Edited version of your private ruling

Authorisation Number: 1012520529075

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Ruling

Subject: Lump sum payment from a foreign superannuation fund

Question 1

Is any part of the lump sum benefit paid from an overseas pension provider assessable as applicable funds earnings under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer:

Yes.

Question 2

Are you entitled to claim a deduction for bank handling charges paid to an Australian bank in respect of the lump sum benefit?

Answer:

Yes.

Question 3

Are you entitled to claim a deduction incurred to establish a bank account in the overseas country in order to receive pension payments from a former overseas employer?

Answer:

No.

Question 4

Are you entitled to claim a credit for any tax payable in the overseas country in respect of the lump sum payment?

Answer:

Yes.

Question 5

Are you entitled to claim a credit for any tax payable in the overseas country in respect of the pension from the former overseas employer?

Answer :

No.

This ruling applies for the following period

Year ended 30 June 2013

The scheme commences on

1 July 2012

Relevant facts and circumstances

You were employed in an overseas country (the overseas country).

In the 19XXincome year you became an Australian resident.

You are aged over 60 years of age.

In the relevant income year you started to receive:

(a) a regular periodic state pension from the overseas country.

This pension is paid in Australian dollars into a local bank account

(b) a regular periodic pension from your former employer (the Employer) in the overseas country. Tax is withheld on this pension in the overseas country.

This pension, paid in the overseas country's currency, is paid into a bank account (the Account) which is located in the overseas country.

The Account was established as the Employer would only pay the pension into an account located in the overseas country.

To facilitate the establishment of the Account you paid establishment costs to a local Australian branch of the overseas bank in which the Account in held.

In the relevant income year you also received a gross lump sum payment (the lump sum) from an overseas pension provider (the Fund)

The Fund is for the provision of benefits upon retirement or death and they cannot be taken prior to these events for any other purposes such as, housing, education, etc.

No contributions have been made by you to Fund since you became a resident of Australia.

A transfer value has been provided in relation to your benefits in the Fund in relation to a date before you became an Australian resident.

The exchange rate for the conversion of the overseas currency to Australian currency for the date before you became an Australian resident has been obtained from the Reserve Bank of Australia.

In a letter from the Fund it shows amongst other matters that:

(a) the lump sum is the total value of your benefits in the Fund;

(b) a percentage of the lump sum is tax free in the overseas country;

(c) tax has been withheld on part of the lump sum; and

(d) the net lump sum made to you.

The net lump sum was paid directly to your bank account held in Australia.

Documentation from your Australian bank shows that:

· the rate at which the overseas currency was converted to Australian currency; and

· the amount of the limp sum in Australian currency which was deposited into your account the amount you paid for as a handling charge.

You have received a letter from the overseas taxing authorities which, in relation to your claim for exemption from overseas tax under the terms of the double tax agreement, they stated:

· Your sources of income from the State and Employer pensions are now exempt from tax in the overseas country under the terms of the double tax agreement;

· You will be repaid the tax which was withheld in the overseas country in relation to the Employer pension; and

· Under the double tax agreement the overseas tax authorities cannot provide you relief on the Fund lump sum. However, you are entitled to overseas tax allowances which can be used against the payment so that the tax can be repaid.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 292-85(2).

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(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(2).

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

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

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

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.

Income Tax Assessment Act 1997 section 8-1

Income Tax Agreements Act 1953

Reasons for decision

Summary

There are 'applicable fund earnings' in respect of the lump sum payment (LSP) you received from the Fund. Consequently, you must include this amount in your assessable income for the relevant income year.

Further, in relation to the LSP, you are entitled to:

(a) a tax credit for any tax paid to the overseas tax authorities up to the amount of tax payable on that income in Australia; and

(b) a deduction for the bank handling expenses.

In relation the pension payments from your former overseas employer:

(a) you are not able to claim a deduction for the establishment costs of a bank account as those costs represent a capital expense; and

(b) as you are a resident of Australia, the pension is only assessable in Australia. Hence, no tax credits would relate to these pension payments as they are not taxable in the overseas country.

However, if tax on the pension has been withheld in the overseas country, you will need to ask the overseas tax authorities to refund the tax you have paid in the overseas country.

Detailed reasoning

In relation to question 1

Lump sum payments from foreign superannuation funds

The applicable fund earnings in relation to a lump sum payment (LSP) from a foreign superannuation fund that is transferred or received more than six months after a person has become an Australian resident is 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 LSP 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 subsection 305-75(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 LSP relates. Subsection 305-75(3) applies where the person becomes an Australian resident after the start of the period to which the LSP 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) 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 an 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 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;

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.

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), that is:

(a) a fund that:

(i) is an indefinitely continuing fund; and

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

(a) a public sector superannuation scheme;

Provident, benefit, superannuation or retirement fund

The High Court examined both the terms superannuation fund and fund in Scott v Commissioner of Taxation of the Commonwealth (No. 2) (1966) 10 AITR 290; (1966) 40 ALJR 265; (1966) 14 ATD 333 (Scott). In that case, Justice Windeyer stated:

…I have come to the conclusion that there is no essential single attribute of a superannuation fund established for the benefit of employees except that it must be a fund bona fide devoted as its sole purpose to providing for employees who are participants money benefits (or benefits having a monetary value) upon their reaching a prescribed age. In this connexion "fund", I take it, ordinarily means money (or investments) set aside and invested, the surplus income therefrom being capitalised. I do not put this forward as a definition, but rather as a general description.

