Edited version of your private ruling

Authorisation Number: 1012528229429

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Ruling

Subject: Assessability of foreign sourced income

Questions and answers:

1. Is the employment income that you have derived from being an employee with international organisation XYZ assessable in Australia?

No.

2. Is any part of a lump sum payment from a foreign pension fund assessable as applicable fund earnings?

No.

This ruling applies for the following periods:

Year ended 30 June 2013

The scheme commences on:

1 July 2012

Relevant facts and circumstances

Facts for Question 1

You were born in country T and are a citizen of country T.

You were an employee of the international organisation XYZ and your remuneration consisted of salary and wages.

Prior to arriving in Australia you worked on an education development programme in country S while employed by organisation XYZ.

During this period you received an Australian permanent resident visa.

You later concluded your employment with organisation XYZ and moved to Australia.

Shortly after moving to Australia you received your final salary and wages payment from the organisation XYZ.

Facts for Question 2

You were employed by organisation XYZ until your resignation. During your period of employment, you were a citizen of country T.

For the period that you were working in country S, you were a resident of country S on a working visa issued to organisation XYZ staff.

You held an interest in a pension fund in country R, organisation XYZ pension fund (the Pension Fund).

Your date of Australian residency was from the period you arrived in Australia (residency date).

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

Shortly after arriving in Australia you received a lump sum payment from the Pension Fund.

This amount was converted to Australian Dollars by your receiving bank.

You no longer hold an interest in the Pension Fund.

Funds cannot be accessed from the Pension Fund other than at death, retirement and invalidity.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5(2)

Income Tax Assessment Act 1936 Subsection 6-15(2)

Income Tax Assessment Act 1936 Subsection 6-20(1)

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

Income Tax Assessment Act 1997 Section 305-60

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

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes ordinary income derived from all sources, whether in or out of Australia, during the income year.

However, subsection 6-15(2) of the ITAA 1997 provides that if an amount is exempt income then it is not assessable.

Subsection 6-20(1) of the ITAA 1997 provides that an amount of ordinary income is exempt income if it is made exempt by a provision of the ITAA 1997 or another Commonwealth law.

The International Organisations (Privileges and Immunities) Act 1963 (IO(P&I)A) is a Commonwealth law under which an international organisation, and persons engaged by it, may be accorded certain privileges and immunities including an exemption from tax.

Taxation Ruling TR 92/14 Income tax: taxation privileges and immunities of prescribed International Organisations and their staff, discusses taxation privileges and immunities of prescribed international organisations and their staff.

The United Nations (Privileges and Immunities) Regulations 1986 (UN(P&I)Regs) were made under the IO(P&I)A. Organisation XYZ is an international organisation to which IO(P&I)A applies. Organisation XYZ Development Programme is a body established by organisation XYZ.

Subregulation 10(1) of the UN(P&I)Regs confers on officers (other than high officers) of the United Nations the privileges and immunities specified in Part 1 of the Fourth Schedule of the IO(P&I)A.

Paragraph 2 of Part 1 of the Fourth Schedule of the IO(P&I)A provides for an exemption from taxation on salaries and emoluments received from an international organisation by an officer (other than high officer) of the organisation (paragraph 9 of TR 92/14).

Taxation Determination TD 92/153 Income tax: who is a 'person who holds an office' as specified in various regulations made under the International Organisations (Privileges and Immunities) Act 1963? provides that the phrase 'person who holds an office' in relation to a prescribed international organisation includes those people who work as employees for that organisation.

In your case, you are employed as an employee by organisation XYZ, therefore you satisfy the requirement of a 'person who holds an office'. As an employee of the UN, paragraph 2 of Part 1 of the Fourth Schedule of the IO(P&I)A provides that the income you derive from service with organisation XYZ is exempt from income tax in Australia.

Accordingly, the income you derive from service with organisation XYZ is exempt income under subsection 6-20(1) of the ITAA 1997, and is therefore not assessable in Australia under subsection 6-5(2) of the ITAA 1997.

Reason for Decision Question 2

Summary

The lump sum you received from the Pension Fund is not assessable income and is not exempt income. Consequently, no amount of the lump sum payment will be included in your assessable income in the relevant income year.

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 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) 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.

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 High Court examined both the terms superannuation fund and fund in Scott v Commissioner of Taxation of the Commonwealth (No. 2) (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) (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 that 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 from the overseas fund to be considered a payment from a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997, it must also satisfy the requirements set out in subsection 295-95(2). This means that it should not be an Australian superannuation fund as defined in that subsection but must be a provident, benefit, superannuation or retirement fund as discussed above.

From the facts provided, benefits are only paid on death, retirement and invalidity, and the Pension 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 you received is from a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997.

Applicable fund earnings

You became a resident of Australia for tax purposes from the time you arrived in Australia and the lump sum payment receipt date was within 6 months after your arrival. As you received this lump sum within six months after you became an Australian resident, section 305-60 applies.

Subsection 305-60 of the ITAA 1997 states:

A superannuation lump sum you receive from a foreign superannuation fund is not assessable income and is not exempt income if:

(a) you receive it within 6 months after you become an Australian resident; and

(b) it relates only to a period:

(i) when you were not an Australia resident; or

(ii) starting after you became an Australian resident and ending before you receive the payment; and

(c) it does not exceed the amount in the fund that was vested in you when you received the payment.

From the facts of this case, you received the lump sum within six months after you became an Australian resident and the payment relates only to a period when you were not an Australian resident. Further, the amount does not exceed the amount in the Pension Fund that was vested in you when you received the payment. The applicable fund earnings in relation to a lump sum payment from a foreign superannuation fund only applies if it is received more than six months residency date.

Therefore, no part of the lump sum payment will be included in your assessable income as 'applicable fund earnings' in the relevant income year.

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