Edited version of private ruling

Authorisation Number: 1011698353699

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Ruling

Subject: Residency, foreign employment income and lump sum payment from foreign superannuation fund

Question 1

Are you a resident of Australia for tax purposes while working overseas?

Answer

Yes.

Question 2

Is your foreign salary and wage income earned overseas whilst employed by the international organisation taxable in Australia?

Answer

No.

Question 3

Are your savings accumulated while in the overseas country taxable when repatriating to Australia (i.e. lump sum)?

Answer

No.

Question 4

Will subdivision 305-B of the Income Tax Assessment Act 1997 (ITAA 1997) apply to the lump sum payment you will receive from the overseas pension plan?

Answer

Yes.

Question 5

Is the interest earned on your savings/pension fund taxable when repatriating it to Australia?

Answer

Yes.

This ruling applies for the following periods:

Year ending 30 June 2011

Year ending 30 June 2012

Year ending 30 June 2013

The scheme commences on:

1 November 2010

The scheme that is the subject of the ruling:

You are an Australian Commonwealth Government employee.

You have been seconded to an international organisation as an Advisor to an Executive Director. The period of employment is two years without extension.

You will be on leave without pay (LWOP) during this time.

During the time you are employed by the international organisation on Australian Government business, you are travelling on an Australian Official passport.

You carry out your work in capital city of the foreign country.

Your annual salary is tax exempt in the foreign country.

You will have the appropriate visa which is granted to the employees of international organisations

You are being paid an amount net of taxes.

If your remuneration under this contract is subject to income tax, you can apply for an allowance to compensate you for the necessity to pay the tax.

As per the letter provided from the international organisation, you were offered benefits and entitlements available to regular staff of the international organisation, with the exception of the staff retirement plan. You have the option of deferring an election to join the pension plan or may elect not to participate in the plan. If you elect to participate in the plan of your previous employer, the international organisation will pay your previous employer's, regular contribution towards the continued participation of such plan.

The letter says as an advisor to the Executive Director, you are subject to present and future administrative regulations for the governance of such staff.

If you were to sign up to the pension plan while abroad, the international organisation would pay out a lump sum figure after two years made up of employee and employer contributions as well as interest.

You state the international agreement on remuneration for employees of the international organisation is that the salary is tax exempt.

While in Australia you contributed to your employer's superannuation fund which is a fund separate to the Commonwealth Public Service.

You do not own property in the foreign country and are leasing a house whilst in the foreign country. You own a property in Australia.

Relevant legislative provisions

Section 6-5 of the Income Tax Assessment Act 1997

Section 995-1 of the Income Tax Assessment Act 1997

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

Subsection 6(1) of the Income Tax Assessment Act 1936

Subsection 6-5(2) of the Income Tax Assessment Act 1997

Section 23AG of the Income Tax Assessment Act 1936

International Tax Agreements Act 1953

Section 6-20 of the Income Tax Assessment Act 1997

International Organisations (Privileges and Immunities) Act 1963 IO(PI)1963

Subsection 295-95(2) of the Income Tax Assessment Act 1997

Subdivision 305-B of the Income Tax Assessment Act 1997

Section 305-65 of the Income Tax Assessment Act 1997

Section 305-70 of the Income Tax Assessment Act 1997

Subsection 305-75(2) of the Income Tax Assessment Act 1997

Subsection 305-75(3) of the Income Tax Assessment Act 1997

Section 960-50 of the Income Tax Assessment Act 1997

Subsection 960-50(4) of the Income Tax Assessment Act 1997

Subsection 960-50(6) of the Income Tax Assessment Act 1997

Paragraph 6(1)(d) of the International Organisations (Privileges and Immunities) Act 1963

Fourth Schedule, Part I, Paragraph 2 of the International Organisations (Privileges and Immunities) Act 1963

Specialised Agencies (Privileges and Immunities) Regulations 1986 Schedule

Explanation: (This does not form part of the notice of private ruling)

Question 1

Are you a resident of Australia for tax purposes while working overseas?

