Edited version of your written advice

Authorisation Number: 1012800146172

Ruling

Subject: Lump sum payment from a foreign pension fund

Question 1

Is any part of a lump payment you receive from a foreign pension fund assessable as applicable fund earnings as worked out under section 305-75 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Question 2

Is the lump sum pension payment you receive from a foreign pension fund assessable in Australia?

Answer

Yes

Question 3

Are you entitled to a foreign income tax offset in relation to tax already paid on the lump sum pension income in the foreign country?

Answer

No

This ruling applies for the following period:

Year ending 30 June 2015

The scheme commences on:

1 July 2014

Relevant facts and circumstances

Your Client migrated to Australia some time ago as a Permanent Resident.

Your Client holds an interest in a foreign pension scheme (the Foreign Fund).

As well as providing benefits on retirement, invalidity and death, the Foreign Fund also provides benefits for purposes such as:

• to pay medical costs incurred by the Participant, their spouse, their children, their dependents or the Beneficiary under the Foreign Fund Agreement;

• to purchase the Participants home;

• to pay for the higher educational expenses of the Participant, their spouse, their children, their dependents or the Beneficiary under the Foreign Fund Agreement; or

• to pay expenses for the repair of damage to the Participants principal resident.

Your Client intends to transfer their benefit from the Foreign Fund into Australia in the 2014-15 income year.

Relevant legislative provisions

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

Income Tax Assessment Act 1997 Subsection 52-10(1A)

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

Income Tax Assessment Act 1997 Subdivision 305 B

Income Tax Assessment Act 1997 Section 305- 55

Income Tax Assessment Act 1997 Section 305 60

Income Tax Assessment Act 1997 Section 305 65

Income Tax Assessment Act 1997 Section 305-70

Income Tax Assessment Act 1997 Section 305-75

Income Tax Assessment Act 1997 section 770-10

Income Tax Assessment Act 1997 Subsection 995-1(1)

Superannuation Industry (Supervision) Act 1993 Section 10

Superannuation Industry (Supervision) Act 1993 Subsection 10(1)

Superannuation Industry (Supervision) Act 1993 Section 19

Superannuation Industry (Supervision) Act 1993 Section 62

International Tax Agreements Act 1953 Section 4

International Tax Agreements Act 1953 Schedule 1 Article 18

Reasons for decision

Question 1

Summary

The Foreign Fund is not considered to be a superannuation fund for the purposes of Subdivision 305-B of the ITAA 1997. Therefore, no part of a lump sum payment from the Foreign Fund would be assessable as applicable fund earnings as calculated under subsection 305-75 of the ITAA 1997.

Detailed reasoning

Lump sum payments transferred from foreign superannuation funds

Subdivision 305-B of the ITAA 1997 deals with superannuation benefits paid from foreign superannuation funds.

Section 305-55 of the ITAA 1997 restricts the application of that Subdivision to lump sums received from certain foreign superannuation funds, or schemes that pay benefits in the nature of superannuation upon retirement or death.

Generally, where a lump sum paid from a foreign superannuation fund is received within six months after Australian residency or termination of foreign employment, the lump sum is tax-free. It is not assessable income and is not exempt income (sections 305-60 and 305-65 of the ITAA 1997).

Where a lump sum paid from a foreign superannuation fund is received more than six months after Australian residency, section 305-70 applies to include any applicable fund earnings in assessable income.

Before determining whether an amount is exempt under sections 305-60, or 305-65 of the ITAA 1997, or assessable under section 305-70, 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 subdivision 305-B will not apply.

Meaning of '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 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.

Meaning of 'superannuation fund'

'Superannuation fund' is defined in subsection 995-1(1) of the ITAA 1997 as having the meaning given by section 10 of the Superannuation Industry (Supervision) Act 1993 (SISA).

Subsection 10(1) of the SISA provides that:

superannuation fund means:

(a) 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.

Meaning of 'provident, benefit, superannuation or retirement fund'

The High Court examined both the terms superannuation fund and fund in Scott v. Federal Commissioner of Taxation (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. 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 the example given by Justice Kitto of a funeral benefit.

Furthermore, Justice Kitto's judgment 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 SISA, a regulated superannuation fund must be 'maintained solely' for the 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 SISA applies only to 'regulated superannuation funds' (as defined in section 19 of the SISA), and foreign superannuation funds do not qualify as regulated superannuation funds as they are established and operate outside Australia, the Commissioner views the SISA (and the Superannuation Industry (Supervision) Regulations 1994 (SISR)) 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 SISA and the SISR.

