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Forward Thinking Magazine : August 2010
17 Example 3: US – Australia transfers Example 2: Trans-Tasman retirement savings transfers Techtalk The 2009 Australian Federal Budget announcement confirmed an earlier proposal that the Australian and New Zealand governments will enact legislation to allow cross-Tasman transfers of retirement savings. Although both countries employ TTE retirement income models (see Table 1), the Australian system appears more concessional overall. More specifically, the Australian model appears to levy a generally lower tax rate on earnings, depending on the income/capital gain return mix. Many New Zealand residents have worked in Australia for sustained periods and have accrued sizeable Australian superannuation interests. Once legislation allows trans-Tasman transfers, the decision to transfer should contemplate the potentially higher taxation impact in New Zealand, amongst other more subjective issues such as administrative convenience, multiple fund fee issues, exchange rate risk, etc. In addition, the 2009 revision of the double tax agreement between Australia and New Zealand provides that Australian sourced pension payments which would be tax free if received by an Australian resident will also be tax free if received by a New Zealand resident, and vice-versa. A similar result applies to lump sum payments. In many cases it might appear attractive for New Zealanders to leave their Australian superannuation in Australia until retirement. The decision for Australians returned from working arrangements in New Zealand may be different, given the apparently more attractive Australian system. However, far fewer Australians are likely to be faced with that decision. The United States of America (US) employs a primarily EET retirement income structure. Contributions to traditional products like 401(k) plans and Individual Retirement Accounts (IRAs) are made on a pre-tax basis, and returns are generally tax free. Benefit payments are broadly subject to ordinary marginal tax rates, with an additional 10% penalty tax applying to benefits paid prior to age 591⁄2. However, Roth 401(k) and Roth IRAs accept post tax contributions, and benefit payments are tax free where certain conditions are met, so are effectively TEE in structure. No specific international transfer provisions (akin to the UK QROPS system) exist in the US. Benefits transferred to foreign funds are generally taxed in the same fashion as other benefit payments. That is, in the case of traditional 401(k) plans and IRAs, at marginal tax rates with a possible 10% additional penalty applying before age 591⁄2. Careful consideration is required to justify a recommendation to transfer offshore prior to age 591⁄2. Providing financial advice in general to clients with a US background presents additional difficulties (see also further general comments below regarding providing advice and licensing, etc). Firstly, and somewhat uniquely, the US purports to have jurisdiction to levy income tax on individuals based on citizenship, rather than the more commonly accepted concepts of residence, abode and/or domicile. This may mean that a US citizen, who is absent the US for decades, is still liable to taxation in that country, despite residence in another country, such as Australia. It follows that any financial advice provided to a US citizen, even if specific only to Australian investment products, should contemplate US taxation implications. In general most Australian financial advisers will not have the authority or expertise to provide advice on the US taxation implications. Secondly, from an Australian taxation viewpoint, the Australian Taxation Office (ATO) has expressed a view that a US 401(k) plan is not a ‘foreign superannuation fund’ as defined in Australian taxation law. One reason for this conclusion is that 401(k) plan benefits can be accessed prior to retirement, albeit subject to an additional 10% taxation penalty. The implication is the assessable income relating to the growth in the benefit since becoming an Australian resident (if greater than 6 months) cannot be transferred by personal election to an Australian superannuation fund. A payment by a US 401(k) plan will be generally taxable in Australia as a trust distribution, reduced by the individual’s contributions paid and any previously assessed FIF income.