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Authorisation Number: 1011717373535

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Ruling

Subject: Foreign superannuation fund payment and foreign income tax offset

Issue 1

Question 1

Is the registered retirement savings plan established in the particular overseas country a 'foreign superannuation fund' as defined in subsection 995-1(1) and subsection 295-95(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

Is any part of the lump sum payment from the overseas retirement savings plan applicable fund earnings and therefore assessable under subsection 305-70 of the ITAA 1997?

Answer

Yes

This ruling applies for the following period:

Year ending 30 June 2010

The scheme commences on:

1 July 2009

Issue 2

Question 1

Are you entitled to claim a foreign income tax offset for tax paid in the overseas country?

Answer

Yes

This ruling applies for the following period:

Year ending 30 June 2010

The scheme commences on:

1 July 2009

You were employed in the overseas country for a number of years.

During that period, you received a redundancy payment from your former employer which you were required to put into a registered retirement savings plan (overseas plan) in the overseas country.

For the period specified in the particular policy with the overseas plan, the monies held in the overseas plan could not be withdrawn, commuted or surrendered earlier except due to ill-health retirement (as certified by a physician under the law of the overseas country) or death.

The monies including investment earnings could be transferred to another registered retirement savings plan as specified in the policy.

You became an Australian resident for tax purposes some years later.

No amounts were transferred into the overseas plan from any other foreign superannuation fund since you became an Australian resident.

You state a particular amount as the value of your account balance on the day before you became a resident.

You received a payment of the redemption amount from the overseas plan in the 2009-10 income year.

An amount of tax was withheld from that payment by the overseas plan.

You state the redemption amount was deposited into your Australian financial institution account.

There is a tax treaty between Australia and the particular overseas country.

Relevant legislative provisions

Subsection 6-10(2) of the Income Tax Assessment Act 1997

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

Subsection 305-60 of the Income Tax Assessment Act 1997

Section 305-70 of the Income Tax Assessment Act 1997

Subsection 305-70(1) of the Income Tax Assessment Act 1997

Section 305-75 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

Subsection 305-75 (5) of the Income Tax Assessment Act 1997

Subsection 305-75 (6) of the Income Tax Assessment Act 1997

Subsection 306-70 of the Income Tax Assessment Act 1997

Subsection 960-50(1) 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

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

Section 10 of the Superannuation Industry (Supervision) Act 1993

Section19 of the Superannuation Industry (Supervision) Act 1993

Section 62 of the Superannuation Industry (Supervision) Act 1993

International Tax Agreements Act 1953

Summary

A portion of the lump sum payment from the overseas plan will be assessable as 'applicable fund earnings'. The 'applicable fund earnings' represents the increase or growth in the foreign fund during the period you were a resident of Australia.

The 'applicable fund earnings' is calculated by translating the amount received from the foreign 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 amount vested in the foreign fund on the day just before you first became an Australian resident at the exchange rate applicable on that day.

Issue 1 Question 1

Detailed reasoning

Lump sum payments 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 subsection 305-70(1) of the Income Tax Assessment Act 1997 (ITAA 1997). The applicable fund earnings is subject to tax at the person's marginal rate. The remainder of the lump sum payment is not assessable income and is not exempt income.

The applicable fund earnings is the amount worked under either subsection

305-75(2) or (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 subsection 305-70(2) 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 subsection 305-70(2) 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 fund's 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 Australian would qualify as a foreign superannuation fund. 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 same 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;

Provident, benefit, superannuation or retirement fund

The High Court examined both the terms superannuation fund and fund in Scott v Commissioner of Taxation of the Commonwealth (No. 2) (1966) 10 AITR 290; (1966) 40 ALJR 265; (1966) 14 ATD 333 (Scott). In that case, Justice Windeyer stated:

…I have come to the conclusion that there is no essential single attribute of a superannuation fund established for the benefit of employees except that it must be a fund bona fide devoted as its sole purpose to providing for employees who are participants money benefits (or benefits having a monetary value) upon their reaching a prescribed age. In this connexion "fund", I take it, ordinarily means money (or investments) set aside and invested, the surplus income therefrom being capitalised. I do not put this forward as a definition, but rather as a general description.

The issue of what constitutes a provident, benefit, superannuation or retirement fund was discussed by the Full Bench of the High Court in Mahony v Commissioner of Taxation (Cth) (1967) 41 ALJR 232; (1967) 14 ATD 519 (Mahony). In that case, Justice Kitto held that a fund had to be exclusively be a 'provident, benefit or superannuation fund' and that 'connoted a purpose narrower than the purpose of conferring benefits in a completely general sense…". This narrower purpose meant that the benefits had to be 'characterised by some specific future purpose' such as the example given by Justice Kitto of a funeral benefit.

Furthermore, Justice Kitto's judgement indicated that a fund does not satisfy any of the three provisions, that is, 'provident, benefit or superannuation fund', if there exist provisions for the payment of benefits 'for any other reason whatsoever'. In other words, though a fund may contain provisions for retirement purposes, it could not be accepted as a superannuation fund if it contained provisions that benefits could be paid in circumstances other than those relating to retirement.

