Edited version of your private ruling

Authorisation Number: 1012342921255

This edited version of your ruling will be published in the public register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.

Ruling

Subject: Lump sum payment from overseas pension scheme

Question 1

Is any part of the lump sum payment from a foreign superannuation scheme included in your client's assessable income as applicable fund earnings?

Answer

Yes.

This ruling applies for the following periods:

1 July 2011 to 30 June 2012

The scheme commences on:

1 July 2011

Relevant facts and circumstances

Your client commenced employment with an overseas government a number of years ago and resigned from that employment in the relevant income year

Your client became a resident of Australia for taxation purposes in a later income year.

Under the relevant overseas legislation your client is entitled to a retirement benefit upon reaching age 55. Your client turned 55 years of age in the relevant income year.

An overseas government is the paying authority and all benefits have been paid out of the general revenue of the overseas government.

No contributions were made by your client or an employer in order to obtain benefits under the relevant overseas legislation.

The benefit is calculated according to a formulae relating to pensionable emoluments and length of service.

Under the relevant overseas legislation your client may elect to take up to a maximum of 50% of the retirement benefit as a lump sum with the balance payable as a pension. In the present case, your client has elected to receive a percentage of the retirement benefit as a lump sum and the remainder as a pension.

A letter from the overseas government advised the value of the cumulative pension increase factor since the taxpayer's resignation.

The amount of your client's deferred pension benefits will be re-calculated based on the cumulative pension increase factor before it is payable to your client in the relevant income year

Your client was paid the lump sum amount on a specific day in the relevant income year.

The lump sum payment will not be taxable in the overseas country.

Relevant legislative provisions

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

Income Tax Assessment Act 1997 Subsection 305-55(2).

Income Tax Assessment Act 1997 Paragraph 305-55(2)(a)

Income Tax Assessment Act 1997 Paragraph 305-55(2)(b)

Income Tax Assessment Act 1997 Paragraph 305-55(2)(c)

Income Tax Assessment Act 1997 Subsection 305-55(3).

Income Tax Assessment Act 1997 Section 305-70.

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

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

Income Tax Assessment Act 1997 Paragraph 305-75(3)(a)

Income Tax Assessment Act 1997 Paragraph 305-75(3)(b)

Income Tax Assessment Act 1997 Paragraph 305-75(3)(c)

Income Tax Assessment Act 1997 Paragraph 305-75(3)(d)

Income Tax Assessment Act 1997 Section 960-50.

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

Income Tax Assessment Act 1997 Section 995-1.

Income Tax Assessment Regulations 1997 Regulation 960-50.01.

Reasons for decision

Summary

A portion of the lump sum paid by the foreign superannuation scheme (the Scheme) to your client is assessable as 'applicable fund earnings'. Accordingly, a part of the lump sum is to be included in your client's income tax return for the relevant income year.

Detailed reasoning

Lump sum payments from foreign superannuation funds

From 1 July 2007 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 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 becomes an Australian resident after the start of the period to which the lump sum relates.

Before determining whether an amount is assessable under subsection 305-70(2) 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 subsection 305-70(2) 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) 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.

Subsection 295-95(2) of the ITAA 1997 defines Australian superannuation fund as follows:

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 funds 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;

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

Thus, 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.

In this case, the entity making the payment is a statutory scheme established under the relevant laws of the overseas country. It is not a 'superannuation fund' as that term is normally understood. Monies are not set aside or pooled together in a separate fund (Mahony v. Commissioner of Taxation (Cth) (1967) 41 ALJR 232; (1967) 14 ATD 519 and Scott, Associated Provident Funds Ltd & Belvidere Investments Pty Ltd v Commissioner of Taxation (Cth) [No 2] (1966) 40 ALJR 265; (1966) 14 ATD 333; [1966] LB Co's Tax Serv 80; (1966) 10 AITR 290). Benefits are paid out of the general revenue of the overseas country.

Thus the statutory scheme referred to as the Scheme is not a superannuation fund and thus, not a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997.

However, subsection 305-55(2) of the ITAA 1997 extends the application of Subdivision 305-B, which deals with the taxation of superannuation benefits from foreign superannuation funds, to payments (other than pension payments) received from a scheme for the payment of benefits in the nature of superannuation upon retirement or death, provided the scheme:

· is not, and never has been, an Australian superannuation fund or a foreign superannuation fund; and

· was not established in Australia; and

· is not centrally managed or controlled in Australia.

As noted above, the Scheme is statutory scheme established under the relevant laws of the overseas country. The Scheme is set up for the express purpose of providing for the payment of benefits in the nature of superannuation upon retirement or death. Its central management and control is clearly not in Australia and it is neither an Australian superannuation fund or a foreign superannuation fund.

Therefore, Subdivision 305-B of Part 3-30 of Chapter 3 of the ITAA 1997 will apply to payments from the Scheme made to Australian residents.

Assessable Amount

As noted above, the applicable fund earnings in relation to a lump sum payment from a foreign superannuation fund (or scheme) will be included in a person's assessable income where the payment is received more than six months after becoming an Australian resident.

In the present case, your client became an Australian resident for tax purposes before the relevant income year and the lump sum payment was made more than six months after your client became an Australian resident. Therefore, a portion of your client's lump sum payment may be assessable under subsection 305-75(3) of the ITAA 1997.

The effect of the calculation of the applicable fund earnings is that your client will be assessed only on the growth in the scheme while your client was a resident of Australia. That is, taxpayers will only be assessed on the accretion in the fund less any contributions made since they became a resident of Australia.

Further, any amounts representative of earnings/growth during periods of non-residency and certain capital amounts previously transferred into the paying fund do not form part of the taxable amount when the overseas benefit is paid.

The amount included as assessable income, and taxed at marginal rates of tax, is worked out under subsection 305-75(3) of the ITAA 1997 because your client became 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 (but before you received it) the amount of your applicable fund earnings is the amount (not less than zero) 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 AUD. For the purposes of section 305-70 of the ITAA 1997, the 'applicable fund earnings' should be calculated by:

· translating the lump sum payment received from the Scheme at the exchange rate applicable on the day of receipt to AUD (item 11 of the table to subsection 960-50(6)); and

· deducting from this amount the AUD equivalent of the payment vested in the Scheme at the exchange rate applicable just before the residency date (item 11A of the table to subsection 960-50(6)).

Calculation of Assessable Amount

In your client's case, the calculation shows there was some growth in the Scheme while your client was a resident of Australia. Accordingly, a part of the lump sum payment received by your client from the Scheme is to be included in your client's income tax return for the relevant income year.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).