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Ruling

Subject: Lump sum payment from foreign retirement annuity

Question 1

Is any part of the lump sum payment received from a foreign retirement annuity fund included in your assessable income as applicable fund earnings in accordance with section 305-75 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Question 2

If any part of the lump sum payment is included in your assessable income as applicable fund earnings, are you entitled to a tax offset for income tax paid in country X in respect of the lump sum payment in accordance with section 770-10 of the ITAA 1997?

Answer

As the answer to Question 1 in Issue 1 is in the negative, further consideration of entitlement to foreign income tax offset is not required.

This ruling applies for the following period:

Income year ended 30 June 2012

The scheme commences on:

During the 2011-12 income year.

Relevant facts and circumstances

You are a former foreign resident.

While residing overseas, you contributed to a foreign retirement annuity fund.

The retirement annuity fund (the Fund) was established overseas and its registered office and the office from which it operates are based overseas.

The aim of the Fund is to make provision for its members' retirement and, in case of a member's death before retirement, death benefits to the member's dependants.

Members of the Fund cannot access their benefits before age 55.

You arrived in Australia a few years ago.

Subsequently, you became a permanent Australian resident.

Subsequently, and more than six months after becoming a resident of Australia, the Fund was closed down and you received a lump sum from the Fund.

Tax in respect of the lump sum was paid overseas.

You did not make any contributions in respect of the retirement annuity policy after you became a resident of Australia.

Assumptions

The amount in the Fund that was vested in you just before you became an Australian resident was calculated by discounting the payment you received by the appropriate rate of return reported in the Fund's publications.

The Commissioner considers that it is reasonable to assume that the value of your interest in your foreign fund in late December 20YY was the amount so calculated.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 305-70

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

Income Tax Assessment Act 1997 Subsection 305-70(2)

Income Tax Assessment Act 1997 Subsection 305-70(3)

Income Tax Assessment Act 1997 Section 305-75

Income Tax Assessment Act 1997 Subsection 305-75(1)

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

Income Tax Assessment Act 1997 Section 770-10

Income Tax Assessment Act 1997 Subsection 960-50(6)

Income Tax Assessment Act 1997 Section 995-1

Reasons for decision

Summary of decision

The 'applicable fund earnings' in respect of the lump sum you received from the foreign fund is zero. Therefore, no amount of lump sum received from the foreign fund is to be included in your assessable income for the 2011-12 income year.

Detailed reasoning

Lump sum payments 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 is assessable under section 305-70 of the ITAA 1997. 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) of the ITAA 1997 applies where the person was an Australian resident at all times during the period to which the lump sum relates. Subsection 305-75(3) of the ITAA 1997 applies where the person was not an Australian resident at all times during the period to which the lump sum relates.

However, 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 of the ITAA 1997 will not apply to the payment received.

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

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

(b) 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.

Meaning of 'superannuation fund'

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).

Subsection 10(1) of the SIS Act defines 'superannuation fund' as:

a fund that:

(i) is an indefinitely continuing fund; and

(ii) is a provident, benefit, superannuation or retirement fund; or

(b) a public sector superannuation scheme;

The meaning of 'provident', benefit, superannuation or retirement fund' is not defined in the SIS Act, therefore, its meaning must be determined according to the ordinary meaning of the words having regard to the context in which they appear.

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 held that a fund had to exclusively be a 'provident, benefit or superannuation fund' and that 'connoted a purpose narrower than the purpose of conferring benefits in a completely general sense…". This narrower purpose meant that the benefits had to be 'characterised by some specific future purpose' such as retirement.

Also, section 62 of the SIS Act, provides that a regulated superannuation fund must be 'maintained solely' for one or more 'core purposes' or one or more of the core purposes and for one or more of the 'ancillary purposes' including provision of benefits:

· on or after retirement from gainful employment; or

· attaining a prescribed age; and

· on the member's death to a member's dependants or legal representative.

In view of the above, the Commissioner of Taxation (the Commissioner) considers that for a fund to be classified as a superannuation fund, it must exclusively provide a narrow range of benefits that are characterised by some specific future purpose. That is, the payment of superannuation benefits upon retirement, incapacity, death of the individual or as specified under the SIS Act.

In the case of Fund, its publications indicate that it provides retirement annuities as a method of saving for retirement where contributions/capital cannot be accessed before retirement or age 55. Therefore, the Fund is considered to be a superannuation fund for the purposes of section 305-75 of the ITAA 1997.

