Section 305 of the tax act: how to move UK, NZ, US pensions to Australian super without triggering marginal-rate tax

For Australians who arrived from the UK, New Zealand, the US, or another country with accumulated retirement savings in a foreign pension or retirement scheme, the decision of whether and how to bring those savings into the Australian super system is one of the most consequential financial moves of their first decade as a resident. The default tax treatment under Subdivision 305-B of the Income Tax Assessment Act 1997 is unfavourable. Without specific intervention, any growth in the foreign fund's value during the member's period of Australian residency — the "Applicable Fund Earnings" or AFE — is included in the member's assessable income at marginal rates (ATO, https://www.ato.gov.au/individuals-and-families/super-for-individuals-and-families/super/growing-and-keeping-track-of-your-super/foreign-super-transfers). For a member on the 39% effective marginal rate (37% income tax plus 2% Medicare Levy, applicable to income between $120,001 and $180,000), $40,000 of AFE produces roughly $15,600 in tax. The interventions that avoid this outcome sit in two specific provisions: the 6-month "fresh-arrival" window under section 305-70 and the post-6-month election under section 305-80.

Section 305-70 provides the cleanest pathway. If the transfer from the foreign fund is received within 6 months of the member becoming an Australian tax resident, the AFE is treated as zero, and the entire transfer is tax-free at the member level. For migrants who can move quickly to consolidate, the 6-month window is the default route — but it requires the foreign fund to release the balance promptly, the receiving Australian fund to be ready to accept the transfer, and the administrative process to complete inside 180 days. For UK pensions in particular, the foreign fund's own conditions of release — typically age-based vesting at 55 or higher — often prevent release inside the window, pushing the transfer into the post-6-month framework.

For transfers received outside the 6-month window — which is most migrants, most of the time — section 305-75 calculates the AFE. Broadly, the AFE is the growth in the foreign fund's value during the member's period of Australian residency. Pre-residency contributions and pre-residency growth are excluded. For a UK pension where the member contributed for decades while resident in the UK and arrives in Australia in their 50s or 60s, the bulk of the balance pre-dates Australian residency, so AFE is typically a manageable proportion of the total transfer. The calculation requires reliable records of the member's foreign fund balance at the date of becoming an Australian resident — a practical challenge for members who did not anticipate the future need.

Section 305-80 is the intervention that turns the default into a clean outcome. The member can elect, by lodging a notice with the receiving Australian super fund before or shortly after the lump sum is received, that an amount up to the AFE be included in the receiving fund's assessable income instead of the member's. The fund pays 15% on that amount; the member pays nothing. For $40,000 of AFE, the election shifts the tax from a $15,600 personal liability at marginal rates to a $6,000 fund tax liability — a saving of roughly $9,600. For larger transfers with proportionally larger AFE, the dollar saving scales correspondingly.

The non-concessional contribution cap is the binding constraint for substantial foreign balances. A foreign super transfer is generally treated as a non-concessional contribution against the receiving member's NCC cap — $120,000 per year for FY2025-26, or up to $360,000 under the bring-forward provisions for members under 75 with Total Super Balance below the relevant threshold (ATO, https://www.ato.gov.au/individuals-and-families/super-for-individuals-and-families/super/growing-and-keeping-track-of-your-super/caps-limits-and-tax-on-super-contributions/non-concessional-contributions-cap). For a UK pension of £500,000 — roughly AUD $1 million at 2026 exchange rates — the cap forces the transfer to be staged across multiple financial years using bring-forward cycles. Year one: $360,000 with bring-forward triggered. Years two and three: nil, bring-forward consumed. Year four: $360,000 with the next bring-forward cycle. The remaining roughly $280,000 either stays in the foreign fund or is taken as a non-super withdrawal in the original country, with whatever tax treatment that triggers.

The Total Super Balance constraint can preclude transfer entirely. For a member with TSB at or above $2.0 million at the prior 30 June, the NCC cap is reduced to zero. A foreign transfer of any size becomes excess, with associated earnings taxed at marginal rates plus the excess contribution penalty. For migrants with substantial foreign super and meaningful existing Australian super, careful TSB management — typically through pension commencement and partial commutation — is often needed before any transfer can proceed.

For UK pensions specifically, additional rules apply. The UK Lifetime Allowance Charge that historically complicated transfers was abolished from 6 April 2024. The Overseas Transfer Charge of 25% can still apply to transfers to funds not QROPS-registered with HMRC. The receiving Australian fund must typically hold QROPS registration for the transfer to proceed without UK-side tax penalties (ATO, https://www.ato.gov.au/businesses-and-organisations/super-for-employers/self-managed-super-funds/qrops-qualifying-recognised-overseas-pension-schemes). Australian retail and industry funds vary in their QROPS status; SMSFs can be structured to comply but require ongoing technical maintenance to retain registration. The UK rules change periodically and require current verification before any transfer is initiated.

For migrants with substantial foreign super, the 6-month window and the section 305-80 election are the two primary tools for a clean transfer. Choosing the right tool, lodging the right form in time, and managing the cap and TSB constraints carefully produces a fundamentally different outcome from the default — and the difference is measured in tens of thousands of dollars on a substantial transfer.

Sources

• Australian Taxation Office (ATO) — Foreign super transfers
• Australian Taxation Office (ATO) — Non concessional contributions cap
• Australian Taxation Office (ATO) — Qrops qualifying recognised overseas pension schemes