Member Event | Important Notice on Tax Issues around Overseas Pensions & Provident Fund

One of the many unforeseen impacts of COVID-19 has been the massive financial impact, especially in the tourism and aviation industries around the world.

Initially this was mainly in reduced hours and unpaid leave, however as time progresses and little solution is in sight, we are now seeing a raft of redundancies that will directly impact Australian expatriate communities and migrants choosing Australia as their future country of residence.

Many of SMATS clients may be affected by this in the coming months, so this article is to bring to your attention a potential significant tax issue that needs to be considered on your offshore Pensions or Provident Funds.

Normally a redundancy for many expatriates is an excuse to continue expatriate life in another country, but the impact of COVID-19 is truly Global so for many the only option may be to return to Australia for a period of time or even contemplate retirement. If you consider that it is likely that you may be required to relocate back to Australia in the next year, then you need to take head of this information if you have an offshore Pension or Provident Fund.

In recent times the ATO have internally changed their interpretation of the way offshore pensions are treated. Current law permits Pensions to be cashed out or rolled over within 6 months of return to Australia without any tax implications and if the Pension was retained overseas would not generally be subject to tax until it was drawn or cashed in at retirement.

The ATO has changed its view on what is regarded as a Retirement Fund, and now treats most employer or Government funds as if they are not “Superannuation” or true Retirement Funds.

The basis for this is that they can be cashed out prior to retirement age (as many employer funds allow access on termination of employment) or have other benefits (such as health or housing as in the case of the Singapore Governments Central Provident Fund).

In taking this view, it adversely impacts anyone relocating to Australia as you are potentially liable of tax on profits of your fund prior to the time you moved to Australia. This is done by treating the fund as an investment trust which allows the ATO to tax unrealised or uncredited gains if they are realised in a financial year that the beneficiary was an Australian resident for tax purposes.

With the end of the Australian tax year nearing on the 30th June, and the potential for many to be forced to return to Australia due to work ceasing or COVID-19 impacts, it is essential you consider taking some important action.

Prior to the 30th June

Consider “cashing out” of any unit type investments and switching to cash. This will realise the past gains in the current financial year prior to you potentially becoming an Australian Tax Resident, hopefully after next financial year starting on 1st July.

You can re-acquire the same investment if you so choose and if you do, only new profits will be subject to future tax. Past profits will be protected from tax as they have now been realised in a financial year prior to you returning or relocating to Australia.

For many it may still be unclear if you will be made redundant or have to return, but if you think this is even a remote chance, then realise gains and then reinvest may be a wise safety move that could save you much in tax if unfortunate circumstances do fall upon your position.

When you are considering permanently relocating

You need to fully understand whether your current offshore pension plan may be caught under these rules, so seek professional advice between your financial planner and taxation adviser.

Try and plan at least one Australian financial year in advance and factor in the importance of realising past gains prior to year of relocation.

This area is indeed quite complicated, and each person’s situation will be different, so be sure to get individual advice prior to taking any action.

ATS has a unique Tax Planning Tool to assist you in fully understanding the full tax implications of relocating or retiring to Australia that will answer all of your queries and allow various what if scenarios to be looked at and assessed. This can provide the peace of mind in your long-term planning and ensure you make rational decisions on the taxation implications affecting your relocation.

To discuss this further contact your nearest SMATS office or