Tax on UK lump sum pension

[Drumbeat]

I have received a very small lump sum pension from a company I worked for as a school leaver in the UK. Tax has been deducted from this and as I have no other UK income I am unsure whether to try and claim this back? Or will I then pay higher tax on it in Australia?

Any advice is appreciated.

[Paul1Perth]

I ink if you've paid tax in the UK you shouldn't be up for any here. My advice would be don't declare it as an income then the tax office won't ask.

[Marisawright]

7 minutes ago, Paul1Perth said:

I ink if you've paid tax in the UK you shouldn't be up for any here. My advice would be don't declare it as an income then the tax office won't ask.

The British and Australian tax offices talk to each other now so I think that would be a very bad idea. Big fines when found out including interest if they take a while to notice 

[Paul1Perth]

7 minutes ago, Marisawright said:

The British and Australian tax offices talk to each other now so I think that would be a very bad idea. Big fines when found out including interest if they take a while to notice 

What's the chances of a small lump sum being chased up. There's not heaps of employees at either tax office looking for the odd few dollars, hopefully they are after the big boys hiding millions.

I would risk it.

[Drumbeat]

28 minutes ago, Marisawright said:

The British and Australian tax offices talk to each other now so I think that would be a very bad idea. Big fines when found out including interest if they take a while to notice 

All I want to do is pay the least amount of tax needed

[Marisawright]

40 minutes ago, Paul1Perth said:

What's the chances of a small lump sum being chased up. There's not heaps of employees at either tax office looking for the odd few dollars, hopefully they are after the big boys hiding millions.

I would risk it.

Remember that guy who got fined several thousand dollars for not declaring the rental income on his British property?  He ended up paying three or four times what the tax would've been.  They don't have to "chase it up" if the British taxman has actively notified them, they just have to put a notice on your MyGov account.

[Marisawright]

23 minutes ago, Drumbeat said:

All I want to do is pay the least amount of tax needed

Good idea.  I think the question to research is, how is an overseas pension treated by the Australian taxman?  How much tax would you pay on it?

 As you probably know, when you declare the lump sum on your Australian tax return, you'll also declare the British tax paid.  The British tax will be deducted from whatever Australian tax is due on the amount.  So if the Australian tax due would be more than the British tax, I don't think there's much point going through the hassle of reclaiming.  

However, if the Australian tax would be LESS than the British tax was, you don't get a refund of the excess British tax, so it might be worth the hassle depending how much it is.

[Ken]

2 hours ago, Drumbeat said:

I have received a very small lump sum pension from a company I worked for as a school leaver in the UK. Tax has been deducted from this and as I have no other UK income I am unsure whether to try and claim this back? Or will I then pay higher tax on it in Australia?

Any advice is appreciated.

It's taxable in Australia if you are a citizen or permanent resident. Note that a lump sum pension paid to an Australian should be taxed only in Australia, but an uncrystallised lump sum is taxed in the UK and the AFE (Applicable Fund Earnings) is taxed in Australia. The AFE is the growth in the fund since you became an Australian resident. The value when you moved to Australia is tax free in these circumstance. This is important because if it is taken as a pension the only part that is tax free is the UPP (Undeducted Purchase Price) which is purely the pension contributions you made (not those made by your employer or the growth before you moved to Australia) - and then only if the ATO has agreed to that figure.

You should be able to claim tax paid in the UK as an offset under the terms of the double taxation treaty in which case the total amount of tax you have to pay would be the same (other than any FX differences) whether you reclaim the UK tax paid from HMRC or from the ATO (as a tax offset). However if the ATO restrict this offset on the grounds that part of it relates to the tax free portion you might get less that way so I'd reclaim it from HMRC just to be sure (I'm not certain of the ATO view of this so I'm probably being overly cautious).

[Drumbeat]

11 minutes ago, Ken said:

It's taxable in Australia if you are a citizen or permanent resident. Note that a lump sum pension paid to an Australian should be taxed only in Australia, but an uncrystallised lump sum is taxed in the UK and the AFE (Applicable Fund Earnings) is taxed in Australia. The AFE is the growth in the fund since you became an Australian resident. The value when you moved to Australia is tax free in these circumstance. This is important because if it is taken as a pension the only part that is tax free is the UPP (Undeducted Purchase Price) which is purely the pension contributions you made (not those made by your employer or the growth before you moved to Australia) - and then only if the ATO has agreed to that figure.

You should be able to claim tax paid in the UK as an offset under the terms of the double taxation treaty in which case the total amount of tax you have to pay would be the same (other than any FX differences) whether you reclaim the UK tax paid from HMRC or from the ATO (as a tax offset). However if the ATO restrict this offset on the grounds that part of it relates to the tax free portion you might get less that way so I'd reclaim it from HMRC just to be sure (I'm not certain of the ATO view of this so I'm probably being overly cautious).

Thank you, the lump sum is only 2300 pounds so hadn't really thought about the tax implications.

[Jon the Hat]

Tax offices don't work on a people reviewing number basis any more, they use data analytics to identify discrepancies, and automation to send you a claim / penalty.  So anyone who tells the UK HMRC they are in Australia, HMRC will share their data with the ATO in a bulk file, who can run a single exercise to flag the missing income.  They can pick up literally everyone.  And they will.  Once they have a discrepancy it IS worth their time following up.

[Alan Collett]

The UK tax deducted under PAYE is likely to be repayable by HMRC.

In Australia - as Ken says - only the growth in the fund from the time you became a tax resident is likely to be taxable, known as the Applicable Fund Earnings.

I anticipate you'll come out ahead financially if you take steps to deal with the pension monies as per the above.