Detailed reasoning

We need to consider your residency status for Australian income tax purposes in order to determine whether your income will be assessable in Australia.

Section 6-5 of the ITAA 1997 provides that where you are a resident of Australia for taxation purposes, your assessable income includes income gained from all sources, whether in or out of Australia. However, where you are a non-resident of Australia for taxation purposes, your assessable income includes only income derived from an Australian source.

An Australian resident is defined in section 995-1 of the ITAA 1997 to be a person who is a resident of Australia for the purposes of the Income Tax Assessment Act 1936 (ITAA 1936).

The terms 'resident' and 'resident of Australia', in regard to an individual, are defined in subsection 6(1) of the ITAA 1936. The definition provides four tests to ascertain whether a taxpayer is a resident of Australia for income tax purposes. These tests are:

1. The resides test.

2. The domicile test.

3. The 183 day test.

4. The Superannuation test.

The primary test for deciding the residency status of an individual is whether the individual resides in Australia according to the ordinary meaning of the word resides. However, where an individual does not reside in Australia according to ordinary concepts, they may still be considered to be a resident of Australia for tax purposes if they satisfy the conditions of one of the other three tests.

Income Tax Ruling IT 2650 contains guidelines for determining whether individuals who leave Australia temporarily to live overseas (for example, on temporary overseas work assignments) cease to be Australian residents for income tax purposes during their overseas stay.

IT 2650 focuses on the first two tests mentioned above (ie. residence according to ordinary concepts and permanent place of abode tests), being the tests most widely applicable to persons who ordinarily reside in Australia but who leave Australia temporarily and are not actually living in Australia during the year of income.

The resides test

The ordinary meaning of the word 'reside', according to The Macquarie Dictionary, 2001, rev. 3rd edn, The Macquarie Library Pty Ltd, NSW is to dwell permanently, or for a considerable time, to have one's settled or usual abode, to live in or at a particular place.

As you will be living and working overseas for a number of years, you are not considered to be residing in Australia.

Consequently, it is necessary to consider the other three tests in determining your residency status. This is because even if a person is found not to 'reside' in Australia within the ordinary meaning of the word, he or she may still fall within the extended definition of 'resident'.

The domicile test

If a person is considered to have their domicile in Australia they will be considered an Australian resident unless the Commissioner is satisfied they have a permanent place of abode outside of Australia.

The primary common law rule is that a person acquires at birth a domicile of origin, being the country of his or her father's permanent home. A person retains the domicile of origin unless and until he or she acquires domicile of choice in another country, or until he or she acquires another domicile by operation of law. The intention that a person must have in order to acquire a domicile of choice in a country is the intention to make his or her home indefinitely in that country eg. through having obtained a migration visa.

In determining a person's domicile for the purposes of the definition of 'resident', it is necessary to consider the person's intention as to the country in which he or she is to make his or her home indefinitely. Thus, a person with an Australian domicile but living outside Australia will retain that domicile if he or she intends to return to Australia on a clearly foreseen and reasonably anticipated contingency eg., the end of his or her employment.

Generally speaking, persons leaving Australia temporarily would be considered to have maintained their Australian domicile unless it is established that they have acquired a different domicile of choice or by operation of law.

In your case, you will be working overseas for two years. There is no evidence of an intention to make your home indefinitely in the overseas country. Your employment contract with the international organisation is for a fixed term of two years without extension and you intend to return to Australia after such time. Therefore, you are considered to have maintained your Australian domicile.

Permanent Place of Abode

Having established that a person has his or her domicile in Australia, the definition of 'resident' requires the Commissioner to be satisfied that the person's 'permanent place of abode' is not outside Australia.

The expression 'place of abode' refers to a person's residence, where one lives with one's family and sleeps at night. In essence, a person's 'place of abode is that person's dwelling place or the physical surroundings in which a person lives.

