Paying double tax

[ToowoombaBlue]

Has anyone else had this issue?

I have a private UK pension on which I pay tax on the occasional lump sums I take at  HMRC standard rates. This is despite them being aware that I am an Australian citizen residing permanently in Australia. I completed a form declaring Australian residency back in 2015.

Now in accordance with Australian tax laws, I also declare these lump sums and my tax is adjusted accordingly here.

I’m in the process of claiming the UK tax back, but it is proper inconvenient!

How can I get them to play ball?

[rammygirl]

There is a specific form that you get from the ATO and send back to them. They then verify and send to HMRC who inform the pension company not to deduct at source.

It is somewhere on the ATO web site. I used it and although it took a while  it worked. 

[Ken]

On 22/06/2023 at 18:15, ToowoombaBlue said:

Has anyone else had this issue?

I have a private UK pension on which I pay tax on the occasional lump sums I take at  HMRC standard rates. This is despite them being aware that I am an Australian citizen residing permanently in Australia. I completed a form declaring Australian residency back in 2015.

Now in accordance with Australian tax laws, I also declare these lump sums and my tax is adjusted accordingly here.

I’m in the process of claiming the UK tax back, but it is proper inconvenient!

How can I get them to play ball?

HMRC have recently changed their approach and ruled that lump sums are not pensions under the terms of the double taxation agreement. That's important because pensions are only taxed in the country you are resident in per the double taxation agreement, whereas other income is taxed first in the country they are sourced (in this case the UK) with that tax paid being an offset in the country where you are resident (in this case Australia). You still only have to pay one set of tax, but instead of it all being paid in Australia it's paid in the UK plus a top-up (assuming the Australian tax rate is higher - which it generally will be in you live in Australia as you'll have more income there) in Australia.

It's different if you are actually receiving a private UK pension and not lump sums. In that case as @rammygirl has said you complete the forms, send them to the ATO to verify them, who send them to HMRC, who (provided they agree that it's a pension) will eventually inform the pension company not to deduct tax at source.

Edited June 24, 2023 by Ken

[InnerVoice]

17 hours ago, Ken said:

HMRC have recently changed their approach and ruled that lump sums are not pensions under the terms of the double taxation agreement. That's important because pensions are only taxed in the country you are resident in per the double taxation agreement, whereas other income is taxed first in the country they are sourced (in this case the UK) with that tax paid being an offset in the country where you are resident (in this case Australia). You still only have to pay one set of tax, but instead of it all being paid in Australia it's paid in the UK plus a top-up (assuming the Australian tax rate is higher - which it generally will be in you live in Australia as you'll have more income there) in Australia.

It's different if you are actually receiving a private UK pension and not lump sums. In that case as @rammygirl has said you complete the forms, send them to the ATO to verify them, who send them to HMRC, who (provided they agree that it's a pension) will eventually inform the pension company not to deduct tax at source.

Thank you! @Ken That's a super-useful post for me, and hopefully for the OP and others too.

I've been wondering about how I could take the '25% tax-free lump sum' from my UK pension without paying too much (or ideally, no) tax. Based on what you've stated above, I assume that HMRC would not tax that first 25% at all because it's considered totally tax-free based on UK laws. I assume I would need to declare that amount in Australia, but would the ATO treat it as taxable income or a capital gain? Would I be correct in thinking that if I was residing in a country where tax on overseas income is exempt, then I'd pay nothing at all in either the UK or the other country (assuming a DTA existed between the two)?

[Ken]

3 hours ago, InnerVoice said:

Thank you! @Ken That's a super-useful post for me, and hopefully for the OP and others too.

I've been wondering about how I could take the '25% tax-free lump sum' from my UK pension without paying too much (or ideally, no) tax. Based on what you've stated above, I assume that HMRC would not tax that first 25% at all because it's considered totally tax-free based on UK laws. I assume I would need to declare that amount in Australia, but would the ATO treat it as taxable income or a capital gain? Would I be correct in thinking that if I was residing in a country where tax on overseas income is exempt, then I'd pay nothing at all in either the UK or the other country (assuming a DTA existed between the two)?

