Edited version of private ruling

Authorisation Number: 1011671958776

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Ruling

Subject: Lump sum payment from overseas pension scheme

Issue 1

Question 1

Is a portion of a lump sum payment received from the Fund included in your client's assessable income as applicable fund earnings under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Advice/Answers

Yes.

Question 2

Is the lump sum received from the Fund included in your client's assessable income as an employment termination payment?

Advice/Answers

No.

Issue 2

Question 1

Is the lump sum payment and the pension your client received from the Fund exempt under the relevant section of the ITAA 1997?

Advice/Answers

No.

This ruling applies for the following period

Year ending 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts

Your client is over 60 years of age.

Your client was employed by an overseas employer.

Your client's employment with their overseas employer was terminated over 20 years ago.

Your client is a member of an overseas superannuation fund (the Fund).

On leaving their employment with their overseas employer your client was awarded a pension and a lump sum payment.

Your client became a resident of Australia for taxation purposes over 10 years ago. Your client currently lives in Australia.

Your client received a lump sum payment from the Fund in the 2009-10 income year.

The lump sum was received as a consequence of your client's employment service with their overseas employer.

Your client is also in receipt of a pension from their overseas employer. The pension was granted to your client after they turned 60 in lieu of service they provided to their overseas employer.

You advised that your client's pension is not paid for any disability or war injury.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 27H

Income Tax Assessment Act 1997 Subsection 6-10

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

Income Tax Assessment Act 1997 Section 6-15

Income Tax Assessment Act 1997 Section 6-20

Income Tax Assessment Act 1997 Subsection 10-5

Income Tax Assessment Act 1997 Subdivision 52-B

Income Tax Assessment Act 1997 Section 52-65

Income Tax Assessment Act 1997 Subsection 82-130(1)

Income Tax Assessment Act 1997 Paragraph 82-130(1)(a)

Income Tax Assessment Act 1997 Section 82-135

Income Tax Assessment Act 1997 Paragraph 82-130(1)(b)

Income Tax Assessment Act 1997 Subsection 295-95(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 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 Paragraph 305-75(3)(d)

Income Tax Assessment Act 1997 Section 960-50

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 Section 995-1

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

International Tax Agreements Act 1953

Income Tax Assessment Regulations 1997 Regulation 960-50.01

Veterans' Entitlements Act  1986

Veterans' Entitlements (Transitional Provisions and Consequential Amendments) Act  1986

Reasons for decision

Issue 1

Summary

A portion of the lump sum benefit your client received from their overseas superannuation fund (the Fund) is assessable as 'applicable fund earnings'. The applicable fund earnings represent the increase or growth in the Fund during the period your client was a resident of Australia.

The applicable fund earnings are assessable in Australia. The remainder of the lump sum benefit is not assessable income and is not exempt income.

In addition, the payment received by your client is not an employment termination payment as it was received more than 12 months after the termination of their employment.

Detailed reasoning

Lump sum payments transferred from foreign superannuation funds

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 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 subsections 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 becomes an Australian resident after the start of 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. 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) 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 percent of:

· the total market value of the funds 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 this case, your client's lump sum benefit was paid by an overseas superannuation fund (the Fund). It is evident that the Fund, which is established overseas, is not an Australian superannuation fund as defined in subsection 295-95(2) of the ITAA 1997. Based on the information provided, the Commissioner considers that the Fund is a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997.

Assessable Amount

As noted above, the applicable fund earnings in relation to a lump sum payment from a foreign superannuation fund will be included in a person's assessable income where the payment is received more than six months after a person has become an Australian resident.

Your client became a resident of Australia over 10 years ago (the residency date). Your client received a lump sum payment in the 2009-10 income year. The date on which your client received the lump sum benefit is more than six months after they became an Australian resident. Accordingly, a portion of the lump sum benefit will be assessable under section 305-70 of the ITAA 1997.

The amount included as assessable income is calculated under subsection 305-75(3) of the ITAA 1997 because your client became 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 (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 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) 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).

* denotes a term defined in section 995-1 of the ITAA 1997.

The calculation of this portion effectively means that your client will be assessed only on the income earned in the Fund while they were a resident of Australia. That is, your client will only be assessed on the accretion in the Fund less any contributions made since they became a resident of Australia.

Furthermore, 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.

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. The applicable fund earnings is the result of a calculation from two other amounts, and subsection 960-50(4) of the ITAA 1997 requires that when applying section 960-50 of the ITAA 1997 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 table in subsection 960-50(6) of the ITAA 1997 sets out the translation rules. Only the following items are relevant to determining the issue in your case:

· item 11 which deals with a receipt or payment to which none of the other items apply, and

· item 11A which applies to amounts that are neither receipts nor payments and to which none of the other items apply.