A person's permanent place of abode cannot be ascertained by the application of any hard and fast rules. It is a question of fact to be determined in the light of all the circumstances of each case. Income Tax Ruling IT 2650 states that the following factors are considered to be relevant by the Tax Office in reaching a state of satisfaction as to a taxpayer's permanent place of abode:

(a) the intended and actual length of the individual's stay in the country overseas; 

(b) any intention either to return to Australia at some definite point in time or to travel to another country; 

(c) the establishment of a home outside Australia; 

(d) the abandonment of any residence or place of abode the individual may have had in Australia; 

(e) the duration and continuity of the individual's presence in the country overseas; 

(f) the durability of association that the individual has with a particular place in Australia.

IT 2650 makes the point that the weight given to each factor will vary with the individual circumstances of each case and no single factor is conclusive.

With regards to the actual duration of a person's stay overseas, a stay of more than 2 years would not be considered as being of a transitory nature and would point towards the establishment of a permanent home overseas. However, IT 2650 stresses that the duration of a taxpayer's stay overseas is not in itself conclusive and must be considered in conjunction with the factors listed at paragraph 23.

With specific regards to living arrangements and permanent place of abode, IT 2650 states, at paragraph 28:

The fact that an individual has established his or her home (in the sense of a dwelling place; a house or other shelter that is the fixed residence of a person; family or household) in an overseas country would tend to show that the place of abode in the overseas country is permanent. Acquisition of a home in the overseas country would be a very relevant though not conclusive factor. On the other hand, individuals or a family group who "make do" in temporary accommodation with limited resources and facilities such as in barracks, singles' quarters, aboard ships, oil rigs, or mining towns, will be less likely to be considered to have established a permanent place of abode overseas.

Application to your circumstances

In your case, we considered the following factors to determine if you meet the domicile test:

- although the actual length of your stay was substantial, your intention was to return to Australia to live at the conclusion of your foreign service in the overseas country. It is accepted that you maintained your Australian domicile throughout your period of overseas employment.

- your stay in the overseas country was for 2 years. However, considering the other factors outlined in IT 2650, the length of your stay alone is not sufficient to say that you established a permanent place of abode in that overseas country.

- you did not set up a permanent home in the overseas country as you were leasing a house in that country. As described in IT 2650, this type of living arrangement is considered to be temporary in nature and is indicative of a person not establishing a permanent place of abode overseas.

- You owned residential property in Australia prior to leaving for the overseas country and maintain ownership of this property.

These factors indicate that you did not establish a permanent place of abode in the overseas country.

Therefore, based on the information provided, we consider you to be an Australian resident for tax purposes in the income years whist working overseas. While your stay in the overseas country will be for two years you maintained your domicile in Australia and did not set up a permanent place of abode offshore.

As you qualify as a 'resident' of Australia under the permanent place of abode test, there is no need to consider the other two residency tests, namely the 183 days test and the Superannuation test. However, we believe that you are a resident of Australia under the superannuation test as well as you are eligible to contribute to the Commonwealth Superannuation Scheme (CSS) or the Public Sector Superannuation (PSS) scheme.

Summary

You are a resident of Australia for tax purposes while working in that international organisation.

Issue 2 Question 1

Is your foreign salary and wage income earned overseas whilst employed in the international organisation taxable in Australia?

Detailed reasoning

Generally, a person who is an Australian resident is assessable on income derived directly or indirectly from all sources, whether in or out of Australia (subsection 6-5(2) of the ITAA 1997).

Section 6-20 of the ITAA 1997 provides that an amount of ordinary income is exempt income if it is made exempt from income tax by a provision of the ITAA 1997 or another Commonwealth law.

Subsection 6-15(2) of the ITAA 1997 provides that if an amount is exempt income then it is not assessable income.

Where a resident of Australia derives income from sources in another country, the relevant Double Tax Agreement will specify which country has a taxing right to the income. Australia has a Double Tax Agreement with the overseas country. The provisions of that agreement as they relate to the facts of your case are discussed below.

Double Tax Agreement between Australia and the overseas country

Article ABC of the overseas country Double Tax Agreement provides that remuneration paid in respect of labour or personal services performed as an employee of a government (including a State or local government) of Australia in the discharge of governmental functions to a citizen of Australia will be taxable only in Australia. The remuneration is exempt from tax in the overseas country.

