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This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

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Edited version of your private ruling

Authorisation Number: 1012419782151

Ruling

Subject: Lump sum payment from foreign pension fund

Questions

Was your client an Australian resident for income tax purposes during the period they were overseas?

Is any part of the benefits transferred from your client's foreign pension scheme to an Australian superannuation fund assessable as applicable fund earnings under section 305-75 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answers

No.

Yes.

This ruling applies for the following period:

Year ended 30 June 2013

The scheme commenced on:

1 July 2012

Relevant facts and circumstances

Your client is an Australian Citizen.

Your client moved overseas during the 2005-06 income year and returned to Australia during the 2011-12 income year.

Your client was over 16 years of age when they departed Australia.

Your client's parents and siblings remained in Australia during this time.

The majority of your client's financial affairs were organised overseas. These affairs included bank accounts, superannuation funds and travel insurance.

Your client maintained a bank account in Australia, which was rarely used during their time overseas.

Your client continued to pay for Australian private health insurance whilst overseas so as not to lose the waiting period benefits upon their return to Australia.

Whilst overseas your client resided in rental properties and their name was always on the lease of these rental properties.

Whilst overseas your client had no rental properties or motor vehicles in Australia.

Your client attended university for one year and worked full time during their time overseas.

Your client visited Australia approximately six times whilst residing overseas, totalling about two-three months in Australia.

Your client has never been a member of the Public Sector Superannuation Scheme (PSS) or Commonwealth Superannuation Scheme (CSS).

Your client held an interest in a pension fund overseas (Pension Fund).

You advised that the value of the Pension Fund on the day before they became an Australian resident, was X.

During the 2012-13 income year, your client's total benefits of Y were transferred from the Pension Fund to an Australian complying superannuation fund.

Your client no longer holds any interest in the Pension Fund and it is now closed.

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

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

Relevant legislative provisions
Income Tax Assessment Act 1936 Subsection 6(1).

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 (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

Your client was not an Australian resident for taxation purposes during the period they resided overseas.

The amount calculated as the applicable fund earnings in respect of the lump sum payment made from the Pension Fund has been determined to be Z.

Detailed reasoning

Residency for taxation purposes - general

Section 995-1 of the Income tax Assessment Act 1997 (ITAA 1997) defines an Australian resident for tax purposes as a person who is a resident of Australia for the purposes of the Income Tax Assessment Act 1936 (ITAA 1936).

The terms resident and resident of Australia, in regard to an individual, are defined in subsection 6(1) of the ITAA 1936. The definition provides four tests to ascertain whether a taxpayer is a resident of Australia for income tax purposes. These tests are:

If any one of these tests is met, an individual will be a resident of Australia for taxation purposes.

The resides test is the primary test for determining the residency status of an individual. If residency is established under the resides test, the remaining three tests do not need to be considered.

If residency is not established under the resides test, an individual will still be a resident of Australia for taxation purposes if they meet the conditions of one of the other three tests.

The resides test

The resides test considers whether an individual is residing in Australia according to the ordinary meaning of the word 'reside'.

The ordinary meaning of the word 'reside', according to the Macquarie Dictionary, 2001, rev. 3rd edition, The Macquarie Library Pty Ltd, NSW, is 'to dwell permanently or for a considerable time; having one's abode for a time', and according to the Compact Edition of the Oxford English Dictionary (1987), is 'to dwell permanently, or for a considerable time, to have one's settled or usual abode, to live in or at a particular place'.

Taxation Ruling IT 2650 - Income tax: residency - permanent place of abode outside Australia adopts principles and guidelines which can also be used for individuals who intend to reside overseas indefinitely. It states in paragraph 19:

The first question to be asked in considering the residency status of a person temporarily leaving Australia is whether he or she can be considered to reside in Australia. If the test of residence according to ordinary concepts is satisfied, there is no need to go any further. The person is a resident of Australia for income tax purposes.

In your client's case, they resided overseas for a considerable length of time.

Your client's length of physical absence from Australia and the surrounding circumstances are not consistent with residing in Australia.

Accordingly, it is considered that your client was not residing in Australia and, therefore, was not a resident of Australia under the resides test.

The domicile and permanent place of abode test

Under this test, a person whose domicile is in Australia will be considered a resident of Australia for taxation purposes unless the Commissioner is satisfied the person's permanent place of abode is outside Australia.

A person's domicile is generally their country of birth. This is known as a person's domicile of origin. A person's domicile of origin will not usually change but can in some circumstances. For example, a person can acquire a domicile in another country by choice.

Although your client was living overseas, we consider that their domicile was still Australia.

Taxation Ruling IT 2650 specifies that a person with an Australian domicile who is living outside Australia will retain their Australian domicile if they intend to return to Australia on a 'clearly foreseen and reasonably anticipated contingency' - at the end of a specific period of time, for example.

In your client's case, when they departed Australia, they intended to live and work overseas for a few years. The date of permanent return to Australia was undetermined. We therefore need to consider whether your client established a permanent place of abode overseas.

