Australian QROPS: what happened on 6 April 2015

This page explains in detail what happened to Australian QROPS on 6 April 2015 and the few months which followed. On 1 July 2015 all but one of the Australian QROPS on the QROPS list maintained by UK Revenue and Customs (now called the ROPS notification list) were suddenly removed from the list. This caused havoc in the pension transfer industry and caught hundreds of people out mid-transfer! Happily HMRC later decided that there would be no tax charges for the people caught out by these changes.
This article does not give the current state of the law and so should not be relied on for plans to transfer UK pension money to Australia. Please see my migrants page for the latest issues to be considered by UK migrants and ex-pats if they wish to transfer UK pension money to Australia.
See in this page:-
  What was the problem with post 6 April 2015 transfers?
What about pre-6 April 2015 transfers?.
Good news at last
The net result: 55 and over solution in the post 6 April 2015 regime

and now no longer relevant but retained for interest:-
Joining in a challenge
If UK tax is charged: possible arguments on appeal

What was the problem with post 6 April 2015 transfers?

At the end of 2014 the UK Government started a consultation process about a proposed amendment to Reg 3 of the Pension Schemes (Categories or Country and Requirements for Overseas Pension Schemes and Recognised Overseas Pension Schemes) Regulations 2006. The proposed amendment provided that in order for an Australian SMSF to be able to apply for QROPS status (or keep QROPS status on renotification or when asked for confirmation) it must satisfy the following requirement (which we may call "the pension release requirement"):-
The benefits payable to the member under the scheme, to the extent that they consist of the member's relevant transfer fund, are payable no earlier than they would be if pension rule 1 in section 165 applied.
The reference here to the member's relevant transfer fund was to the UK sourced pension money transferred into the fund.

The reference to pension rule 1 in section 165 was a reference to the Finance Act 2004. It reads:-

No payment of pension may be made before the day on which the member reaches normal minimum pension age, unless the ill-health condition was met immediately before the member became entitled to a pension under the pension scheme.
The normal minimum pension age referred to here is the age of 55.

The "ill-health condition" is described in Schedule 28 of the Finance Act 2004 as follows:-

For the purposes of this Part the ill-health condition is met if--
  1. the scheme administrator has received evidence from a registered medical practitioner that the member is (and will continue to be) incapable of carrying on the member's occupation because of physical or mental impairment, and
  2. the member has in fact ceased to carry on the member's occupation.

Despite my representations (perhaps also from others) that this change would catch out many Australian QROPS funds who would be unaware of these changes, as from 6 April 2015 the amendment was made.

The problem for Australian superannuation funds was that under Australian superannuation law, earlier withdrawals are permitted in various circumstances, the better known ones being severe financial hardship and compassionate grounds. But this meant that Australian funds were non-compliant with this new requirement.

I was of the view that the answer to this was to ensure that the SMSF deed prohibited withdrawals from the UK sourced pension money in the fund unless the member was aged 55 or retired on ill-health grounds. So, from the beginning of 2015 my QROPS trust deeds contained this prohibition, and my advice to former clients with earlier deeds was to amend their trust deed to include the prohibition. This was also the advice that I gave in the pack "How to deal with the HMRC compliance letter".

The same view was held by others in the industry and I am aware of several other funds including one big retail fund which amended their deeds in a similar way. I am also aware that legal advice from law firms specialising in this area was to this effect.

The compliance letter from HMRC dated 17 April 2015 received by many Australian superannuation funds which were QROPS registered, asked how they complied with the pension release requirement. The questions asked, and the notes to the letter, suggested that it was possible to amend the trust deed to ensure compliance.

The principle behind the amendments to the trust deed was that a trustee is only able to act in accordance with the trust deed. To do otherwise would amount to a breach of trust.

Despite these attempts to comply with the new pension release requirement, in the QROPS list issued on 1 July 2015, HMRC removed all relevant Australian QROPS from the list except for one. And many Australian QROPS then received in the post a letter dated 29 June 2015 saying that their fund ceased to be recognised overseas pension scheme as from 6 April 2015.

Between 1 July 2015 and 17 August 2015 the QROPS list had only one Australian fund named, that is the Local Government Superannuation Scheme.

Those who still had some transfers to make were badly caught out by what happened. Many had made detailed plans to transfer their UK pension funds to their Australian superannuation funds and had organised their financial affairs accordingly. Some people paid a considerable amount in fees to establish such plans and/or partially to implement them. Many missed age deadlines for their transfer because of what happened.