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 Commissioner of Taxation (Cth) (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 the example given by Justice Kitto of a funeral benefit.

Furthermore, 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.

In view of the legislation and the decisions made in Scott and Mahony, the Commissioner's view is 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, invalidity or death of the individual or as specified under the SIS Act.

Therefore, in order for the lump sum payment to be considered a payment from a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997, the paying fund must be a provident, benefit, superannuation or retirement fund established and administered overseas.

In the present case it is evident that the Fund, which was established in the overseas country, is not an Australian superannuation fund as defined in subsection 295-95(2) of the ITAA 1997.

Further, the information provided in relation to the Fund indicates the benefits are only paid on retirement and the Fund would meet the definition of superannuation fund. Therefore, on the basis of the information provided, the Commissioner considers the LSP you received is from a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997.

Calculation of Assessable Amount

You became a resident of Australia for tax purposes in the 199X income year and received a lump sum payment from the Fund during the relevant income year. As this is more than 6 months after you became an Australian resident, and the Fund is a foreign superannuation fund, section 305-70 of the ITAA 1997 applies to include the 'applicable fund earnings' (if any) in your assessable income.

The 'applicable fund earnings' are worked out under section 305-75 of the ITAA 1997. 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:

(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 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).

In short, you are assessed only on the income earned (the accretion) in respect of the Fund less any contributions you made since becoming a resident of Australia. 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$). Furthermore subsection 960-50(4) of the ITAA 1997 provides that when foreign currency is an element in the calculation of another amount, translation must firstly occur prior to the calculation of any other amounts. Accordingly, 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 overseas superannuation fund to Australian dollars at the exchange rate applicable on the day of receipt (item 11 of the table to subsection 960-50(6)); and

· deducting from this amount the Australian dollar equivalent of the payment vested in the overseas superannuation fund at the exchange rate applicable on the day immediately before the residency date (item 11 of the table to subsection 960-50(6)).

All exchange rates are published on the ATO website.

Amounts to be used in calculation

The documentation provided shows the transfer value of your benefits in the Fund at the time that you became a resident of Australia. This is converted into Australian dollars at the exchange rate that applied on the day before you became an Australian resident.

The Australian Taxation Office (ATO) website provides a historical list of daily, average monthly and average yearly exchange rates in respect of various foreign currencies, at www.ato.gov.au. Alternatively, they may be obtained by calling our information helpline on 13 10 20. However, there are no daily rates listed for 1990.

The daily Reserve Bank exchange rate for date before you became an Australian resident has been used in your case and the value of the overseas currency into Australian currency for that date has been calculated.

You have advised that no contributions were made to the Fund by you the date that you became an Australian resident nor have any amounts been transferred into the Fund from other foreign superannuation funds during the period.

The amount of your benefits in the Fund which you received on a date in the relevant income year are 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. In your case, you were a resident for the whole of that 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.

Calculation of the assessable amount of the payment from the foreign superannuation 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) of the ITAA 1997.

The above figure is multiplied by the proportion of the total days determined under paragraph 305-75(3)(c) of the ITAA 1997.

To this figure we add the amounts determined under paragraph 305-75(3)(d) of the ITAA 1997.

Applying the above calculation to the LSP shows that there are assessable applicable fund earnings relating to your LSP from the Fund. You must include this amount in your assessable income for the relevant income year.

In relation to question 2,3, 4 and 5

Bank handling charges

Section 8-1 of the ITAA 1997 allows a deduction for losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature.

The charges for bank handling are considered to be incurred in earning your lump sum benefit

Therefore you are entitled to claim a deduction for the bank charges. The bank charges should be deducted from the net lump sum benefit income

Deduction incurred to establish a bank account in the overseas country to receive pension payments

Section 8-1 of the ITAA 1997 allows a deduction for losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature.

Costs incurred in establishing a bank account are capital in nature and are therefore not deductible.

Application of the Double Taxation Agreement to a lump sum payment

The International Tax Agreements Act 1953 (DTA) contains the current agreement between Australia and the overseas country. The purpose of the DTA is to avoid double taxation by allocating taxing rights over income between Australia and the overseas country.

Generally, this means that the country of residence will retain the right to tax the income. In addition, the DTA also provides for any tax paid in the overseas country on the foreign source income to be allowed as a credit against any tax payable in Australia on the foreign source income.

However, there is no provision contained in the DTA that specifically covers your overseas lump sum payments paid to Australian residents. Consequently, both countries retain the taxing rights to these type of payments.

As your income is assessable in both countries you are entitled to a credit for the tax paid in the overseas country up to the amount of tax payable on that income in Australia.

Overseas employer pension

A provision in the DTA between Australia and the overseas country, which relates to pensions and annuities, shows that pensions (including state pensions) and annuities paid to a resident of Australia are only assessable in Australia.

As you are a resident of Australia, the pension is not taxable in the overseas country pursuant to the DTA. However, as the facts provided indicate that tax on the pension has been withheld in the overseas country, you will need to ask the overseas tax authorities to refund the tax you have paid in the overseas country.

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