Item 11 of the table in subsection 960-50(6) of the ITAA 1997 applies to a receipt or payment where none of the other items applies. The lump sum payment from the Fund is not included in any of the other items in the table so it will fall within item 11. Under this item, the payment is translated to Australian dollars at the exchange rate applicable at the time of receipt.

When the amount of the lump sum benefit that was vested in your client just before the residency date (subparagraph 305-75(3)(a)(i) of the ITAA 1997) is determined, there is no actual receipt or payment of an amount. All that occurs is a determination of the vested amount expressed in the foreign currency, in this case, pounds sterling.

Regulation 960-50.01 of the Income Tax Assessment Regulations 1997 (ITAR 1997) modifies the table in subsection 960-50(6) of the ITAA 1997 to include item 11A that applies to amounts, other than receipts and payments, to which none of the other items apply. Under this item, the amount is translated into Australian dollars at an exchange rate that is reasonable having regard to the circumstances.

Therefore, for the purposes of section 305-70 of the ITAA 1997, the 'applicable fund earnings' should be calculated by:

· translating the lump sum benefit received from the Fund at the exchange rate applicable on the day of receipt to Australian dollars (item 11 of the table in subsection 960-50(6) of the ITAA 1997); and

· deducting from this amount the Australian dollars equivalent of the lump sum benefit vested in the Fund at the exchange rate applicable just before the residency date (item 11A of the table in subsection 960-50(6) of the ITAA 1997).

Employment termination payment

From 1 July 2007, payments made in consequence of the termination of a taxpayer's employment are known as employment termination payments. Prior to 1 July 2007, these payments were known as eligible termination payments.

Section 995-1 of the ITAA 1997 states:

employment termination payment has the meaning given by section 82-130.

Subsection 82-130(1) of the ITAA 1997 states:

A payment is an employment termination payment if:

(a) it is received by you:

(i) in consequence of the termination of your employment; or

(ii) after another person's death, in consequence of the termination of the other person's employment; and

(b) it is received no later than 12 months after the termination (but see subsection (4)); and

(c) it is not a payment mentioned in section 82-135 of the ITAA 1997.

Therefore, it can be seen that a number of conditions need to be satisfied in order for the payment to be treated as an employment termination payment.

Failure to satisfy any of the conditions will result in the payment not being considered an employment termination payment.

The payment must be received no later than 12 months after termination of employment

To qualify as an employment termination payment, the payment must be received no later than 12 months after the termination of the taxpayer's employment (paragraph 82-130(1)(b) of the ITAA 1997). This is referred to as the 12 month rule.

As noted in the facts, your client's employment with their overseas employer was terminated over 20 years ago and your client received the lump sum payment in the 2009-10 income year - more than 12 months after the termination of their employment. Therefore, this condition has not been satisfied.

Other Requirements under subsection 82-130(1) of the ITAA 1997

As noted earlier, all the requirements under subsection 82-130(1) of the ITAA 1997 must be met in order for a payment to qualify as employment termination payment. As the requirement under paragraph 82-130(1)(c) of the ITAA 1997 has not been met, it is not necessary to examine whether the remaining requirements under subsection 82-130(1) have been satisfied.

Therefore, the lump sum payment is not an employment termination payment for the purposes of subsection 82-130(1) of the ITAA 1997.

Issue 2

Summary

The lump sum payment and pension which your client received overseas are not exempt from tax in Australia.

In addition, a convention provides that pensions and annuities paid to a resident of Australia shall be taxable only in Australia.

Therefore, the pension received by your client is included in their assessable income are assessable in Australia and forms part of their statutory income.

Detailed reasoning

Section 6-10 of the ITAA 1997 provides that the assessable income of a resident taxpayer includes statutory income amounts which are not ordinary income but are included in assessable income by another provision.

The assessable income of an Australian resident, includes statutory income from all sources, whether in or out of Australia (subsection 6-10(4) of the ITAA 1997).

Section 10-5 of the ITAA 1997 lists the provisions about assessable income. 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.

Section 6-15 of ITAA 1997 provides that if an amount is exempt income, it will be excluded from assessable income. Section 6-20 of the ITAA 1997 specifies that an amount of ordinary income is exempt income if it is made exempt from income tax by a provision of the ITAA 1997 of another Commonwealth law.

The lump sum payment and pension your client received from overseas is not an exempt payment. Therefore the lump sum payment and service pension income is not exempt from tax in Australia.

In determining liability to Australian tax of foreign sourced income received by a 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).

In this case, the relevant convention provides that pensions and annuities paid to a resident of Australia shall be taxable only in Australia.

Therefore, the pension received by your client is included in your assessable income under section 27H of the ITAA 1936, and forms part of your client's statutory income under subsection 6-10(4) of the ITAA 1997.

Hence, the lump sum payment and service pension your client has received from their overseas employer is assessable in Australia under section 6-10 of the ITAA 1997.