What did this mean for pre-6 April 2015 transfers?

There was no concern about transfers before 6 April 2015 to an Australian QROPS. Such transfers were not affected by the withdrawal of QROPS recognition.

However, it meant that the fund became what is referred to under UK law as a "former QROPS". The obligations of a former QROPS (to report withdrawals of UK sourced money and not to use the money to purchase taxable property) were largely the same as they were before the fund lost QROPS recognition.

How come Government Superannuation Schemes could still be on the QROPS list?

This was because the new pension release requirement did not apply to an "overseas public service pension scheme" and Government Superannuation Schemes came within this definition.

Why did HMRC remove all other Australian schemes from the QROPS list on 1 July 2015?

HMRC informed me as follows:-

"We understand that there are rules in Australian law that provide for access to pension savings in Australian superannuation funds before age 55. Some of these payments can be restricted by scheme rules but others cannot and if an individual asks for them to be paid the superannuation fund is obliged to do so, regardless of what the scheme rules say."
In other words, HMRC's view at that time was that no Australian superannuation fund could be a QROPS because whatever changes it made to its rules it can never comply with the UK's pension release requirement. HMRC has since tempered this view: see the net result: the 55 and over solution.

What access to pension savings was HMRC referring to which cannot be restricted by scheme rules?

There appear to have been two areas of concern.

The first was where a member is on a temporary resident visa, who is not an Australian citizen and who has now permanently departed Australia. If such a person asks the trustee to pay them the value of their superannuation fund the trustee is obliged by statute to pay it. This is condition of release 103A. This could happen if the member is younger than 55 but in the context of a QROPS, a member on a temporary resident visa who had no intention of residing in Australia permanently would not be advised to transfer in from a foreign superannuation fund anyway so this is unlikely to happen in practice. In theory however, it is possible.

The second was where a member has made non-concessional contributions into the fund in excess of the annual cap (or the 3 years' bring forward provision). In these circumstances the member can elect to release the money from the fund to themselves (and the ATO will issue a release authority which the fund must comply with). The alternative is for the member to pay excess contribution tax. However the law prohibits the fund from receiving any contribution which is in excess of the cap (Reg 7.04), and it must be returned within 30 days. It is only where a loophole applied (where the transfers were done in tranches, each below the cap but which in aggregate were above the cap) that the member could elect for the repayment.

Legal arguments

In both of the above situations, there were legal arguments to be made about the conflict between a provision in a trust deed (which prohibits a payment out) and a statutory provision (which requires a payment out). The statute does not necessarily prevail because a payment out contrary to the trust deed is still technically a breach of trust (although in these circumstances the trustee would not face any adverse consequences).

Also, in the case where the trust deed prohibits a payment from the fund unless the member is 55 or over or the ill-health condition is met, the natural answer to the question whether under that scheme the member's benefits are otherwise payable is in the negative.

The wording of the new rule was that it required that "the scheme satisfies the requirement that the benefits payable to the member under the scheme, to the extent that they consist of the member's relevant transfer fund, are payable no earlier than" (the age of 55 unless the ill-health condition is met).

HMRC interpreted the words "the scheme satisfies the requirement" and "under the scheme" as referring not just to the rules of the scheme, but also to the statutory framework under which it exists. In the light of the other parts of the regulations, which examine closely that statutory framework, it is not clear that HMRC interpreted these words correctly.

Such doubts are supported by the use of the word "scheme" throughout the legislation (Part 4 of the Finance Act 2004). It is not used in the context that HMRC wishes to apply here. It refers only to an arrangement which provides pension benefits and which (in the case of a UK scheme) can be registered with HMRC.

It was also arguable that since there would be an unauthorised transfer if there was a leak of UK pension money to a member before the pension release requirement were satisfied, therefore this was the appropriate sanction rather than stopping the fund getting QROPS status in the first place.

Possible arguments on appeal if any tax is charged

This section is included for interest only, since HMRC have indicated that not tax will be charged.

Any transfer of UK pension money prior to 6 April 2015 to a fund which was recognised as a QROPS at the time is not affected by the change of rules because the change only applies to transfers after that date.

In the case of transfers after 6 April 2015, then in the letter of 29 June 2015 HMRC says that such transfers will be taxed as an unauthorised payment.

