Anyone know what the situation is regarding yet-to-mature UK endowment policies (designed to repay the mortgage)and Oz tax? Apparently the proceeds are paid out tax free, but if they are then used to repay your Australian mortgage, does the Oz taxman want a cut? Please say no! If he does we'll just leave the proceeds in the UK, or go back home, whatever it takes to keep our hard-earned cash to ourselves!

Hi Cheryl

UK endowment policies are paid out tax free on maturity and are not subject to any tax levy if you are resident in Australia.

Although there are possible tax implications if they are cashed-in before normal maturity.

My accountant confirmed this to me as I have a UK policy which matures in January 2009.

I hope this helps.

Neither of you state whether you are permanent residents but if you are then your UK Policies are subject to Australian tax.

For permanent residents UK policies will fall under the Foreign Life Policy Rules (FLP) which can be extremely complicated depending on which method of assessment is adopted.

To try and explain it in it's simplest form you need to get a surrender value on the policy from your insurance company each year. In each tax year you will deduct the previous surrender value from the current one and this will give a taxable profit or loss. This profit or loss can be adjusted by the contributions made in the year and any payments out to you by the insurance company. The resulting profit is declared on your Oz tax return. If it is a loss it can be carried forward but can only be offset against future profits for that policy.

Derek your accountant is correct in saying that the final pay out is not subject to additional tax in Australia as you should have already paid tax under the FLP.

As far as UK tax is concerned there are no penalties on maturity because you have moved to OZ and your insurance company will pay out the full amount to you.

I am not a tax expert and above information is given based upon my current understanding of the tax law. I am happy to be shot down in flames but please go to the ATO web site and look up the FLP rules.

So you still pay tax then, whether it's at payout or via the FLP rules. How I wish I'd have known that before we came out - it would have been a major negative and we probably (almost certainly) would not have bothered emigrating.The whole move has cost us a fortune anyway - all the equity in our house back home has gone on it, and we're no better off. It looks as though we're going to be even worse off in the future and that our mortgage will go on and on and on, since the Oz government will take a chunk of our policy payouts. Damn the taxman!

Cheryl,

Sorry to be the bringer of bad news but let's see if this helps any.

You have not said where in the cycle you are with your insurance policy but if you have had the policy for a considerable time before you moved to Oz then you might have a major part of your investment which is tax free.

The FLP rules don't kick in until the date that you finally became a permanent resident so that any equity that had been built up in your policy is not subject to the FLP rules and hence will be tax free in OZ and the UK.

You will need to ask your insurance company for a surrender value at the date you became permanent resident and you will need to explain to them why you need it. I had no difficulty getting a retrospective valuation.

Let's say you are 20 years into a 25 year policy and the valuation when you got PR was £30000. If the policy only increases to £35000 at the end of the 25 years then you will only pay tax in OZ on the £5000 increase. Obviously you will need a valuation each year but assuming that it increases £1000 each year then you will only pay tax on the £1000 in each year. The tax rate will depend on all your other income.

All of the above is a massive simplification of the rules but hopefully makes the point that not all of you investment will necessarily be subject to tax. I suggest talking to a good accountant.

Thanks for sharing all that Paddy. It's something i hadn't even given a thought to. Have a policy with about 5 years to run and was just thinking it would be tax free, nothing to worry about. Best get it sorted now and cover the tax when it suits me.

Thanks a lot Paddy - that's still an awful lot of money going to the taxman; I really don't see
why he should get any though, the premiums were paid from money which has already been taxed, and it's nothing to do with the Australian government. Thanks for making the picture clearer though - looking for an accountant who knows the loopholes!!

Cheryl

You can look at minimising any tax depending on your empoloyment status.

For example a self employed person or a person under 65 not working can make a Superannaution contribution and claim a 100% tax deduction to reduce their tax bill.

A Employed person could look at salary sacrificing earnings to super to ge tthem into a lower tax bracket so that they only pay tax at 15% or less (keep salary below $30K).

You should see a financial planner who can work with your accountant to keep you on track with the ATO and legally save you $$$$$

regards

Liam