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Ruling

Subject: Lump sum payment from a foreign pension scheme

Question:

Is any part of the benefit transferred from your client's Overseas Pension Plan, a pension scheme in a foreign country, to Australia assessable as applicable fund earnings under section 305-75 of the Income Tax Assessment Act 1997?

Advice/Answers:

Yes.

This ruling applies for the following periods:

1 July 2011 to 30 June 2012

1 July 2012 to 30 June 2013

The scheme commenced on:

1 July 2011

Relevant facts:

Your client became a resident of Australia over 10 years ago.

Your client is a member of an Overseas Pension Plan (the Pension Fund).

Your client wishes draw benefits from the Pension Fund, and take the maximum cash sum and a pension as stated in the Pension Fund's letter.

There have been no contributions to the Pension Fund since your client migrated to Australia.

There have been no transfers into the Pension Fund from other foreign pension schemes by your client since becoming a resident of Australia.

Funds cannot be accessed from the Pension Fund other than at retirement.

Benefits in the Pension Fund increase in accordance with inflation, up to a maximum of 5% per annum.

Assumptions:

The applicant could not obtain a figure for the value of the benefit on the day their client became an Australian resident. However an amount for the maximum lump sum payable has been provided.

Based on the information provided, the pensions increase with reference to inflation up to a maximum of 5%.

Therefore, based on the figures provided regarding the lump sum and the inflation increases between your client's residency date and X March 2012, the Commissioner considers it reasonable to assume a value of the lump sum on the residency date.

Further, the Commissioner considers it reasonable to assume that the value of the Pension Fund on the day before the residency date was the same as it was on residency date

As the exact date of the payment from the Pension Fund to your client is not known and the inflation and exchange rates are only available until X March 2012, the Commissioner will calculate the withdrawal amount on the assumption that the lump sum payment was paid on X March 2012.

Relevant legislative provisions:

Income Tax Assessment Act 1997 Subsection 295-95(2)

Income Tax Assessment Act 1997 Section 305-70

Income Tax Assessment Act 1997 Subsection 305-70(1)

Income Tax Assessment Act 1997 Section 305-75

Income Tax Assessment Act 1997 Subsection 305-75(2)

Income Tax Assessment Act 1997 Subsection 305-75 (3)

Income Tax Assessment Act 1997 Subsection 305-75 (5)

Income Tax Assessment Act 1997 Subsection 305-75 (6)

Income Tax Assessment Act 1997 Subsection 306-70

Income Tax Assessment Act 1997 Subsection 960-50(1)

Income Tax Assessment Act 1997 Subsection 960-50(4)

Income Tax Assessment Act 1997 Subsection 995-1(1)

Superannuation Industry (Supervision) Act 1993 Section 10

Superannuation Industry (Supervision) Act 1993 Section 19

Superannuation Industry (Supervision) Act 1993 Section 62

Reasons for decision

Summary

A portion of the lump sum payment from the Pension Fund is assessable as 'applicable fund earnings'. Essentially, this assessable amount represents the earnings accrued in the foreign fund for the period of your client's Australian residency.

Detailed reasoning

Lump sum payments transferred from foreign superannuation funds

The applicable fund earnings in relation to a lump sum payment from a foreign superannuation fund, that is received more than six months after a person has become an Australian resident, will be assessable under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997). The remainder of the lump sum payment is not assessable income and is not exempt income.

The applicable fund earnings is subject to tax at the person's marginal rate. The remainder of the lump sum payment is not assessable income and is not exempt income.

The applicable fund earnings is the amount worked out under either subsection 305-75(2) or (3) of the ITAA 1997. Subsection 305-75(2) applies where the person was an Australian resident at all times during the period to which the lump sum relates. Subsection 305-75(3) applies where the person was not an Australian resident at all times during the period to which the lump sum relates.

Before determining whether an amount is assessable under section 305-70 of the ITAA 1997, it is necessary to ascertain whether the payment is being made from a foreign superannuation fund. If the entity making the payment is not a foreign superannuation fund then section 305-70 will not have any application.

Foreign superannuation fund

A foreign superannuation fund is defined in subsection 995-1(1) of the ITAA 1997 as follows:

· a superannuation fund is a foreign superannuation fund at a time if the fund is not an Australian superannuation fund at that time; and

· a superannuation fund is a foreign superannuation fund for an income year if the fund is not an Australian superannuation fund for the income year.