Since in practice there would naturally some delay between the date when the sending fund closed the UK pension account and sent the money and its receipt, the question arises what date should be taken for the transfer. Since the unauthorised act would have been the payment from the UK pension account it is my view that in the usual case the date when that payment was made should be taken as the date for the transfer.

Transfers in respect of a member aged 55 or over from a defined contribution arrangement. Even if HMRC is correct that the receiving fund was not a QROPS at the time of the tranfer, I do not think it can be categorised as an unauthorised payment. This is because such lump sum withdrawals are now permitted by UK law. It would be a "uncrystallised funds pension lump sum" allowed by Lump Sum Rule 4A in Schedule 29 of the Finance Act 2004. Such lump sums are authorised member payments by section 164(1)(b). The payment would not be free of tax however, because as a lump sum it would be taxable by the UK. This is because the Double Taxation Agreement does not cover pension lump sums (Article 17 of that agreement makes "pensions" taxable only in the country of residence, but this does not apply to lump sums). The first 25% would be tax free but the remainder would be taxable. Receipt of the money in Australia (by the superannuation fund) would also be taxable if the transfer was made more than 6 months after the member became tax resident in Australia, but this tax would not be on the whole amount: only on the earnings on the money since Australian tax residency. Consideration should be given to whether the UK tax paid (or part of it) could be treated as a foreign tax offset to reduce or extinguish the Australian tax bill, or the other way round (so that any Australian tax paid reduced or offset the UK tax bill).

Transfers in respect of a member aged 55 or over from a defined benefit arrangement. The situation is different, because such payments made in the form of a lump sum may only be made to a QROPS. If HMRC is correct, and the receiving fund was not a QROPS at the time of the transfer then it would be an unauthorised payment.

Transfers in respect of a member aged less than 55. If HMRC is correct, and the receiving fund was not a QROPS at the time of the transfer then it would be an unauthorised payment unless the ill-health condition was met.

Substantive arguments

There are arguments which can be made that the transfer was in fact a lawful QROPS transfer, or should be treated as such. Note that advice would need to be taken as to whether all these arguments can be used in an appeal against an unauthorised payment charge (sometimes it is necessary to seek judicial review at the same time).

Firstly there is the argument that a fund which had amended its deed to prohibit payment of benefits to members under 55 unless the ill-health condition was met did in fact comply with the pension release requirement. This argument is discussed above. If successful, this argument would mean that at the time of the alleged unauthorised payment the fund was in fact a QROPS. If so, the payment would not be unauthorised after all.

Secondly, there are arguments which can be made on the basis of unfairness. It is recognised that taxpayers should be treated fairly and this is should be considered in the light of any prior representation and previous practice which had given them a legitimate expectation that a certain state of affairs will continue.1

1 Preston v IRC [1985] STC 282 and Cameron v HMRC [2012] EWHC 1174 (Admin)

 

One of the previous representations was publishing a list of QROPS funds, which list had no statutory authority and therefore appeared to be a list of funds which HMRC recognised a having QROPS status. This certainly seemed to be the role of the list until 15 April 2015 when the list first included a warning that the fact that a fund was on the list did not mean its status was accepted and said that it was "your responsibility to find out if you have to pay tax on any transfer of pension savings" and "HMRC will usually pursue any UK tax charges (and interest for late payment) arising from transfers to overseas entities that do not meet the Rops requirements even when they appear on this list."

One difficulty with this warning is that it did not explain the approach which subsequently was taken by HMRC - which as can be seen above was based on highly technical grounds which very few people foresaw (this fact is shown by the number of specialists who believed an amendment to the deed would suffice - see above). Another difficulty was that those initiating the transfer, that is the members themselves, would have no reason to check the list on a regular basis. Admittedly a similar warning was in the letter of 17 April 2015, but again it did not explain that Australian funds were unable to comply. In any case it was only sent to some funds. It started to be received by funds in the post on 30 April 2015. It was not until 17 June 2015 that the list was suspended altogether.

The contents of the letter of 17 April 2015 also supports the unfairness point. This letter asked for information whether the scheme satisfied the new requirements and if so how. It did not say that HMRC thought that Australian schemes could not, even if the deed was amended, and why this was the case.

Indeed the letter stated:-

How can the scheme satisfy the Pension Age Test?
A scheme may satisfy the pension age test if:
  • The scheme rules do not allow for benefits form funds that had UK tax relief to be paid earlier that age 55 unless the member is retiring due to ill-health. (These rules may apply only to the UK tax relieved funds or may apply more generally) and/or
  • The law of the country in which the scheme is established acts to prohibit the payment of benefits before age 55 unless the member is retiring due to ill-health.
The use of the words "the scheme rules" in the first bullet point is notable, and is exactly the point made above about the correct interpretation of "scheme" in the legislation.

