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The Techconnect team respond to many questions from advisers. In this edition of Adviser News we asked the team what have been the most common questions so far this year. It looks like UK pensions and the pension bonus scheme are the hot-button issues at the moment. The top three questions – and their answers – are below:


Question One

How do I work out the growth component on a UK pension (or any overseas super fund for that matter)? How do I then work out the applicable tax?

Answer:

The estimated growth and tax is worked out by making four calculations: 

  1. What the Australian dollar equivalent of the pension was when the member became an Australian tax resident.
  2. What the Australian dollar equivalent of the pension is now. To do this you will need the UK pound/Australian dollar exchange rate at the time the member became an Australian tax resident and on the day of the most recent valuation of the pension.
  3. The difference between 1. and 2.
  4. The tax is 15 per cent on 3.
Case study: Emily

Emily became an Australian tax resident on 17 December 2005, having emigrated from the UK.

At that time she had a UK pension worth £211,544, or A$498,017 (£1= $2.3542).

On 31 January 2015 her UK pension was worth £325,657 or A$644,801 (£1 = $1.98)

In Australian dollar terms the difference is $146,784, which is the estimated growth when the pension is transferred to Australia (this won't be the final figure because inbetween 31 January and the actual transfer date there will be fluctuations in the pension amount and the exchange rate).

Disregarding fund capped contribution rules for this question, the next step is to work out the possible tax. The estimated tax if transferred to an Australian QROPS complying super fund is:

15% x $146,784 = $22,018.


Question Two

Does the fund capped contribution rule mean that I have to wait a further three years, one year or just one day before completing the second part of a QROPS transfer?

Answer:

The answer depends on how much of the first transfer was comprised of non-concessional contributions (NCCs).

If, between the two transfers, there is less than $540,000 of NCCs then the second transfer can be completed on the following day. However, if the two transfers mean that the combined NCC amount exceeds $540,000 then the second transfer must be done three years after the first to avoid breaching the bring forward cap. 

When considering the NCC cap one also needs to consider if there have been any other NCCs as well.

Case study: Emily (continued)

Following on from the previous example of Emily, Emily has $644,801 of equivalent benefits in the UK. The growth component is $146,784 (from question one), with the non-growth component being $498,017.

Emily's total benefit is over the fund capped contribution amount of $540,000 however it is not going to push her over the non-concessional bring forward amount (unless she has made other NCCs). Therefore, Emily can transfer up to $540,000 on one day and the balance on the next day, as long as she provides an election to claim $146,784 on or after making the second transfer. 

If Emily's NCCs were over $540,000, Emily should only transfer the UK equivalent of say $520,000 in the first instalment to ensure that currency fluctuations don't push her over the NCC cap by mistake.

In order to do this in practice Emily needs to split the UK equivalent of $144,801 over to another fund in the UK before transferring the UK equivalent of $500,000 to Australia. Emily cannot transfer the entire $644,801 to the Australian QROPS fund and then expect the Australian fund to return the excess.


Question Three

A person has registered for the Pension Bonus Scheme (PBS) and has satisfied the work test all through the five years. They are now age 70 and intend on retiring in July 2015. If they are paid long service leave (LSL) as a fortnightly amount for the next four months will this prohibit them from claiming the PBS amount because they have worked more than 13 weeks after having stopped work? (Their income is above the upper limit of the incomes test in February 2015.)

Answer:

The general rule regarding the PBS is that the aged pension and the PBS must be applied for concurrently. However, your client can't apply for the age pension as their income is over the upper limit for the age pension. (Even if it were below the upper limit, you'd want to maximise your PBS by ensuring that your income was lower as the PBS is affect by the amount of age pension that you can get.) 

The PBS claim must be made within 13 weeks of the following events:

  • you stop meeting the work test, or
  • a period of non-accruing membership ends

Pension Bonus claims lodged later than 13 weeks after these events could result in the amount of the bonus payable being reduced or lost. Your question is when does the work test finish? Is it when the claimant finishes receiving their LSL or when the client physically stops working. Section 93C of the Social Security Act 1991 (Cth) states that production of a group certificate or payment summary will suffice to prove that the work test has been satisfied.


Important
The information contained in this newsletter is provided on behalf of the IOOF group of companies and is intended for financial adviser use only. It is given in good faith and has been prepared based on information that is believed to be accurate and reliable at the time of publication. Any examples are for illustration purposes only and are based on the continuance of present laws and our interpretation of them at the time.