Edited version of your written advice

Authorisation Number: 1051493975095

Date of advice: 14 March 2019

Ruling

Subject: Lump sum payment from an overseas pension scheme

Questions

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

2. Are the pension payments made to your client from an overseas pension scheme assessable income under the ITAA 1997?

Answers

1. Yes.

2. Yes.

This ruling applies for the following period:

Income year ended 30 June 2018

The scheme commences on:

1 July 2017

Relevant facts and circumstances

Your Client, who is over 55 years of age, worked for an overseas government for more than ten years until Your Client resigned.

Around the time of resignation, Your Client migrated to Australia (using their pre-resignation leave entitlements) and became a resident of Australia for taxation purposes.

Under the relevant overseas legislation, Your Client is entitled to a retirement benefit upon reaching a specified age. Your Client reached that specified age in the relevant income year.

All benefits were paid out of the general revenue of the overseas government.

No contributions were made by Your Client or an employer in order to obtain benefits under the relevant overseas legislation. The benefit is calculated according to a number of formulae relating to pensionable emoluments and length of service.

Under the relevant overseas legislation Your Client may elect to take up to a maximum percentage of their retirement benefit as a lump sum with the balance payable as a pension. In this case, Your Client elected to receive that maximum percentage of the retirement benefit as a lump sum and the remainder as a pension.

A document was issued to Your Client by the overseas government which provided the following information:

(a) Unreduced Annual Pension at date of resignation/retirement:

(b) Rate of Reduced Annual Pension Opted for:

(c) Reduced Annual Pension at date of resignation/retirement:

(d) Commuted Pension Gratuity at date of resignation/retirement:

(e) Cumulative Pension Increase Factor:

(f) (i) Cumulative Reduced Annual Pension:

(f) (ii) Cumulative Commuted Pension Gratuity:

(g) Date from which the Deferred Pension Benefits became payable:

The document also stated that the deferred pension benefits became payable to Your Client in the 2017-18 income year.

A further document was issued to Your Client by the overseas government which provided the following information:

● Commuted Gratuities –

● Deferred Pension Increase

● Net total:

● Date payment arranged:

● Payment method:

● Bank A/C No:

A lump sum payment was deposited directly into Your Client’s overseas bank account in the 2017-18 income year.

The lump sum payment is not taxable in the overseas country.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 27H

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

Income Tax Assessment Act 1997 Subdivision 305-B

Income Tax Assessment Act 1997 Subsection 305-55(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 960-50(6)

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

Income Tax Assessment Act 1997 Subsection 6-5(1)

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

Income Tax Assessment Act 1997 Subsection 6-10(1)

Income Tax Assessment Act 1997 Subsection 6-10(2)

Income Tax Assessment Act 1997 Subsection 6-10(4)

Income Tax Assessment Act 1997 Subsection 770-10(1)

All references are to the ITAA 1997 unless otherwise indicated.

Reasons for decision

Summary

A portion of the lump sum payment Your Client received from the overseas pension scheme must be included as ‘applicable fund earnings’ in Your Client’s assessable income for the 2017-18 income year.

The assessable applicable fund earnings are calculated as $X (cents ignored) and is subject to Your Client’s marginal tax rate. This amount is assessable in Australia, notwithstanding that the lump sum payment is not taxable in the overseas country.

The pension payments received by Your Client are assessable in Australia, and to be included in Your Client’s assessable income in the relevant income year.

Detailed reasoning

Question 1

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 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). 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, 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) 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.

In this case, the entity making the payment is a statutory scheme established under the relevant laws of the overseas country. It is not a ‘superannuation fund’ as that term is normally understood. Monies are not set aside or pooled together in a separate fund (Mahony v. Commissioner of Taxation (Cth) (1967) 41 ALJR 232; (1967) 14 ATD 519 and Scott. Benefits are paid out of the general revenue of the overseas government.

Thus the overseas pension scheme (the Scheme) is not a superannuation fund and therefore not a foreign superannuation fund as defined in subsection 995-1(1).

However, subsection 305-55(2) extends the application of Subdivision 305-B, which deals with the taxation of superannuation benefits from foreign superannuation funds, to payments (other than pension payments) received from a scheme for the payment of benefits in the nature of superannuation upon retirement or death, provided the scheme:

● is not, and never has been, an Australian superannuation fund or a foreign superannuation fund; and

● was not established in Australia; and

● is not centrally managed or controlled in Australia.

As noted above, the Scheme is a statutory scheme established under the relevant laws of the overseas country. The Scheme is set-up for the express purpose of providing for the payment of benefits in the nature of superannuation upon retirement or death. Its central management and control is clearly outside Australia and it is neither an Australian superannuation fund nor a foreign superannuation fund.

Therefore, Subdivision 305-B will apply to payments from the Scheme made to Australian residents.

Assessable Amount

Your Client became a resident of Australia more than 20 years ago and received a lump sum payment from the Scheme in the 2017-18 income year. As this was more than six months after they became an Australian resident, section 305-70 applies to include any ‘applicable fund earnings’ in Your Client’s assessable income.

The ‘applicable fund earnings’ are worked out under section 305-75. 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) 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, Your Client is assessed only on the growth in the Scheme 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/scheme 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.

In ATO Interpretative Decision ATO ID 2015/7 Income tax/Superannuation: Foreign currency translation rules in working out ‘applicable fund earnings’ under section 305-75 of the ITAA 1997, the Commissioner considered the foreign currency translation rules in relation to lump sum transfers from foreign superannuation funds. The Commissioner in considering Item 11A of the table in subsection 960-50(6), determined that the exchange rate at which it is reasonable to translate amounts used in the method statements set out in subsection 305-75(3) into Australian currency is the exchange rate applicable at the time of receipt of the relevant superannuation lump sum.

Therefore, for the purposes of section 305-70, the ‘applicable fund earnings’ amount in respect of the lump sum received from a fund should be calculated by deducting the Australian dollar equivalent of the amount vested in the fund just before the day the taxpayer first became an Australian resident, from the amount received by the taxpayer from the fund. Both amounts should be translated using the exchange rate applicable on the day of receipt of the lump sum.

Amounts to be used in calculation

The amount of ‘applicable fund earnings’ is calculated in accordance with subsection 305-75(3) and is to be included in Your Client’s assessable income for the 2017-18 income year. This amount is assessable in Australia, notwithstanding that the lump sum payment is not taxable in the overseas country.

Question 2

Ordinary Income and Statutory Income

Subsection 6-5(1) provides that assessable income includes ‘income according to ordinary concepts’, which is called ordinary income.

Subsection 6-5(2) provides that, if you are an Australian resident, your assessable income includes the ordinary income you derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

Subsection 6-10(1) provides that assessable income also includes amounts that are not ‘ordinary income’, but which are included as assessable income by another provision. Subsections 6-10(2) and 6-10(4) refer to these amounts as statutory income, and if you are an Australian resident, includes statutory income from all sources, whether in or out of Australia, in assessable income.

Section 27H of the Income Tax Assessment Act 1936 provides that annuities or pensions paid from a foreign superannuation fund, or a pension paid from a scheme that is not, and has never been, an Australian superannuation fund are included in your assessable income.

Accordingly, the monthly pension income/benefits Your Client receives is assessable income and taxable in Australia. These amounts are reported as assessable foreign income.

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