Then there was this:-

Can I amend my scheme rules to meet the new requirements?
Yes. Please submit form APSS251A.

These two passages in the letter actually encouraged funds to amend the rules and amounted to a represention that if they did so they would comply with the new requirement. This representation is even more significant because in Australia most QROPS trustees do not follow changes to UK pension law and would be entitled in the circumstances to take what HMRC said in this letter at face value rather than to be expected to foresee whether HMRC might change its mind.

A third "unfairness" point is that trustees in April 2015 were facing transfer deadlines arising from the ending of transfers from unfunded salary based schemes, and also from the approaching end of the Australian tax year on 30 June. They were therefore naturally anxious to finish transfers in the pipeline.

There is a third main point to make. It is the question of the "decision" made by HMRC that no Australian QROPS could satisfy the pension release test (even if its rules were amended). Judging from the letter dated 17 April 2015, HMRC made this decision after that date. The decision was promulgated in the letter dated 29 June 2015, and this was first being received by Australian funds in the post on 10 July 2015. It would be interesting to know when the decision was made. Prior to that decision being promulgated to Australian QROPS funds, those funds which had amended their deeds had every reason to believe that the amendment had succeeded.

Joining in a challenge

This section is included for interest only, because it seems unlikely that a challenge will now be necessary.

It is clear from the above that an arguable challenge could be mounted against a charge to UK tax arising from a post 6 April 2015 alleged unauthorised payment. If such a thing becomes necessary, speed will probably be important. There is a right of appeal against an assessment to tax, but in this particular case it may also be necessary to apply for "judicial review". In either case, there is a short time limit.

I am in contact with tax barristers in the UK who would be able to deal with such a challenge. Obviously if costs can be shared this is best for all. As soon as I hear that any such challenge has become necessary, I hope to be in a position to post the contact details on this news page and/or to inform people who are affected directly. Please note that I am receiving no referral fee for this, and of course you are free now and would be free then, to take other routes.

Good news at last

The net result: 55 and over solution in the post 6 April 2015 regime

In July 2015 a solution was found: to restrict membership of the fund to age 55. A client using my trust deed which did this applied for his fund to go on the ROPS list. He heard on 13 August 2015 that his fund would be placed on the list and it appeared on the list four days later. This was the very first Australian private fund to appear on the list since the removal of all the others. Since then many private Australian SMSFs, one retail fund and some government schemes have appeared on the list (the vast majority of these were my clients).

The solution found at that time therefore was to restrict membership of the fund to age 55 and over (HMRC have confirmed that this "necessarily" satisfies the pension release requirement).

No tax on transfers caught in the pipeline

There was then some excellent news for those whose transfers had been caught in the pipeline while (unknown to them) their QROPS fund was being removed from the list. These people were extremely worried that they would have to pay 55% tax on the transfers which had taken place. But at the end of June 2016 they started to hear from HMRC that no tax would be charged with respect to transfers made between 6 April 2015 and 30 June 2015.

Jeremy Gordon
22 April 2017

Copyright © Jeremy Gordon
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This article only applies to UK registered pension schemes and Australian self-managed superannuation schemes regulated by the Australian Tax Office. It applies to UK migrants to Australia, and to Australian ex-pats returning to Australia from the UK.

Disclaimer - legal advice
This article does not arise from any instructions from you and it is not legal advice given to you. You should check for yourself as to the legal issues for UK migrants and returning Australian ex-pats transferring their pensions to Australian SMSFs. If you follow the information on this page, you do so at your own risk.

Disclaimer - financial product advice
This article provides factual information only and is not intended to give a recommendation or opinion about a financial product or class of financial products. It particular it should not be taken to be advice about the prudence of establishing an SMSF in Australia and transferring to it money held in another pension scheme or in another form of investment. You should satisfy yourself about this.

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Jeremy Gordon is a barrister practising in Queensland and in the UK. He can be contacted by email using
or by mail at PO Box 354 Corinda QLD 4075. Or he can be contacted through his uk practice Chambers of Bernard Richmond QC, Lamb Building, Temple, London EC4Y 7AS, tel: 020 7797 7788. The conditions applying his work in Australia are here (opens in new window). For conditions applying to his work in England and Wales please ask.