Edited version of your written advice

Authorisation Number: 1051209292414

Date of advice: 3 April 2017

Ruling

Subject: Lump sum payment from a foreign fund

Question

Is any part of the lump sum payment received from the foreign fund assessable as applicable fund earnings under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 2016

The scheme commences on:

1 July 2015

Relevant facts and circumstances

You held an interest in a foreign pension scheme (the Fund). Membership with the Fund commenced in the 198A-8B income year.

You could not access your benefits in the Fund other than at retirement.

You left the Fund in the 199C-DD income year.

You became a resident of Australia for income tax purposes in the 199C-DD income year.

In late 2015, having previously chosen to defer receipt of your pension, you elected to receive a lump sum amount and residual pension from the Fund.

You received a lump sum from the Fund and a proportionate amount of your pension in the 2015-16 income year.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 27H

Income Tax Assessment Act 1997 Section 6-10

Income Tax Assessment Act 1997 Section 10-5

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

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 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 Subsection 10(1)

Superannuation Industry (Supervision) Act 1993 Section 19

Superannuation Industry (Supervision) Act 1993 Section 62

The Convention Between the Government Of The United Kingdom of Great Britain And Northern Ireland And The Government Of Australia For The Avoidance Of Double Taxation And The Prevention Of Fiscal Evasion With Respect To Taxes On Income And On Capital Gains

All legislative references are to the ITAA 1997 unless otherwise indicated.

Reasons for decision

Summary

A portion of the lump sum payment paid by the Fund to you must be included as 'applicable fund earnings' in your assessable income for the 2015-16 income year.

The assessable applicable fund earnings is calculated in accordance with subsection 305-75(3) and is subject to your marginal tax rate.

Detailed reasoning

Assessability of foreign pensions, annuities and other income

Under section 6-10 the assessable income of a resident taxpayer also includes statutory income from all sources, whether in or out of Australia.

Section 10-5 lists those provisions that relate to assessable income. Included in this list is section 27H of the Income Tax Assessment Act 1936 which provides that annuity amounts received by a taxpayer are to be included in their assessable income; and section 305-70 which provides that benefits from foreign superannuation funds and schemes received by a taxpayer are to be included in their assessable income.

In determining liability to Australian tax on foreign sourced income received by a resident taxpayer, it is necessary to consider not only the income tax laws but also any applicable double tax agreement.

The Convention Between the Government Of The United Kingdom of Great Britain And Northern Ireland And The Government Of Australia For The Avoidance Of Double Taxation And The Prevention Of Fiscal Evasion With Respect To Taxes On Income And On Capital Gains (The Convention), is the relevant international tax treaty that must be considered in this case. Article 17 of The Convention provides that pensions or annuities are taxable only by the country of which the recipient is a resident.

The Convention does not specifically address the taxation of benefits received by a taxpayer from foreign superannuation funds and schemes. Article 20 of The Convention however, provides rules for the allocation between the two countries of taxing rights with respect to items of income not dealt with in the preceding Articles of The Convention. Broadly, Article 20 provides, that where the income may be taxed in both countries, the country of residence of the recipient of the income is obliged by Article 22 of The Convention to provide double taxation relief. That is, if UK tax has been paid (under UK laws) on foreign sourced income by an Australian resident, a credit for that tax paid shall be allowed against Australian tax payable in respect of that income.

In your case, pursuant to Australia's current international tax agreement with the UK and Australia's income tax laws, any applicable fund earnings on the lump sum payment from the Fund is assessable in Australia, with a credit for any UK tax paid on that income available to you as an offset.

Further, the calculation of applicable fund earnings in respect of a lump sum payment from a foreign superannuation fund is addressed below.

Applicable fund earnings

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.

The applicable fund earnings amount is subject to tax at the person's marginal tax rate. The remainder of the lump sum payment is not assessable income and is not exempt income.

The applicable fund earnings is worked out under either subsection 305-75(2) or 305-75(3).

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.

An amount is only assessable under section 305-70 if the entity making the payment is a foreign superannuation fund.

Meaning of 'foreign superannuation fund'

A foreign superannuation fund is defined in subsection 995-1(1) 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), 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) defines a superannuation fund as having the same meaning given by section 10 of the Superannuation Industry (Supervision) Act 1993 (SISA).

In accordance with subsection 10(1) of the SISA, 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'.

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 SISA, 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 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.

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), consideration must also turn to 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.

In this case, available information indicates that as your benefits in the Fund were only payable upon retirement, invalidity and death, the Fund therefore meets the definition of a 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 from the Fund was from a foreign superannuation fund as defined in subsection 995-1(1).

Applicable fund earnings

You became a resident of Australia for income tax purposes in the 199C-DD income year and received a lump sum payment in respect of your entitlements in the Fund in the 2015-16 income year. As this was more than six months after you became an Australian resident, section 305-70 applies to include any 'applicable fund earnings' in your assessable income.

The 'applicable fund earnings' are worked out under section 305-75. As mentioned earlier, 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.

Subsection 305-75(3) 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).

This means you are assessed only on the accretion on the benefits in the fund less any contributions 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) 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 that when applying section 960-50 to amounts that are elements in the calculation of another amount you need to:

● first, translate any amounts that are elements in the calculation of other amounts (except special accrual amounts); and

● then, calculate the other amounts.

For the purposes of section 305-70, the 'applicable fund earnings' should be calculated by:

● translating the amount of the superannuation lump sum received from the foreign fund to Australian currency at the exchange rate applicable on the day of receipt; and

● deducting from this amount, the part of the lump sum that is attributable to amounts transferred into the fund from any other foreign superannuation fund at the exchange rate applicable on the day of receipt of the lump sum.

Calculation of the assessable amount of the payment from the Fund

The amount of applicable earnings has been calculated in accordance with subsection 305-75(3).

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