The expression 'place of abode' refers to a person's residence, where they live with their family and sleep at night. In essence, a person's place of abode is that person's dwelling place or the physical surroundings in which a person lives.

A permanent place of abode does not have to be 'everlasting' or 'forever'. It does not mean an abode in which you intend to live for the rest your life. An intention to return to Australia in the foreseeable future to live does not prevent you in the meantime setting up a permanent place of abode elsewhere.

Some of the factors which have been considered relevant by the Courts, Boards of Review and Administrative Appeals Tribunal and which are used by the ATO in reaching a state of satisfaction as to a taxpayer's permanent place of abode include:

The intended and actual length of the taxpayer's stay in the overseas country

Whether the taxpayer intended to stay in the overseas country only temporarily and then to move on to another country or to return to Australia at some definite point in time

Whether the taxpayer has established a home (in the sense of dwelling place; a house or other shelter that is the fixed residence of a person, a family, or a household), outside Australia

Whether any residence or place of abode exists in Australia or has been abandoned because of the overseas absence

The duration and continuity of the taxpayer's presence in the overseas country and

The durability of association that the person has with a particular place in Australia, i.e. maintaining bank accounts in Australia, informing government departments such as the Department of Social Security that he or she is leaving permanently and that family allowance payments should be stopped, place of education of the taxpayer's children, family ties and so on.

In your client's case:

When they moved overseas their intention was to live and work there for a few years. They lived there for almost six years.

Considering the above information we consider that your client established a permanent place of abode overseas, and accordingly consider that your client is not a resident of Australia for taxation purposes under the domicile test.

The 183-day test

Where a person is present in Australia for 183 days (i.e. half of the income year) during an income year, the person will be a resident of Australia for taxation purposes unless the Commissioner is satisfied that the person's usual place of abode is outside Australia and the person does not intend to take up residence in Australia.

Your client was not a resident of Australia for taxation purposes under this test because they were not in Australia for more than 183 days during the 2007, 2008, 2009, 2010, 2011 and 2012 income tax years. Your client was in Australia for more than 183 days in the 2006 income year. Accordingly we consider your client a resident of Australia for the portion of the income year before your client departed Australia for overseas.

The superannuation test

Under this test, an individual will be considered a resident of Australia for taxation purposes if:

In your client's case, they were over the age of 16, and they have never been a member of the PSS or CSS. Accordingly, your client is not a resident of Australia for taxation purposes under this test.

Residency conclusion

Based on the facts, your client is not considered to be a resident of Australia under any of the tests of residency outlined in subsection 6(1) of the ITAA 1936 and subsection 995-1(1) of the ITAA 1997 during the period they were overseas.

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 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.

Based on the rules of the foreign pension fund, benefits are only paid to members on their retirement and therefore the fund would meet the definition of superannuation fund. In addition, it is clear the payer of the lump sum payment is established outside of Australia with its central management and control outside of Australia. Therefore, on the basis of the information provided, the Commissioner considers the lump sum payment your client received to be from a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997.

Calculation of Assessable Amount

Your client became a resident of Australia for tax purposes during the 2011-12 income year and the payment was made during the 2012-13 income year. As this is more than 6 months after your client became an Australian resident section 305-70 of the ITAA 1997 applies to include the 'applicable fund earnings' (if any) in their assessable income.

The 'applicable fund earnings' are worked out under section 305-75 of the ITAA 1997. 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 (but before you received it) the amount of your applicable fund earnings is the amount (not less than zero) worked out as follows:

In short, your client is assessed only on the income earned (the accretion) in respect of the Pension Fund less any contributions they made since they 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. The applicable fund earnings is the result of a calculation from two other amounts and subsection 960-50(4) states when applying section 960-50 to amounts that are elements in the calculation of another amount you need to:

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 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 they 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 your client first became an Australian resident.

Amounts to be used in calculation

You have stated that the value of the benefit in the Pension Fund on the day before your client became an Australian resident was X. This is converted into Australian dollars at the exchange rate that applied on that day which converts the amount of X to X (cents ignored).

You have advised that no contributions were made to the Pension Fund after your client became an Australian resident.

No amounts were transferred into the Pension Fund from other foreign superannuation funds during the period.

The amount your client received during the 2012-13 income year was Y. Again, this is converted into Australian dollars at the exchange rate that applied on that day which converts the amount of Y to Y (cents ignored).

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. As your client was a resident for the whole of this period, 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.

Therefore, applying subsection 305-75(3) to your circumstances, the amounts to be used in calculating the applicable fund earnings are as follows:

Calculation of the assessable amount of the payment from foreign superannuation fund

In accordance with 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), Y

This figure is multiplied by the proportion of the total days determined under paragraph 305-75(3)(c) - '1'

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

The applicable fund earnings of Z is subject to tax at your client's marginal rate and is required to be included as 'applicable fund earnings' in their income tax return for the 2012-13 income year.

Alternatively, if your client has elected for their Australian superannuation fund to pay the tax on any applicable fund earnings on their behalf, they must notify the super fund that there was applicable fund earnings of Z upon transfer.

The remainder of the lump sum payment is not assessable income and is not exempt income.

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