Understanding Foreign Superannuation

Superannuation Taxation Worldwide

Australian superannuation tax treatment differs significantly from that of many other countries. The government taxes contributions and investment earnings during the accumulation phase. However, benefits are generally not taxed, except for Total and Permanent Disablement (TPD) benefits and death benefits payable to non-dependents. In contrast, many other countries allow tax-free contributions and earnings, taxing benefits upon emergence.

The following table illustrates these differences:

Jurisdiction	Pension tax	Lump sum tax
Canada	Taxed as income	Taxed as income in year of receipt and subject to withholding tax
Great Britain	Taxed as income	Tax free up to lifetime cap of 25% of value
India	Taxed as income	Partly taxed as income depending on nature of scheme
New Zealand	Tax free
	United States of America	Portion funded by post tax contributions is tax free, balance taxed as income

Australian Taxation of Foreign Superannuation

Foreign-sourced pensions and lump sums are generally taxed as income in Australia. They are subject to an offset, but not a rebate under double taxation treaties.

Transferring Superannuation to Australia

Transferring foreign superannuation entitlements to Australia often makes sense. However, this can only occur if the foreign fund is classified as a Foreign Superannuation Fund (FSF) under Australian law. Funds domiciled in Canada, India, and the United States do not qualify as FSFs.

Subject to the rules of the ceding fund and jurisdiction, one can transfer FSF entitlements to Australia as non-concessional contributions. The amount transferable is limited by non-concessional contribution caps.

If the transfer occurs within six months of obtaining Australian tax residency, it is tax-free. Otherwise, tax is payable on the increase in value from the time of residency to transfer, known as the Applicable Fund Earnings (AFE). By default, the AFE is added to taxable income and taxed at 15%. However, one can elect for the receiving superannuation fund to pay the tax. The AFE is not subject to non-concessional contribution caps, and both the AFE and any transferred amount as a non-concessional contribution are treated as tax-free upon benefit emergence.

Managing Large Transfers

Due to non-concessional contribution caps, one may need to stage transfers over time. In these cases, the AFE is apportioned between the amounts, and it is essential to keep records of the initial AFE, additional AFE, and the amounts used.

A possible workaround is to deliberately breach the non-concessional caps and then seek a release of over-contributions. However, the foreign country’s laws may impose tax on early lump-sum releases of transferred funds, making it challenging to ignore the contribution caps and seek a release of the over-contribution.

If one has other Australian superannuation funds, they can over-contribute and then elect to release funds from another fund. The amount released includes the over-contribution plus 85% of ATO deemed earnings from transfer to release. One would then incur marginal tax on all deemed earnings, subject to a 15% rebate. This allows the transaction to proceed in one stage.

UK-Sourced Funds and QROPS

UK law only permits transfers to Qualifying Recognised Overseas Pension Schemes (QROPS). Since Australian law allows the release of superannuation on hardship grounds before age 55, and UK law does not, only Australian funds that limit their membership to those over 55 can be a QROPS. There is one public offer fund that meets this criterion, or one can establish a Self-Managed Superannuation Fund (SMSF).

QROPS must report transactions to the UK government for five years from receipt of funds. "Unauthorised payments" may attract tax, making it unusual for individuals to remove funds from QROPS for five years, except for pension drawdowns.

UK State Pensions

Special provisions apply to UK State pensions. Once they commence payment in Australia, they are no longer indexed, and one can sometimes catch up on missing years of National Insurance contributions.

UK State pension recipients living in Australia are not eligible for annual indexation of their pension once it commences. Therefore, the initial rate received at age 67 remains constant throughout retirement and is eroded by inflation. If one returns to the UK as a resident, the pension reverts to the full level. If one subsequently returns to Australia, the pension continues unindexed at the level at the time of return.

The UK State pension requires a 35-year contributory history. Contribution years can be purchased through voluntary "Class 3" contributions of £824.20 per year (from 6 April 2025) for each missing year. To pay Class 3 voluntary contributions, one must have worked in the UK immediately before leaving and must currently be working abroad (or have worked while abroad). The full pension entitlement is £230.25 per week (from 6 April 2025), implying a 2.4-year payback period if one purchases an extra contribution year. Voluntary contributions are valid for six years back, and there is no requirement for one to have been working in the UK for the bought-back years.

New Zealand-Sourced Funds

The AFE provisions do not apply to transfers from New Zealand funds. Transfers from New Zealand funds to Australian funds are subject to requirements of separation of funds and a delay of retirement to age 65. This renders it unattractive for many funds to accept these transfers. However, several public offer funds, including First Super, Brighter Super, and Vision Super, do accept transfers.

The restriction on release before age 65 applies only to the capital transferred from the KiwiSaver, not to earnings thereon.

Transferring Superannuation Out of Australia

The only permissible outward transfers of superannuation are to KiwiSaver accounts and Departing Australia Superannuation Payments (DASP).

One can fully transfer their Australian superannuation to a New Zealand KiwiSaver account, with the restriction that it cannot be transferred to any other country other than Australia. When funds are blended with existing or future KiwiSaver funds, the Australian-sourced component subject to this restriction is the transferred amount and earnings thereon.

DASPs are possible when one’s temporary visa expires, allowing for the complete withdrawal of balances. If the visa is class 417 or 462 (working holidays), a tax of 65% is levied on the taxable component. Otherwise, the tax is 35%.