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Edited version of private ruling
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Ruling
Subject: Lump sum payment from an overseas plan
Issue
Question
Is any part of the lump sum payment made from an overseas plan included in the taxpayer's assessable income under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Answer
Yes.
This ruling applies for the following period
For the year ended 30 June 2009
The scheme commenced on
1 July 2008
Relevant facts
A number of years ago, your client commenced employment with an overseas company (the company) before arranging a transfer to their company in Australia.
Whilst employed in the overseas country (Country 1) your client was a participant of the company's pension fund.
Subsequently, your client migrated to Australia from Country 1 and your client's company pension was to be deferred until their normal retirement age.
After spending some time working in Australia, your client returned back to Country 1.
Shortly after, your client returned to Australia and became an Australian resident for tax purposes.
A few years later, an overseas plan (the plan) was established and designed to minimise any shortfall between the company's pension funds of different countries.
The plan was based in another overseas country (Country 2) and was non-contributory for participants with the company making annual contributions.
The plan is an unfunded plan, not intended to be qualified under any country's laws regarding pension plans. Payments under the plan are not guaranteed or protected by any governmental agency.
An account is established for each participant. Allocations and interest are credited to each participant's account annually and paid as a lump sum at retirement, death, or termination of employment.
For eligible employees, an allocation for years of service prior to the plan's effective date, was added to their entitlement. Your client was entitled to a specified allocation for years of service prior to the plan's effective date.
Your client received an annual statement from the plan which shows your client's annual allocations for two calendar years.
The statement shows the vested percent in your client's prior service account balance and the vested percent in your client's annual allocation account balance.
Later, the company and the plan was acquired by another company.
Subsequently, your client's position was made redundant and they were advised that their benefits in the plan would be made as a monthly payment for life. However, there were several processes that were to be completed before the payment would commence.
The administration of the plan advised that the plan pays benefits in the form of an account balance and is paid as a one-time lump sum shortly after termination.
You were unable to provide information confirming whether the monies payable by the plan come from a separate account maintained by the employer for the purpose of administering the scheme, or simply from the normal funds of the employer.
In the 2008-09 income year, a payment was made (in Australian dollars) from the plan to your client's bank account.
Your client is over 60 years of age.
Relevant legislative provisions
Income Tax Assessment Act 1997 Subsection 295-95(2).
Income Tax Assessment Act 1997 Section 305-70.
Income Tax Assessment Act 1997 Subsection 305-70(2).
Income Tax Assessment Act 1997 Subsection 305-75(2).
Income Tax Assessment Act 1997 Subsection 305-75(3).
Income Tax Assessment Act 1997 Subsection 995-1(1).
Superannuation Industry (Supervision) Act 1993 Section 10.
Superannuation Industry (Supervision) Act 1993 Section 19.
Superannuation Industry (Supervision) Act 1993 Section 62.
Taxation Administration Act 1953 Subsection 357-105(2).
Reasons for decision
Summary
A portion of your client's lump sum payment received from the overseas scheme comprises applicable fund earnings and is therefore to be included in your client's assessable income for the 2008-09 income year.
Detailed reasoning
Lump sum payments transferred from foreign superannuation funds
From 1 July 2007, the applicable fund earnings in relation to a lump sum payment from a foreign superannuation fund or scheme that is received more than six months after a person has become an Australian resident will be assessable under section 305-70 of the ITAA 1997. 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 305-75(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.
Before determining whether an amount is assessable under section 305-70 of the ITAA 1997, it is necessary to ascertain whether the payment is being made from a foreign superannuation fund or scheme. If the entity making the payment is not a foreign superannuation fund or scheme, then section 305-70 will not have any application.
Foreign superannuation fund or scheme
Certain superannuation benefits from foreign superannuation funds or schemes are taxable in accordance with Subdivision 305-B of the ITAA 1997.
The entities to which this subdivision applies are defined in section 305-55 of the ITAA 1997, which states in part:
305-55(1) This Subdivision applies if:
(a) you receive a superannuation lump sum from a foreign superannuation fund; and
(b) ...
305-55(2) This Subdivision also applies if you receive a payment, other than a pension payment, from a scheme for the payment of benefits in the nature of superannuation upon retirement or death that:
(a) is not, and never has been, an Australian superannuation fund or a foreign superannuation fund; and
(b) was not established in Australia; and
(c) is not centrally managed or controlled in Australia.
305-55(3) This Subdivision applies to a payment mentioned in subsection (2) from a scheme mentioned in that subsection in the same way as it applies to a superannuation lump sum from a foreign superannuation fund.
A foreign superannuation fund is defined in subsection 995-1(1) of the ITAA 1997 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.
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 as defined in subsection 995-1(1) of the ITAA 1997.