You were employed by the Australian government and were sent to the overseas country, and the duties that you performed were in the discharge of governmental functions. Article ABC therefore applies in your case. As you are not a foreign country's national and it has been determined that you were not a permanent resident of that foreign country, Australia has the sole taxing right to your remuneration (salary/wages) derived when you were in the foreign country.

Assessability of income from the international organisation

Salary received by a person who holds an office in a specified international organisation may be exempt from Australian income tax pursuant to regulations made under the International Organisations (Privileges and Immunities)Act 1963 (IO(P&I)A).

The international organisation in your case is specified as an international organisation to which the IO (P&I) A applies.

Taxation Determination TD 92/153 provides that the phrase 'person who holds an office' in relation to a prescribed international organisation includes those people who work as employees for that organisation. The phrase does not include experts or consultants.

The privileges and immunities of officers (other than high officers) of such international organisations are specified in Part 1 of the Fourth Schedule of the IO (P&I) A. Paragraph 2 of Part 1 of the Fourth Schedule (IO(P&I)A) provides that salaries received from the organisation are exempt from taxation in Australia.

The Commissioner's guidelines as to the assessability of remuneration derived from International Organisations are dealt with in Taxation Ruling TR 92/14.

Paragraph 12 of TR 92/14 states that generally, Australia's policy is that experts and consultants are not exempt from tax in Australia.

Taxation Determination TD 92/153 provides information as to who is a 'person who holds an office'. The determination states that the Department of Foreign Affairs and Trade (DFAT), who administers the IO (P&I) A regulations considers that the phrase 'person who holds an office' covers those people who work as employees of the organisation.

Paragraph 3 of TD 92/153 states that if the international organisation designates a person as one who holds an office in that organisation, the Tax Office will accept in the absence of contrary evidence that this designation is sufficient evidence of the status of that person.

In your case, your employment contract states that you are engaged in a particular role reporting to a senior member of the organisation, and that you are entitled to the benefits and entitlements offered to regular staff of the fund. You are also eligible to contribute to the staff pension fund, are subject to present and future administrative regulations of such staff and you were paid an annual salary.

All these conditions of your engagement strongly suggest that you are a person who holds an office or is an employee.

Accordingly, the salary remuneration received as a holder of an office in that international organisation would be exempt from tax under the IO (P+I) A. As the income is exempt income under section 6-20 of the ITAA 1997, it is not assessable under subsection 6-5(2) of the ITAA 1997.

Section 23AG of the ITAA 1936

Section 11-15 of the ITAA 1997 lists those provisions dealing with income which may be exempt. Included in this list is section 23AG of the ITAA 1936 which deals with overseas employment income.

Section 23AG of the ITAA 1936 sets out what foreign employment income is eligible for exemption from income tax in Australia.

Your foreign employment income is not exempt from Australian tax if you did not have to pay tax in the country where you earned that income because of any of the following:

- a tax treaty with Australia or a law giving effect to a treaty agreement

- the foreign country does not impose tax on employment or personal services income

- a law of the foreign country or an international agreement to which Australia is a party that deals with diplomatic or consular privileges and immunities, or privileges and immunities for people connected with international organisations.

It should be noted that section 23AG of the ITAA 1936 which exempts income earned in overseas employment where an Australian resident has been engaged in foreign service for a continuous period of not less than 91 days, does not apply in your situation. This is because an amount of foreign earnings derived in a foreign country is not exempt from tax under section 23AG of the ITAA 1936 if the amount is exempt from income tax in the foreign country because of any of the reasons listed in section 23AG(2) of the ITAA 1936, one of those being because of your remuneration from employment in the foreign country was exempt from tax in the foreign country, because of a law corresponding to the International Organisations (Privileges and Immunities) Act 1963 or to the regulations under that Act;. Therefore the exclusion in paragraph 23AG (2)(e) of the ITAA 1936 will apply and the income will not be exempt income under subsection 23AG(1) of the ITAA 1936.

Summary

The salary and wage income received from the international organisation is not taxable in Australia.