In this case, information available indicates that as well as providing benefits on retirement, invalidity and death, the Foreign Fund also provides benefits for purposes such as:

• to pay medical costs incurred by the Participant, their spouse, their children, their dependents or the Beneficiary under the Foreign Fund Agreement;

• to purchase the Participants home;

• to pay for the higher educational expenses of the Participant, their spouse, their children, their dependents or the Beneficiary under the Foreign Fund Agreement; or

• to pay expenses for the repair of damage to the Participants principal resident.

Because the benefits in the Foreign Fund are also paid for other than retirement purposes, the Foreign Fund does not meet the 'sole purpose test' and therefore cannot be considered a 'superannuation fund' for Australian income tax purposes.

Consequently, Subdivision 305-B of the ITAA 1997 would not apply to any lump sum payments received from the Foreign Fund.

Question 2

Summary

Your Client's lump sum payment will be taxed in Australia as according to the DTA between Australia and the Foreign country, Australia has the taxing rights as the lump sum pension payment is in relation to past employment.

Detailed reasoning

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

2. Pension income is ordinary income assessable under subsection 6-5(2) of the ITAA 1997.

3. In determining your Client's liability to pay tax in Australia it is necessary to consider not only the domestic income tax laws but also any applicable double tax agreements.

4. The agreement between Australia and the Foreign country operates to avoid the double taxation of income received by residents of Australia and the Foreign country.

5. Consequently your Client's lump sum payment will be taxed in Australia as according to the DTA between Australia and the Foreign country, Australia has the taxing rights as the lump sum pension payment is in relation to past employment

Question 3

Summary

6. Your Client is not eligible for a Foreign Income Tax Offset (FITO) as the lump sum payment is not taxable in the Foreign country as according to the DTA between Australia and the Foreign country, Australia has the taxing rights on this payment.

Detailed reasoning

7. If your Client has paid foreign tax in another country, they may be entitled to an Australian foreign income tax offset, which provides relief from double taxation.

8. These rules apply for income years that start on or after 1 July 2008. Different rules apply for income periods up to 30 June 2008.

9. To qualify for a foreign income tax offset (FITO) you Client must meet all of the following criteria:

• Your Client must have paid the foreign tax on the foreign income,

• The foreign tax must be a tax which your Client was personally liable for, and

• The income or gain that the foreign tax was paid must be included in your Client's assessable income for Australian income tax purposes.

10. The foreign income tax offset is a non-refundable tax offset. The foreign income tax offset is applied to your Client's income tax liability including the Medicare levy and the Medicare levy surcharge where applicable. Any excess is not refunded to you Client.

11. Your Client is not eligible for a Foreign Income Tax Offset (FITO) as the lump sum payment is not taxable in the Foreign country as according to the DTA between Australia and the Foreign country, Australia has the taxing rights on this payment.

Other Relevant Information

An individual may be liable additional excess non-concessional contributions (ENCC) tax if they exceed their non-concessional contributions cap for a financial year.

Non-concessional contributions are the contributions made to a complying superannuation fund by or for an individual that are generally not included in the fund's assessable income.

Non-concessional contributions include:

• personal contributions that the individual was not allowed to claim an income tax deduction for,

• amounts transferred from foreign superannuation funds (excluding amounts included in the fund's assessable income), and

• amounts transferred from non-complying superannuation funds (regardless of whether the non-complying superannuation fund is a resident or foreign non-complying fund)

To accommodate larger contributions, subsection 292-85(3) of the ITAA 1997 allows 'bring forward' provisions for non-concessional contributions to apply to individuals aged under 65 in a financial year. Under the bring forward arrangements, the non-concessional contributions cap is three times the current year cap over the course of three years if certain conditions are satisfied.

The conditions specified under subsection 292-85(3) of the ITAA 1997 are:

• the non-concessional contributions for the first year exceed the non-concessional cap for that year (currently at $180,000 for the 2014-2015 financial year);

• the taxpayer is under 65 years at any time in the first year, and

• a previous calculation of the cap under the bring forward provisions does not determine the taxpayer's non-concessional cap in the first year.

If the individual exceeds their cap for a financial year they may receive an ENCC determination and will be able to elect how the ENCC will be treated.

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