Under the definition of Australian superannuation fund in subsection 295-95(2) of the ITAA 1997 a superannuation fund that is established outside of Australia and has its central management and control outside of Australia would qualify as a foreign superannuation fund. The fact that some of its members may be Australian residents would not necessarily alter this.

Subsection 995-1(1) of the ITAA 1997 defines a superannuation fund as having the same meaning given by section 10 of the Superannuation Industry (Supervision) Act 1993 (SIS Act), which requires that the fund is a provident, benefit, superannuation or retirement fund.

Provident, benefit, superannuation or retirement fund

The issue of what constitutes a provident, benefit, superannuation or retirement fund was discussed by the Full Bench of the High Court in Mahony v. Federal Commissioner of Taxation (1967) 41 ALJR 232; (1967) 14 ATD 519 (Mahony).

In that case, Justice Kitto's judgement indicated that a fund does not satisfy any of the three provisions, that is, 'provident, benefit or superannuation fund', if there exist provisions for the payment of benefits 'for any other reason whatsoever'. In other words, though a fund may contain provisions for retirement purposes, it could not be accepted as a superannuation fund if it contained provisions that benefits could be paid in circumstances other than those relating to retirement.

In section 62 of the SIS Act, a regulated superannuation fund must be 'maintained solely' for the 'core purposes' of providing benefits to a member when the events occur:

· on or after retirement from gainful employment; or

· attaining a prescribed age; and

· on the member's death (this may require the benefits being passed on to a member's dependants or legal representative).

Notwithstanding the SIS Act applies only to 'regulated superannuation funds' (as defined in section 19 of the SIS Act), and foreign superannuation funds do not qualify as regulated superannuation funds as they are established and operate outside Australia, the Commissioner views the SIS Act (and the SIS Regulations) as providing guidance as to what 'benefit' or 'specific future purpose' a superannuation fund should provide.

It is evident that the payer of the lump sum payment, the Pension Fund is established outside of Australia. Similarly, the central management and control is outside of Australia.

On the basis of the information provided, the Commissioner considers that the Pension Fund is a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997.

The actual figures relating to your client's future lump sum payment must be used in place of the amounts assumed below

The following paragraphs show how the 'applicable fund earnings' are calculated, including applying the appropriate exchange rates to the payment received.

These calculations are made on the basis of the exchange rate on X March 2012 - that is, on the assumption that the lump sum payment was received by your client on this date. When the actual figures for the lump sum payment received in British pounds and the exchange rate applicable on that future day are known, you must substitute those figures into the formula to obtain the taxable amount in respect of your client.

Applicable fund earnings

Your client became a resident of Australia for tax purposes many years ago and it is assumed he received the lump sum payment in respect of the Pension Fund on X March 2012. As this was more than six months after your client became an Australian resident, section 305-70 applies to include the 'applicable fund earnings' in your client's assessable income.

The 'applicable fund earnings' are worked out under section 305-75. As mentioned earlier, subsection 305-75(3) applies where the person becomes an Australian resident after the start of the period to which the lump sum relates.

Subsection 305-75(3) of the ITAA 1997 states:

· If you become an Australian resident after the start of the period to which the lump sum relates, the amount of your applicable fund earnings is the amount (not less than zero) worked out as follows:

· work out the total of the following amounts:

The amount in the fund that was vested in you just before the day (the start day) you first became an Australian resident during the period;

· the part of the payment that is attributable to contributions to the fund made by or in respect of you during the remainder of the period;

· the part of the payment (if any) that is attributable to amounts transferred into the fund from any other foreign superannuation fund during the period;

· subtract that total amount from the amount in the fund that was vested in you when the lump sum was paid (before any deduction for foreign tax);

· multiply the resulting amount by the proportion of the total days during the period when you were an Australian resident;

· add the total of all previously exempt fund earnings (if any) covered by subsections (5) and (6).

In short, your client is assessed only on the income earned (the accretion) in respect of the Pension Fund less any contributions your client made since your client became a resident of Australia. Further, any amounts representative of earnings during periods of non-residency, and transfers into the paying fund do not form part of the taxable amount when the overseas benefit is paid.