Issue 2

Question 2

Are your savings accumulated while in the overseas country taxable when repatriating to Australia (i.e. lump sum)?

Detailed reasoning

As the salary that you received from that international organisation is not assessable in Australia as discussed above, the accumulated savings of income received from that international organisation when repatriating to Australia will also be tax exempt.

Summary

Savings accumulated from your salary and wage income from that international organisation when repatriating is non-taxable.

Issue 2

Question 3

Will subdivision 305-B of the ITAA 1997 apply to the lump sum payment you will receive from the international organisation's pension plan?

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 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.

However, section 305-65 of the ITAA 1997 may apply to exclude the lump sum payment, subject to certain conditions being met, where the payment is made in consequence of the termination of overseas employment. Section 305-65 states:

A superannuation lump sum you receive is not assessable income and is not exempt income if:

(a) you receive it in consequence of:

(i) the termination of your employment as an employee, or as the holder of an office, in a foreign country; or

(ii) the termination of your engagement on qualifying service on an approved project (within the meaning of section 23AF of the Income Tax Assessment Act 1936), in relation to a foreign country; and

(b) it relates only to the period of that employment, holding of office, or engagement; and

(c) you were an Australian resident during the period of the employment, holding of office or engagement; and

(d) you receive the lump sum within 6 months after the termination; and

(e) the lump sum is not exempt from taxation under the law of the foreign country; and

(f) for a period of employment or holding an office - your foreign earnings from the employment or office are exempt from income tax under section 23AG of the Income Tax Assessment Act 1936; and

(g) for a period of engagement on qualifying service on an approved project - your eligible foreign remuneration from the service is exempt from income tax under section 23AF of that Act

Subsection 305-65(f) of the ITAA 1997 requires that for the period of employment or holding of an office, ones foreign earnings from that employment or office be exempt from income tax under section 23AG of the ITAA 1936.

Section 23AG of the ITAA 1936 effectively operates to exempt foreign earnings derived from certain activities by an Australian resident taxpayer from at least 91 days of continuous employment in a foreign country. However, from 1 July 2009 the scope of the exemption under section 23AG is substantially restricted by the operation of subsection 23AG(1AA).

Subsection 23AG(1AA) of the ITAA 1936 states:

However, those foreign earnings are not exempt from tax under this section unless the continuous period of foreign service is directly attributable to any of the following:

(a) the delivery of Australian official development assistance by the person's employer;

(b) the activities of the person's employer in operating a public fund covered by item 9.1.1 or 9.1.2 of the table in subsection 30-80(1) of the Income Tax Assessment Act 1997 (international affairs deductible gift recipients);

(c) the activities of the person's employer, if the employer is exempt from income tax because of paragraph 50-50(c) or (d) of the Income Tax Assessment Act 1997 (prescribed institutions located or pursuing objectives outside Australia);

(d) the person's deployment outside Australia as a member of a disciplined force by:

(i) the Commonwealth, a State or a Territory; or

(ii) an authority of the Commonwealth, a State or a Territory;

(e) an activity of a kind specified in the regulations.

In this case you are an employee of an international organisation. Employment with that international organisation does not fall within the activities listed under subsection 23AG(1AA) of the ITAA 1936. Therefore the exemption provided under section 23AG would not apply to the salary you will receive from that international organisation.

On the other hand, salary received by a person who holds an office in an international organisation which is a specialized agency may be exempt from Australian income tax under paragraph 6(1)(d) of the International Organisations (Privileges and Immunities) Act 1963 (IO(P&I)A) and paragraph 2 of Part I of the Fourth Schedule to the IO(P&I)A. Taxation Determination TD 92/153 provides that the phrase 'person who holds an office' in relation to a prescribed international organisation includes those people who work as employees for that organisation.

The international organisation you work for is designated as a specialized agency to which the IO(P&I)A applies (item 5 of column 2 of the table in the Schedule to the Specialised Agencies (Privileges and Immunities) Regulations 1986).