Yes, if you are a permanent resident or citizen the ATO would treat it as taxable income. The value of your pension fund at the date you moved to Australia (or became a permanent resident if later) is not taxable income, but (depending on how you take your pension) the tax-free portion is the last part of your pension that you draw down, so if you're taking lump sums that first 25% would likely be entirely taxable while later lump sums could be partly or wholly tax free. If, however, you commence a pension, and the only lump sum is the 25%, it's a matter of valuing the worth of the lump sum when you moved to Australia separately from the pension. In that case you would get some of it tax-free, as only the growth is taxed.

The pension portion wouldn't necessarily be fully taxed either since you are entitled to get the purchased value of the pension (the amount you paid in) tax-free. Unfortunately, unlike with the lump-sum, the tax-free portion is only the amount you personally paid into your pension and all of the growth before you moved to Australia, plus any amounts paid in by your employer would still be taxable. Furthermore, claiming this UPP isn't particularly easy as you have to prove what you paid into you pension decades ago and get the ATO to approve it, and then it's often a tiny amount compared to the growth of your pension so many taxpayers don't bother. Some taxpayers mistakenly believe they can automatically claim an 8% UPP. That however is the rate that the ATO has granted for UK state old-age pension. For a personal pension you have to get the rate agreed with the ATO.

As to your other question, if you were residing in a country where tax on overseas income is exempt (and this includes Australia if you are a temporary resident) then you would pay no tax at all on the 25% as that is tax-free in the UK. That would apply whether or not a DTA existed between the two countries. If there was a DTA it's theoretically possible that the other 75% would be tax free in both countries (if taken as a pension and not as lump sums) - but I don't see that working for temporary residents in Australia nor do I think a DTA would be agreed that passed taxing rights on pensions to a country where they would be tax free.

[Alan Collett]

https://www.ato.gov.au/law/view/document?DocID=AID/AID201248/00001&PiT=99991231235958

https://www.ato.gov.au/law/view/document?DocID=AID/AID201249/00001&PiT=99991231235958

Hi @InnerVoice

Here's some light reading for you!

ID 2012/48 looks at the tax situation when an annuity/pension is not commenced at the same time as the lump sum, while 2012/49 looks the position when a pension is commenced at the same time.

It can get a bit technical!

The question of how to value your UK fund at the relevant time can also be an issue, with differing outcomes depending on the approach taken.

Best regards.

[Alan Collett]

On 22/06/2023 at 18:15, ToowoombaBlue said:

Has anyone else had this issue?

I have a private UK pension on which I pay tax on the occasional lump sums I take at  HMRC standard rates. This is despite them being aware that I am an Australian citizen residing permanently in Australia. I completed a form declaring Australian residency back in 2015.

Now in accordance with Australian tax laws, I also declare these lump sums and my tax is adjusted accordingly here.

I’m in the process of claiming the UK tax back, but it is proper inconvenient!

How can I get them to play ball?

Remember that not all of a lump sum from a foreign (UK) pension fund is taxable in Australia - only the Applicable Fund Earnings on the lump sum/s received.

Check also that recurring lump sum payments don't cause the payments to be more accurately categorised as a pension.

Best regards.

[InnerVoice]

2 hours ago, Ken said:

Yes, if you are a permanent resident or citizen the ATO would treat it as taxable income. The value of your pension fund at the date you moved to Australia (or became a permanent resident if later) is not taxable income, but (depending on how you take your pension) the tax-free portion is the last part of your pension that you draw down, so if you're taking lump sums that first 25% would likely be entirely taxable while later lump sums could be partly or wholly tax free. If, however, you commence a pension, and the only lump sum is the 25%, it's a matter of valuing the worth of the lump sum when you moved to Australia separately from the pension. In that case you would get some of it tax-free, as only the growth is taxed.

The pension portion wouldn't necessarily be fully taxed either since you are entitled to get the purchased value of the pension (the amount you paid in) tax-free. Unfortunately, unlike with the lump-sum, the tax-free portion is only the amount you personally paid into your pension and all of the growth before you moved to Australia, plus any amounts paid in by your employer would still be taxable. Furthermore, claiming this UPP isn't particularly easy as you have to prove what you paid into you pension decades ago and get the ATO to approve it, and then it's often a tiny amount compared to the growth of your pension so many taxpayers don't bother. Some taxpayers mistakenly believe they can automatically claim an 8% UPP. That however is the rate that the ATO has granted for UK state old-age pension. For a personal pension you have to get the rate agreed with the ATO.