Foreign currency conversion

Subsection 960-50(1) of the ITAA 1997 states that an amount in a foreign currency is to be translated into Australian dollars (A$). The applicable fund earnings is the result of a calculation from two other amounts and subsection 960-50(4) states that when applying section 960-50 to amounts that are elements in the calculation of another amount you need to:

(a) first, translate any amounts that are elements in the calculation of other amounts (except special accrual amounts); and

(b) then, calculate the other amounts.

The table in subsection 960-50(6) of the ITAA 1997 sets out the translation rules. Only the following items are relevant to determining the issue in your case:

· item 11 which deals with a receipt or payment to which none of the other items apply, and

· item 11A which applies to amounts that are neither receipts nor payments and to which none of the other items apply.

Item 11 of the table in subsection 960-50(6) of the ITAA 1997 applies to a receipt or payment where none of the other items applies. The payment your client finally received is not included in any of the other items in the table so it will fall within item 11. Under this item, the payment is translated into Australian dollars at the exchange rate applicable at the time of receipt.

When the amount in the foreign fund that was vested in your client just before she became a resident of Australia (subparagraph 305-75(3)(a)(i) of the ITAA 1997) is determined, there is no actual receipt or payment of an amount. All that occurs is a determination of the vested amount expressed in the foreign currency.

Regulation 960-50.01 of the Income Tax Assessment Regulations 1997 (ITAR) modifies the table in subsection 960-50(6) of the ITAA 1997 to include item 11A that applies to amounts other than receipts and payments, and for which none of the other items apply. Consequently the vested amount is translated into Australian dollars at an exchange rate that is reasonable having regard to the circumstances.

Therefore, for the purposes of section 305-70 of the ITAA 1997, the 'applicable fund earnings' should be calculated by translating the amount received from the foreign fund at the exchange rate applicable on the day of receipt to Australian dollars and deducting from this amount the Australian dollar equivalent of the amount vested in the fund at the exchange rate applicable just before the day you first became an Australian resident.

Amounts to be used in calculation

The value of the benefit in the Pension Fund on the day before your client became a resident of Australia is converted into Australian dollars at the exchange rate that applied on that day.

From the facts provided no contributions have been made to the Pension Fund since your client migrated to Australia. There have been no transfers into the Pension Fund from other foreign pension schemes by your client since becoming a resident of Australia.

It is assumed that on X March 2012, part of your client's benefits in the Pension Fund were paid out to your client in the form of a one-off lump sum. Therefore, this is the amount vested in your client when the lump sum was paid. This is converted into Australian dollars at the exchange rate that applied on that day.

'The period' for the purposes of paragraph 305-75(3)(c) of the ITAA 1997 commences on the day on which the person first became an Australian resident and ceases on the day the lump sum is paid. Your client was a resident for the whole of the period. Therefore, the Australian resident days and the total days are the same, and so the proportion to be used in the calculation is 1.

There are no previously exempt fund earnings in relation to the lump sum.

Applying subsection 305-75(3) of the ITAA 1997 to your client's circumstances, the amounts to be used in calculating the applicable fund earnings for the Pension Fund are as follows:

305-75(3)(a)(i) The amount converted to Australian dollars, vested in your client before they became a resident of Australia

305-75(3)(a)(ii) Nil

305-75(3)(a)(iii) Nil

305-75(3)(b) The amount of the lump sum payment received converted to Australian dollars

305-75(3)(c) 1

305-75(3)(d) Nil

Calculation of the assessable amount of the payment from Pension Fund 

In accordance with subsection 305-75(3) of the ITAA 1997 the amounts determined at sub-paragraphs 305-75(3)(a)(i), (ii) and (iii) are added.

This total is then subtracted from the amount determined under paragraph 305-75(3)(b).

This figure is multiplied by the proportion of the total days determined under paragraph 305-75(3)(c):

To this figure we add the amounts determined under paragraph 305-75(3)(d).

Therefore, had the lump sum been received in March 2012, the amount calculated would have been included as assessable 'applicable fund earnings' in your client's tax return for the 2011-12 income year.

As advised previously, you will be required to substitute the exact figures in the above calculation based on the exchange rate on the day your client receives the lump sum.

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