Edited version of private ruling

Authorisation Number: 1011476728296

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Ruling

Subject: Taxation of foreign superannuation benefit

Questions:

Can the pension being paid to your client in Australia by an Australian company after monies have been transferred to the company from an overseas superannuation fund be considered to be an Australian sourced pension?

Advice/Answers:

No.

This ruling applies for the following period:

1 July 2008 to 30 June 2009

The scheme commenced on:

1 July 2008

Relevant facts:

Your client is over 55 years of age.

Your client had been working for an Australian subsidiary of an overseas parent company since some decades ago.

Your client has been a member of the Australian company's staff superannuation fund (the Fund) since then.

The Fund was converted from a defined benefit fund to an accumulated balance fund. As part of the conversion, the pool of money was broken up two ways:

a large portion was allocated to existing members based on a formula and became the opening balance in their individual accounts under the new plan; and

a proportion of the pool was allocated to the Australian subsidiary company and reverted to consolidated revenue.

Your client became concerned that he was at a disadvantage against what he could have expected from the defined benefit plan.

Your client wrote to a senior officer in the overseas parent company seeking action to compensate him financially.

Your client received advice from the overseas parent company that he had been added to the parent company's overseas pension plan (the Plan), retroactively from his date of hire with the Australian subsidiary company.

As this was a top up, it was made clear that any pension entitlements, when due, would be offset by the accumulated value of the compulsory superannuation contributions made in Australia to avoid double dip.

The Defined Benefit Fund in Australia had closed by this time and it was not possible to make any transfers to the new accumulation plan which existed in Australia. The offer was therefore made of membership of the Plan in the foreign country, specifically for mobile overseas pensions.

The Plan was established in the foreign country.

The Plan is administered by a retirement board in the foreign country.

The Plan is not regulated under Superannuation Industry (Supervision) Act 1993 (SISA).

Your client has retired from the Australian subsidiary company.

The arrangement now is that the Plan pays the Australian subsidiary company which then pays this pension to your client through the normal payroll system and deducts Pay As You Go (PAYG) tax.

The pension payments are being made to your client through the payroll system of the Australian subsidiary company.

Relevant legislative provisions:

Income Tax Assessment Act 1936 Section 26AA

Income Tax Assessment Act 1936 Section 27H

Income Tax Assessment Act 1997 Section 6-5

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 Subsection 995-1(1)

International Tax Agreements Act 1953 Section 4

Superannuation Industry (Supervision) Act 1993 Section 42

Reasons for decision

Summary

The pension is not an Australian sourced pension as the source is a foreign superannuation fund located in the foreign country.

Detailed reasoning

Sections 6-5 and 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997) provide that the assessable income of a resident taxpayer includes ordinary income and statutory income derived directly or indirectly from all sources during the income year.

Section 10-5 of the ITAA 1997 lists the types of assessable income that are affected by statutory provisions. Included in this list is section 27H of the Income Tax Assessment Act 1936 (ITAA 1936) which provides that annuities and superannuation pensions are included in assessable income.

It is considered that the source of a pension is the fund from which the pension is paid, so that if the fund is situated in Australia, the source of pension is in Australia. It is immaterial where the service, the subject of the pension, was given.

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

Section 4 of the Agreements Act incorporates that Act with the ITAA 1936 and ITAA 1997 so that those Acts are read as one.

Foreign superannuation fund

A foreign superannuation fund is defined in subsection 995-1(1) of the ITAA 1997 as follows:

· a superannuation fund is a foreign superannuation fund at a time if the fund is not an Australian superannuation fund at that time; and

· 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:

· the fund was established in Australia, or any asset of the fund is situated in Australia at that time; and

· at that time, the central management and control of the fund is ordinarily in Australia; and

· at that time either the fund had no member covered by subsection (3) (an active member) or at least 50% of:

· the total market value of the fund's assets attributable to superannuation interests held by active members; or

· 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.

In the present case it is evident that the parent company's overseas pension plan (the Plan) which is a pension scheme established in the foreign country, is not an Australian superannuation fund as defined in subsection 295-95(2) of the ITAA 1997. Therefore, the Plan is a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997.

In your client's case the source of the pension is the foreign country as it is the Plan located there which is paying your client the pension. It is being paid by the Australian subsidiary company only for administrative convenience. The Australian subsidiary company is an agent for the overseas pension plan.

The source of the pension remains the foreign country. Therefore the pension can not be treated as having an Australian source.

Please note that from 1 July 2007, the legislation has changed in relation to superannuation pensions and benefits paid from complying superannuation funds. However, these changes do not affect any pensions or annuities paid from overseas funds which are not considered complying superannuation funds under section 42 of the Superannuation Industry (Supervision) Act 1993 as they are not resident funds.