As to your other question, if you were residing in a country where tax on overseas income is exempt (and this includes Australia if you are a temporary resident) then you would pay no tax at all on the 25% as that is tax-free in the UK. That would apply whether or not a DTA existed between the two countries. If there was a DTA it's theoretically possible that the other 75% would be tax free in both countries (if taken as a pension and not as lump sums) - but I don't see that working for temporary residents in Australia nor do I think a DTA would be agreed that passed taxing rights on pensions to a country where they would be tax free.

@Ken I honestly can't remember when I started my UK private pension because it was connected to a company I once worked for, and I didn't pay much attention at the time. I think it was with the Pru, and then I transferred it to Clerical Medical at some point. When I returned to the UK in 2008 I got myself an IFA and he advised me to transfer to Aviva, which I did. Just before I returned to Australia in 2011, I transferred it again (based on his advice) to Parmenion, and I've been with them ever since. The bottom line is I have absolutely no idea what my pension was worth when I moved to Australia, or when I returned in 2011. I also added quite a bit of money when I was living in the UK, so I guess that would convolute the valuation of the tax-free portion even further.

[InnerVoice]

14 hours ago, Alan Collett said:

https://www.ato.gov.au/law/view/document?DocID=AID/AID201248/00001&PiT=99991231235958

https://www.ato.gov.au/law/view/document?DocID=AID/AID201249/00001&PiT=99991231235958

Hi @InnerVoice

Here's some light reading for you!

ID 2012/48 looks at the tax situation when an annuity/pension is not commenced at the same time as the lump sum, while 2012/49 looks the position when a pension is commenced at the same time.

It can get a bit technical!

The question of how to value your UK fund at the relevant time can also be an issue, with differing outcomes depending on the approach taken.

Best regards.

Thanks @Alan Collett, that's appreciated. Valuing my UK fund is probably going to be a bit of an issue, as I mentioned in my previous post to Ken. I even thought about moving back to the UK for a year when I finally retire so I can get the 25% completely tax-free without any issues (around £50,000), but that'd depend how much I was going to get stung for in tax over here (it might not be worth the effort).

[Andrew from Vista Financial]

1 hour ago, InnerVoice said:

Thanks @Alan Collett, that's appreciated. Valuing my UK fund is probably going to be a bit of an issue, as I mentioned in my previous post to Ken. I even thought about moving back to the UK for a year when I finally retire so I can get the 25% completely tax-free without any issues (around £50,000), but that'd depend how much I was going to get stung for in tax over here (it might not be worth the effort).

Seems like quite an effort (and cost) to save some tax.

 

Don't discount a transfer to an OZ (QROPS) Super, tax is only payable on the AFE (growth) when a transfer is carried out and this can usually be mitigated to a flat 15% then thereafter withdrawals are tax free.  

[InnerVoice]

32 minutes ago, Andrew from Vista Financial said:

Don't discount a transfer to an OZ (QROPS) Super, tax is only payable on the AFE (growth) when a transfer is carried out and this can usually be mitigated to a flat 15% then thereafter withdrawals are tax free.  

Thanks @Andrew from Vista Financial. I looked into the possibility of transferring it about 5 years ago and I was informed at the time that it probably wasn't going to be worth it unless I had around a quarter of a million. My pot is considerably less than that, but I'm happy to get a second opinion at some point though. I was under the impression that there are also fees to be paid to HMRC in the event of a transfer because they have given me a 20% tax credit on all my personal contributions.

[Ken]

14 minutes ago, InnerVoice said:

Thanks @Andrew from Vista Financial. I looked into the possibility of transferring it about 5 years ago and I was informed at the time that it probably wasn't going to be worth it unless I had around a quarter of a million. My pot is considerably less than that, but I'm happy to get a second opinion at some point though. I was under the impression that there are also fees to be paid to HMRC in the event of a transfer because they have given me a 20% tax credit on all my personal contributions.

If the amount of AFE is relatively small, then there is also the option of transferring it to Australia and paying it in to your own super fund yourself as a voluntary contribution which you are claiming as a tax deduction and then only paying 15% tax on it rather than the full whack. There's a host of things you need to comply with and the amount you can contribute in this way is severely limited, but if your total fund isn't already too large (and you didn't pay in the maximum in previous years already), you can use underpayments from previous years too.