Edited version of private advice

Authorisation Number: 1051505608312

Date of advice: 26 June 2019

Ruling

Subject: Payment from a foreign superannuation fund

Question 1

Is any part of the lump sum received by a person (the Taxpayer) from an Overseas Fund assessable as applicable fund earnings under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

Is the annual pension from the Overseas Fund assessable income in Australia?

Answer

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

The Taxpayer migrated to Australia and became a resident for tax purposes.

While living overseas, the Taxpayer became a member of the Overseas Fund, a defined benefit scheme established and controlled overseas.

Funds cannot be accessed from the Overseas Fund other than at retirement.

There were no contributions or transfers made into the Overseas Fund since the Taxpayer became a resident of Australia for tax purposes.

As per the rules of the Overseas Fund, the Taxpayer elected to be paid a lump sum of an amount, along with an annuity amount from the Overseas Fund. The pension annuity is paid on a year basis to the Taxpayer's Australian bank account.

In the 2017-18 income year, the Taxpayer received a lump sum payment their Australian bank account.

The deferred pension increases each April by the increase in the Retail Prices Index.

Relevant legislative provisions

Australian treaty Series [2003] ATS 22 Article 17-1

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 section 305-70

Income Tax Assessment Act 1997 subsection 305-75(3)

Income Tax Assessment Act 1997 paragraph 305-75(3)(a)

Income Tax Assessment Act 1997 paragraph 305-75(3)(b)

Income Tax Assessment Act 1997 paragraph 305-75(3)(c)

Income Tax Assessment Act 1997 section 305-80

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)

Reasons for decision

Summary

The 'applicable fund earnings' in respect of the lump sum payments from the Overseas Fund is an amount. This amount must be included in the Taxpayer's income tax return for the 2017-18 income year.

Detailed reasoning

Lump sum payments transferred from foreign superannuation funds

Section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that an Australian resident taxpayer who receives a lump sum from a foreign superannuation fund more than six months after becoming an Australian resident must include the 'applicable fund earnings' of the lump sum (if any) in their assessable income.

Based on the information provided, the Commissioner accepts the Overseas Pension Fund is a foreign superannuation fund.

In accordance with subsection 305-70(2) of the ITAA 1997, so much of the lump sum as equals the applicable fund earnings, as worked out under section 305-75 is included in the assessable income of a person.

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 amount is 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.

Applicable fund earnings

The Taxpayer became a resident of Australia for tax purposes and the lump sum payments from the Overseas Fund were transferred in the 2017-18 income year. As this was more than six months after your client became an Australian resident, section 305-70 of the ITAA 1997 applies to include any 'applicable fund earnings' in your client's assessable income for the relevant year.

The 'applicable fund earnings' amount is worked out under section 305-75 of the ITAA 1997. 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) 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).

The effect of section 305-75 of the ITAA 1997 is that your client is assessed only on the income earned on their benefits in the Overseas Pension Fund less any contributions they made since they became a resident of Australia. Any earnings made 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$). 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.

The Commissioner considers the correct rule for translating foreign currency into Australian dollars for the purposes of working out an individual's 'applicable fund earnings' under section 305-75 is that each amount in a foreign currency that is an element in the calculation is to be translated to Australian dollars at the exchange rate applicable at the time of receipt of the relevant superannuation lump sum.

Calculation of the applicable fund earnings amount

The calculation of the applicable fund earnings amount in respect of the lump sum received by the Taxpayer from the Overseas Fund is shown in the table below. As discussed, any amounts in pound sterling are translated into Australian dollars using the exchange rate (available on the ATO website) applicable on the day of receipt.

Therefore, the 'applicable fund earnings' amount in respect of the lump sum payment received by the Taxpayer from the Overseas Fund that should be included in the Taxpayer's assessable income for the 2017-18 income year is an amount.

Question 2

Reasons for decision

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

Pension income falls within ordinary income and is assessable under the legislation.

In determining liability to Australian tax on foreign sourced income it is necessary to consider not only the Australian income tax laws but also any applicable tax treaty contained in the International Tax Agreements Act 1953 (the Agreements Act).

The Agreement operates to avoid the double taxation of income received by residents of Australia and the Overseas Country and explains that any pension (including government pensions) and annuities paid to an Australian resident shall be taxable only in Australia.

Conclusion

An amount received as a pension is ordinary income and forms part of the Taxpayer's assessable income in the year it is received. Accordingly, as the Taxpayer is an Australian resident, their assessable income will include the pension income from the overseas pension scheme under subsection 6-5(2) of the ITAA 1997.

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