The fact that some of its members may be Australian residents would not necessarily alter this.
Subsection 995-1(1) of the ITAA 1997, defines a superannuation fund as having the meaning given by section 10 of the Superannuation Industry (Supervision) Act 1993 (SIS Act), that is:
(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.
From the information you provided, it is not certain whether the plan would be a foreign superannuation fund. This is because you were unable to provide evidence that monies due to plan members were held separately from the other assets of the employer.
However, on the basis of the information you were able to provide, it is clear that the plan would satisfy the requirements of section 305-55(2) of the ITAA 1997, in that it is a scheme for the payment of benefits in the nature of superannuation upon retirement or death. Further, the benefit your client received from the plan is not a pension.
Consequently, it is considered that lump sum payments from the plan are assessable income in accordance with section 305-70 of the ITAA 1997.
Calculation of assessable amount
The applicable fund earnings in relation to a lump sum payment from a foreign superannuation fund or scheme will be included in a person's assessable income where the payment is received more than six months after becoming an Australian resident.
This calculation effectively means that a person will be assessed only on the income earned in the fund or scheme while they were a resident of Australia. That is, they will only be assessed on the accretion in the fund less any contributions made since they became a resident of Australia.
Further, any amounts representative of earnings during periods of non-residency and certain capital amounts previously transferred into the paying fund do not form part of the taxable amount when the overseas benefit is paid.
In this case, your client became a resident of Australia for tax purposes more than six months after your client became an Australian resident.
Further, your client became a member of the plan after they became a resident of Australia, therefore your client's lump sum payment will be assessable under subsection 305-75(2) of the ITAA 1997.
Subsection 305-75(2) of the ITAA 1997 states:
If you were an Australian resident at all times during 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 part of the lump sum that is attributable to contributions made by or in respect of you on or after the day when you became a member of the fund (the start day);
(ii) the part of the lump sum (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 income tax);
(c) add the total of all your previously exempt fund earnings (if any) covered by subsections (5) and (6).
Foreign currency conversion
It should be noted that subsection 960-50(1) of the ITAA 1997 states that an amount in a foreign currency is to be translated into Australian currency. Item 7 of the table in subsection 960-50(6) of the ITAA 1997 provides that:
· an amount of statutory income that is received at or before the time when the requirement first arose to include the amount in a taxpayer's assessable income is to be translated to Australian currency at the exchange rate applying at the time of receipt; or
· in any other case, the amount of statutory income is to be translated at the rate applying at the time when the requirement first arose to include the amount in a taxpayer's assessable income.
Therefore any amounts assessable under section 305-70 the ITAA 1997 will be calculated in the overseas currency and then converted to Australian dollars in accordance with item 7 of the table in subsection 960-50(6) of the ITAA 1997, being the daily rate of exchange on the day the payment is received.
Lump sum payment
The assessable amount of your client's lump sum payment is calculated as follows.
The total of the amounts mentioned in paragraph 305-75(2)(a) of the ITAA 1997 comprises:
· the amount that is attributable to contributions in respect of your client after they became an Australian resident include allocations made in the 1997 and 1998 calendar years;
· amounts transferred into the plan from any other foreign superannuation fund = Nil.
It is noted that you were only able to provide evidence of your client's employer's contributions to the plan in two calendar years. If your client obtains documentary evidence of employer contributions in other years, these amounts will further reduce the assessable amount.
In this case the payment was made in Australian dollars to your client in the 2008-09 income year. However, the employer contributions made in respect of your client, are to be converted from Country 2's currency into Australian dollars.
The employer has identified on an annual statement the exchange rates, converting Country 2's currency to Australian dollars, applicable to these contributions in each year. These exchange rates differ very slightly from the relevant official exchange rate. Consequently, the Commissioner is prepared to accept these exchange rates to translate Country 2's currency to Australian dollars.
Paragraph 305-75(2)(b) of the ITAA 1997 requires that the contributions amount calculated above for each year be subtracted from the total amount of the lump sum payment payable by the plan.
Finally, paragraph 305-75(2)(c) of the ITAA 1997 requires that any previously exempt fund earnings calculated under subsections 305-75(5) and 305-75(6) of the ITAA 1997 are added to the total as stated under paragraph 305-75(2)(d) of the ITAA 1997 In your client's case, there were no previously exempt fund earnings.
Therefore the applicable fund earnings calculated under subsection 305-75(2) of the ITAA 1997 is the total amount of the lump sum payment payable by the plan less the employer contributions made in respect of your client.
Assessable amount of the payment from the foreign superannuation scheme
The amount calculated as the applicable fund earnings is the portion of your client's lump sum payment that is the assessable amount in accordance with subsection 305-70(2) of the ITAA 1997.