Therefore, your foreign earnings are specifically exempt from Australian tax under the IO(P&I)A. Hence, the payments are not exempt under section 23AG of the ITAA 1936 and the condition under subsection 305-65(f) of the ITAA 1997 is not satisfied.

As mentioned earlier, the 'applicable fund earnings' is the amount worked out under either subsections 305-75(2) or 305-75(3) of the ITAA 1997. As you are an Australian resident and presumably will remain so at all times during the period to which the lump sum relates, then subsections 305-75(2) will apply.

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 of the ITAA 1997 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) 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.

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:

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

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

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

(i) the total market value of the funds assets attributable to superannuation interests held by active members; or

(ii) 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 lump sum benefit will be paid by the Fund. It is evident that the Fund, which is established in the overseas country, 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, where a person receives their lump sum benefits more than six months after the termination of their foreign employment or where section 305-60 of the ITAA 1997 does not apply, 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(2) of the ITAA 1997 because you will be an Australian resident at all times. 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

Subsection 960-50(1) of the ITAA 1997 states that an amount in a foreign currency is to be translated into AUD. The applicable fund earnings is the result of a calculation from two other amounts, and subsection 960-50(4) requires that when applying section 960-50 to amounts that are elements in the calculation of another amount you need to:

(a) first, translate any amounts that are elements in the calculation of other amounts (except special accrual amounts); and

(b) 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.

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)); and

· deducting from this amount the Australian dollars equivalent of the contributions made by you or in respect of you at the exchange rate applicable when the contributions are made (item 11A of the table in subsection 960-50(6)).

Summary

A portion of the lump sum paid by the international organisation in the overseas country is assessable as 'applicable fund earnings'. The applicable fund earnings represent the increase or growth in the Pension Fund during the period you are a member of the Pension Fund.

The applicable fund earnings is calculated by translating the lump sum payment received from the Pension Fund at the exchange rate applicable on the day of receipt into Australian dollars (AUD), and deducting from this amount the AUD equivalent of the contributions made by you or in respect of you at the exchange rate applicable on the days the contributions were made.

The applicable fund earnings is the assessable amount to be specified in your income tax return in the year you will receive the payment and will be subject to your marginal rate of tax.

The remainder of the retirement lump sum is not assessable income and is not exempt income. As such, this amount is tax-free.

Issue 2

Question 4

Is the interest earned on your savings/pension fund taxable when repatriating it to Australia?

Detailed reasoning

Article UV(1) of the applicable Convention provides that interest from sources in the overseas country, to which a resident of Australia is beneficially entitled, may be taxed in Australia.

Article UV(2) of the applicable Convention provides that interest income may also be taxed in the overseas country. However, the tax shall not exceed 10 per cent of the gross amount of the interest.

Article YZ(2) of the applicable Convention provides that a credit against Australian tax for tax paid in the overseas country shall be allowed (in accordance with the law of Australia) where tax has been paid under the overseas country's law and in accordance with the overseas country's Convention.

Subsection 160AF(1) of the ITAA 1936 provides that where the assessable income of a resident contains foreign sourced income and foreign tax has been paid on that income, a foreign tax credit will be allowed. The foreign tax credit allowed against Australian income tax is the lesser of:

· the amount of that foreign tax paid, reduced in accordance with any relief available to the taxpayer under the law relating to that tax, or

· the amount of Australian tax payable in respect of the foreign income.

Therefore, the interest income of an Australian resident derived from the overseas country will form part of their assessable income under subsection 6-5(2) of the ITAA 1997. If tax was paid in relation to this interest income, a foreign tax credit will be allowed.

If the tax payable in the overseas country is less than the Australian tax that will be payable then the taxpayer will be entitled to a full credit for the tax paid in the overseas country. Where tax paid in the overseas country is greater than the Australian tax payable, the taxpayer is only entitled to a credit equal to the value of the Australian tax payable and cannot recover any excess overseas tax paid. However, under section 160AFE of the ITAA 1936, any excess foreign tax credit can be carried forward for a maximum of five years for application against any future tax payable on the taxpayer's foreign income of the same class.

Summary

The interest earned on your savings/pension fund when repatriating to Australia is taxable.