Meaning of 'Australian superannuation fund'

Australian superannuation fund is defined in subsection 295-95(2) of the ITAA 1997 as:

A superannuation fund is an Australian superannuation fund at a time, and for the income year in which that time occurs, if:

(a) the fund was established in Australia, or any asset of the fund is situated in Australia at that time; and

(b) at that time, the central management and control of the fund is ordinarily in Australia; and

(c) at that time either the fund had no member covered by subsection (3) (an active member) or at least 50% of:

(i) the total market value of the fund's assets attributable to superannuation interests held by active members; or

(ii) the sum of the amounts that would be payable to or in respect of active members if they voluntarily ceased to be members;

(iii) is attributable to superannuation interests held by active members who are Australian residents.

The Commissioner has issued Taxation Ruling TR 2008/9 which sets out the Commissioner's interpretation of the definition of Australian superannuation fund in subsection 295-95(2) of the ITAA 1997. The Commissioner considers that there are three tests (paragraphs (a), (b) and (c) of subsection 295-95(2) that a superannuation fund must satisfy at a particular time if it is to be an Australian superannuation fund. If a fund fails to satisfy any one of these tests at that particular time, it is not an Australian superannuation fund at that time, even if it satisfies the other two tests.

Thus, a superannuation fund that is established outside of Australia, and whose assets are not situated in Australia would qualify as a foreign superannuation fund, regardless whether or not the remaining two tests are met.

As the Fund is a superannuation fund established overseas, and its central management and control is overseas, it is not an Australian superannuation fund. As such, it is a foreign superannuation fund for the purposes of subsection 305-75(1) of the ITAA 1997.

Lump sum - applicable fund earnings

As you became a resident of Australia after the start of the period to which the lump sum relates; and the lump sum was paid more than six months after you became an Australian resident, a portion of the lump sum payment will be assessable under subsection 305-75(3) of the ITAA 1997.

This calculation effectively means that your will be assessed only on the income earned in the foreign fund while you were a resident of Australia.

In accordance with subsection 305-75(3) of the ITAA 1997 the applicable amount is worked out as follows:

(a) work out the total of the following amounts:

(i) 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;

(ii) 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;

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

(b) 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);

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

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

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 currency. The applicable fund earnings is the result of a calculation from two other amounts, and subsection 960-50(4) requires 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.

Consequently, the lump sum payment you received is translated into Australian Dollars at the exchange rate applicable at the time of receipt. Similarly, the amount vested in the fund on the day before you became an Australian resident is converted to Australian Dollars at the exchange rate that applied on that day.

Calculation of Assessable Amount

No contributions were made to the Fund after the residency date, and no transfers were made to the Fund from other foreign superannuation funds. You were a resident at all times during this period.

Therefore, the total of the amounts mentioned in paragraph 305-75(3)(a) of the ITAA 1997 comprise:

· the amount of the lump sum benefit vested in you just before the residency date;

· contributions made to the fund for or by you after the residency date;

· the amount transferred into the fund from any other foreign superannuation fund.

Paragraph 305-75(3)(b) of the ITAA 1997 requires that the amount calculated above be subtracted from the total amount of the lump sum paid by the Fund.

Under paragraph 305-75(3)(c) of the ITAA 1997, the result above is multiplied by the proportion of days you were a resident to the total number of days from when you were a resident until the date the payment was made. In your case, the resident days and the total days are the same, and so the proportion to be used in the calculation is '1'.

As the amount calculated under paragraph 305 - 5(3)(b) is less than zero, no amount of the lump sum payment from the Fund will be included in your assessable income for the 2011-12 income year as 'applicable fund earnings'.

Paragraph 305-75(3)(d) of the ITAA 1997 concerns previously exempt fund earnings calculated under subsections 305-75(5) and (6). Previously exempt fund earnings are the applicable fund earnings of any amounts transferred from one foreign superannuation fund to another foreign superannuation fund after you became a resident of Australia. In your case, there are no previously exempt fund earnings.

Therefore, your applicable fund earnings in accordance with subsection 305-75(3) of the ITAA 1997 for this lump sum is NIL.

Issue 2

Question 1

If any part of the lump sum payment is included in your assessable income as applicable fund earnings, are you entitled to a foreign income tax offset for income tax paid in South Africa in respect of the lump sum payment in accordance with section 770-10 of the ITAA 1997?

Summary of decision

As the answer to Question in Issue 1 is in the negative, further consideration of entitlement to foreign income tax offset is not required.

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