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Foreign Pensions in Australia

Treatment of Foreign Pensions in Australia

General Position

A significant number of Australian retirees receive foreign pensions and benefits; just over 200,000 according to figure from the Australian Bureau of Statistics (2016/2017).

The majority of foreign pensions and annuities received by Australian residents are taxable in Australia, but there are exceptions (including US social security payments, which are subject to a final withholdings tax in the US) and tax advice is strongly recommended prior to your first receipt of any pension.

If withholding tax applies in the source country then you may be able to claim a foreign tax offset in Australia, to ensure there is no double taxation of your income subject to:

  • your not being entitled to seek a refund of the foreign tax from the source country, and
  • the foreign pension or annuity also being taxable in Australia.

Note that if your pension or annuity is paid from a country with which Australia has a tax treaty, you may also be able to make arrangements to have no tax withheld from your pension payments. Note that these treaties typically include information sharing arrangements which include foreign countries reporting income paid to Australian residents to the ATO.

Claiming a "Undeducted Purchase Price" (UPP) Deduction

In some situations, but not all, you may be able to claim that some part of your pension represents a return of your after tax contributions and should therefore not be taxable - this is referred to as the pension's "Undeducted Purchase Price" or "UPP". The UPP is usually calculated by dividing your contribution to your pension or annuity by a life expectancy factor, according to life expectancy statistics.

The ATO has established practices in terms of how to calculate the UPP of certain UK, Dutch, Austrian, German and Italian pensions - for example, the UK pension deduction is typically 8% and 25% for Dutch pensions. For others, you will need to contact the foreign pension provider for certain information and then request a specific UPP determination from the ATO. Many individuals will find professional advice useful in these circumstances and please fill out the Inquiry form below if you would like assistance.

Impact on Social Security Benefits

Overseas income, including pension income, is included in the "income test" applying to social security benefits such as the age pension; Centrelink uses specific exchange rates to convert your overseas income into AUD. Consequently, the receipt of a foreign pension may reduce your Australian pension by up to 50 cents for every $1 of comparable foreign pension received, if you exceed the income free limit.

Exceptions exist in terms of some restitution payments, which are considered exempt income, and some pensions under Social Security agreements. Also, if you are relying upon an International Social Security Agreement to meet minimum residency requirements, then any overseas payment may be simply deducted from your local pension entitlement.

We receive very regular inquiries about eligibility for foreign pensions and the associated tax and social security implications in Australia - particularly in relation to UK State pensions, US Social Security, Canadian CPP and European pensions generally.

This is a complex area where individual situations vary significantly and advice will require detailed information regarding applicants and professional fees will apply in relation to any advice provided.

If you would like to arrange professional advice in relation to the above matters, please complete the Inquiry form below providing details and you will be contacted accordingly. You will receive a fee quotation in advance of any advice or services being provided.