Best regards.

[Chortlepuss]

On 17/06/2021 at 15:35, Ken said:

It's taxable in Australia if you are a citizen or permanent resident. Note that a lump sum pension paid to an Australian should be taxed only in Australia, but an uncrystallised lump sum is taxed in the UK and the AFE (Applicable Fund Earnings) is taxed in Australia. The AFE is the growth in the fund since you became an Australian resident. The value when you moved to Australia is tax free in these circumstance. This is important because if it is taken as a pension the only part that is tax free is the UPP (Undeducted Purchase Price) which is purely the pension contributions you made (not those made by your employer or the growth before you moved to Australia) - and then only if the ATO has agreed to that figure.

You should be able to claim tax paid in the UK as an offset under the terms of the double taxation treaty in which case the total amount of tax you have to pay would be the same (other than any FX differences) whether you reclaim the UK tax paid from HMRC or from the ATO (as a tax offset). However if the ATO restrict this offset on the grounds that part of it relates to the tax free portion you might get less that way so I'd reclaim it from HMRC just to be sure (I'm not certain of the ATO view of this so I'm probably being overly cautious).

Is there an option to apply to HRMC to get all income from UK (pensions and rental) paid gross in UK and just pay the tax in Australia?  I currently pay no UK tax on my UK rental (under tax threshold but have also completed form to get all income gross) but my upcoming pension income  will put me over the UK tax threshold. At the moment I have UK and Australian tax returns so would be easier just to declare tax in Australia - Will UK get first dibs?  Makes it tricky to calculate given non aligned  tax reporting periods. 

[Alan Collett]

17 minutes ago, Chortlepuss said:

Is there an option to apply to HRMC to get all income from UK (pensions and rental) paid gross in UK and just pay the tax in Australia?  I currently pay no UK tax on my UK rental (under tax threshold but have also completed form to get all income gross) but my upcoming pension income  will put me over the UK tax threshold. At the moment I have UK and Australian tax returns so would be easier just to declare tax in Australia - Will UK get first dibs?  Makes it tricky to calculate given non aligned  tax reporting periods. 

There's no option - the tax treatment of UK pensions to tax residents of Australia is determined by Article 17 of the Tax Treaty.

What's your visa status in Australia?

Best regards.

[Chortlepuss]

19 hours ago, Alan Collett said:

There's no option - the tax treatment of UK pensions to tax residents of Australia is determined by Article 17 of the Tax Treaty.

What's your visa status in Australia?

Best regards.

Citizen. There is a form on HRMC site to apply to have UK income paid gross where a full time tax resident of Australia. I asked the ATO about it and they said they weren’t aware of it (even though the form states it goes to the ATO). I get my UK property earnings paid gross so wondered if I could get my UK pension paid gross in UK and taxed only in Australia. Mind you the people answering my call weren’t aware of how the UK pension tax free sum was taxed in Australia (they told me on the whole sum and not just the growth component). It’ll get very complicated to apportion tax already paid on UK income across tax years so I wondered if there was a simpler way of doing it. 

[Chortlepuss]

22 minutes ago, Chortlepuss said:

Citizen. Resident in Australia full time for tax purposes.  There is a form on HRMC site to apply to have UK income paid gross where a full time tax resident of Australia. I asked the ATO about it and they said they weren’t aware of it (even though the form states it goes to the ATO). I get my UK property earnings paid gross so wondered if I could get my UK pension paid gross in UK and taxed only in Australia. Mind you the people answering my call weren’t aware of how the UK pension tax free sum was taxed in Australia (they told me on the whole sum and not just the growth component). It’ll get very complicated to apportion tax already paid on UK income across tax years so I wondered if there was a simpler way of doing it. 

Updated to say resident in Aus full time for tax purposes. Edit button not working for me! 

[Alan Collett]

2 hours ago, Chortlepuss said:

Updated to say resident in Aus full time for tax purposes. Edit button not working for me! 

If you need help feel able to complete the enquiry form at www.bdhtax.com - we assist with matters of this nature regularly.

Best regards.

[Chortlepuss]

23 hours ago, Alan Collett said:

If you need help feel able to complete the enquiry form at www.bdhtax.com - we assist with matters of this nature regularly.

Best regards.

Thanks Alan 

I’ve now found info I need after reading up on article 17. My understanding is that for anyone with a defined benefits scheme, a UK tax free lump sum is taxed in Australia on growth in lump sum since gaining Australian residence. Regular payments from the pension can be paid gross in UK if a nil tax code form is completed informing HRMC that they are not UK tax resident and resident in Australia for tax purposes. Tax will be deducted at source from UK pension unless this form is submitted to HRMC. If tax has already been deducted by HRMC it can be reclaimed on this form. If this is the case, it’ll certainly save me a lot of complex spreadsheet calculations!

[Alan Collett]

If you are happy to proceed on the basis of personal research - that's your call.

With transactions of this type I recommend that a professional tax opinion is obtained, and paid for.

Best regards.

[Chortlepuss]

23 hours ago, Alan Collett said:

If you are happy to proceed on the basis of personal research - that's your call.

With transactions of this type I recommend that a professional tax opinion is obtained, and paid for.

Best regards.

Thanks Alan 

Im taking the advice of a tax lawyer - just wish more of this stuff was in the public domain. It impacts so many people, happens on a regular basis and if even the ATO help desk aren’t across the rules, there’s not much help for most of us! 

[Alan Collett]

There's an old saying that free advice is worth what you paid for it.

And I wouldn't rely on verbal advice from public servants at the ATO/HMRC/DoHA/etc.   No accountability if they get it wrong.

Good luck!