your applicable fund earnings. Depending on how much your super lump sum was, being unable to work that out may prove to be costly.

 

For example, there are times when the applicable fund earnings are zero (some funds never recovered from the global financial crisis). In turn, regardless of the ATO ID that is relevant to your circumstances, you wouldn't have to declare any of the lump sum on your tax return.

 

You indicated in a previous post that you have already declared the entire lump sum amount on your tax return and that you already have the tax bill. To be able to change that amount, you (or your accountant) will need to submit an amendment.

 

For more information about amending tax returns or fixing a mistake, refer to our website.

 

To be able to submit that amendment, you will need to be able to justify why you are altering the amount that you previously declared. If you can't, the conclusion that you have reached (declaring the whole amount) would appear to be a reasonable one.

 

Good luck with it.

 

Thanks,

 

ChrisR

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