Edited version of private advice

Authorisation Number: 1051529451408

Date of advice: 13 June 2019

Ruling

Subject: Lump sum payment from a foreign pension plan

Question 1

Does section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997) apply to the lump sum payment received by the Taxpayer from the Foreign Fund?

Answer

Yes.

Question 2

Is the Taxpayer entitled to a foreign income tax offset for income tax paid in another country in respect of the lump sum?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 2018

The scheme commences on:

1 July 2017

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The Taxpayer was living in another country with their partner, the Deceased.

The Deceased began employment in the other country.

The Deceased became a member of the Foreign Fund and named the Taxpayer as the benefactor of his Plan.

The Foreign Fund is a foreign superannuation fund.

The Taxpayer arrived in Australia and was a resident for tax purposes.

The Taxpayer and the Deceased ended their relationship.

The Deceased passed away.

A Foreign Fund Account Summary (the Summary) and a Termination Benefit Statement (the Statement) in respect of the Deceased have been provided.

The Taxpayer was entitled to a death benefit of Amount A

Payment of the proceeds was made in the 2018 financial year with tax of Amount B withheld in the other country

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 305-B

Income Tax Assessment Act 1997 Section 307-65

Income Tax Assessment Act 1997 Section 305-70

Income Tax Assessment Act 1997 Section 305-75

Income Tax Assessment Act 1997 Section 307-5

Income Tax Assessment Act 1997 Section 770-10

Income Tax Assessment Act 1997 Section 770-70

Reasons for decision

Question 1

Summary

The applicable fund earnings provisions apply to a lump sum benefit received by a taxpayer from a foreign superannuation fund, after another person's death, because the other person was a member of the fund.

Detailed reasoning

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

Section 307-65 of the ITAA 1997 defines a superannuation lump sum as a superannuation benefit that is not a superannuation income stream benefit. Section 307-5 of the ITAA 1997 includes in the definition of a superannuation benefit a payment to a taxpayer from a superannuation fund, after another person's death, because the other person was a member of the fund.

Where a lump sum from a foreign superannuation fund is received more than six months after Australian residency, section 305-70 of the ITAA 1997 applies to include any applicable fund earnings (AFE) in assessable income.

The AFE is the amount worked out under either subsection 305-75(2) or 305-75(3) of the ITAA 1997. The "you" first appearing in these subsections is the death benefit recipient. Consequently, where the death benefit recipient was an Australian resident for the whole of the period to which the lump sum relates subsection 305-75(2) of the ITAA 1997 applies, and where the death benefit recipient became a resident during that period subsection 305-75(3) applies. The period of Australian residence of the deceased fund member is not relevant.

In this case, the benefit paid by the Foreign Fund is a superannuation lump sum and it was received more than six months after the Taxpayer became an Australian resident. Accordingly, section 305-70 of the ITAA 1997 applies to include any AFE in the Taxpayer's assessable income.

As the Taxpayer became a resident after the period to which the lump sum relates the method in subsection 305-75(3) of the ITAA 1997 applies to work out the amount of AFE.

Subsection 305-75(3) of the ITAA 1997 states:

If you become an Australian resident after the start period to which the lump sum relates (but before you received it) 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 remainder of the period;

(b) subtract that total 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 the situation of death benefit payments some of the references to "you" and "your" in the legislation, which literally refer to the death benefit recipient, must be interpreted as referring to the deceased fund member to avoid anomalous results in applying the methods in subsection 305-75 of the ITAA 1997.

For the purposes of subparagraph 305-75(3)(a)(i) of the ITAA 1997 we are concerned with the amount in the Foreign Fund that was vested in the Deceased at the time the Taxpayer became a resident. This taxes the earnings for the period the Taxpayer was an Australian resident. The amount vested in the Deceased when the Taxpayer became an Australian resident was amount.

For the purposes of subparagraph 305-75(3)(a)(ii) of the ITAA 1997 we are concerned with the amount of contributions made by or for the benefit of the Deceased after the Taxpayer first became a resident. The Summary shows the amount of contributions made after the Taxpayer became an Australian resident.

The above amounts can be used to determine the amount of AFE.

Question 2

Summary

The Taxpayer is entitled to a foreign income tax offset.

Detailed reasoning

A foreign income tax offset (FITO) is a non-refundable tax offset, that will reduce the Australian tax that would be payable on foreign income which has been subjected to foreign income tax.

Section 770-10 of the ITAA 1997 is the primary provision under which a foreign income tax offset arises. FITO can be claimed for foreign income tax paid by a taxpayer in respect of an amount that is included in their assessable income.

When claiming a FITO, a taxpayer is required to gross up their income for the foreign tax paid (or which is taken to have been paid) in respect of that income.

The amount of the tax offset is the sum of all foreign income tax that has been paid by the taxpayer for the income year subject to a limit (cap) (section 770-70 of the ITAA 1997).

The foreign tax offset cap is based on the amount of Australian tax payable on the double-taxed amounts and other assessable income amounts that do not have an Australian source.

If foreign tax has been withheld from amounts paid, the taxpayer is entitled to claim a FITO only for the proportion of the foreign income tax which equates to the proportion of foreign income included in the assessment subject to the foreign income tax offset cap.

In the Taxpayer's case, they are entitled to a FITO for the income tax withheld from the lump sum in the other country, limited to the amount to which they are entitled under section 770-10 of the ITAA 1997.

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