In section 62 of the SIS Act, a regulated superannuation fund must be 'maintained solely' for the 'core purposes' of providing benefits to a member when the events occur:

(i) on or after retirement from gainful employment; or

(ii) attaining a prescribed age; and

(iii) on the member's death. (this may require the benefits being passed on to a member's dependants or legal representative).

Though section 62 of the SIS Act also allows a superannuation fund to provide benefits for 'ancillary purposes', such as, benefits paid on the termination of employment in the event of ill-health and benefits for dependants following the death of a member after retirement or attaining the prescribed age, it should be noted that they do not extend to general or non-retirement purposes such as education, home purchases or medical expenses et cetera.

Notwithstanding the SIS Act applies only to 'regulated superannuation funds', as defined in section 19 of the SIS Act, and foreign superannuation funds do not qualify as regulated superannuation funds, as they are established and operate outside Australia, the Commissioner views the SIS Act (and its regulations) as providing guidance as to what 'benefit' or 'specific future purpose', a superannuation fund should provide.

In view of the legislation and the decisions made in Scott and Mahony, the Commissioner's view is that for a fund to be classified as a superannuation fund, it must exclusively provide a narrow range of benefits that are characterised by some specific future purpose. That is, the payment of superannuation benefits upon retirement, invalidity or death of the individual or as specified under the SIS Act.

Therefore, notwithstanding the fact that a foreign superannuation fund may possess some features for the provision of funds in retirement, the Commissioner considers such a fund as not being a superannuation fund for Australian tax purposes if the fund:

(i) can also be used as a savings plan for non-retirement purposes; and/or

(ii) contains provisions for pre-retirement withdrawals for general non-retirement purposes such as housing, education and medical expenses et cetera.

Retirement savings plan

There are retirement savings plan registered under the provisions of the particular overseas country (overseas retirement savings plans). Any income earned is usually exempt from tax for the period the funds remain in the plan.

A plan participant may make contributions to the particular overseas retirement savings plan up until the year in which the plan participant turns a particular age. A deduction up to prescribed limits may be claimed under the income tax law of the overseas country.

Partial withdrawals from the overseas retirement savings plan may be made at any time. However, the withdrawal is usually subject to income tax in the year in which the withdrawal is made.

Withdrawals up to certain prescribed limits may be made from the overseas retirement savings plan to participate in other particular savings plans of the overseas country which are not subject to income tax of the particular overseas country.

These other particular savings plans allow a plan participant to withdraw up to certain prescribed limits for non-retirement purposes. Amounts withdrawn under these plans must be repaid to the particular plan within a certain timeframe. Any amount that is not repaid will be subject to income tax of the overseas country in the year in which the amount was due.

In order for the overseas retirement savings plan to be considered a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997 it must also satisfy the requirements set out in subsection 295-95(2) of the ITAA 1997. This means that it should not be an Australian superannuation fund as defined in that subsection.

The overseas plan must also satisfy section 10 of the SIS Act. As noted earlier, it must be a provident, benefit, superannuation or retirement fund.

Although some of the requirements are met (such as being established outside of Australian and central management and control being outside of Australia), the requirement that an overseas retirement savings plan be a provident, benefit, superannuation or retirement fund is not met.

The reason for this is that, apart from permitting withdrawals (subject to prescribed limits) to allow participation in other savings plan under the income tax law of the overseas country, the overseas plan permit withdrawals at any time.

In other words the overseas retirement savings plan provides for the payment of benefits 'for any other reason whatsoever' and not solely (that is, exclusively) for retirement purposes.

Therefore, the overseas retirement savings plan is not a foreign superannuation fund for the purposes of the ITAA 1997. Consequently, section 305-70 of the ITAA 1997 would not apply to any lump sum payment made from the overseas retirement savings plan.

Locked-in Retirement Savings Plans

Certain overseas retirement savings plans are established by the transfer of locked-in pension fund assets from other registered pension plans or locked-in retirement savings or income plans.

Under the pension laws of the particular overseas country, and after a period of time after joining the plan, all monies in the plan becomes fully vested in the plan participant.

This means that, while the plan participant owns all the money in the plan, the plan participant can only access the funds under predetermined circumstances (for example) when the plan participant reaches retirement age.

If the plan participant was a member of a locked-in retirement savings plan, the participant terminated employment, and the participant's plan was fully vested, the proceeds of that plan are considered 'locked-in'. These locked-in funds can only be transferred into certain particular 'Locked-in Plans'.

In order for a locked-in retirement savings plan to be considered a foreign superannuation fund it must satisfy the requirements set out in subsection 295-95(2) of the ITAA 1997, that is, it must not be an Australian superannuation fund but must be a provident, benefit, superannuation or retirement fund. The particular overseas plan in question meets these requirements and is established outside of Australia. Similarly, the central management and control is outside of Australia.

As noted above, unlike the overseas retirement savings plans that permit withdrawals of benefits at any time which are not solely (that is exclusively) for retirement purposes, the funds in the locked-in retirement savings plan are 'locked-in' and can only be used to accumulate retirement income.

It is apparent that the particular overseas plan in question does not permit withdrawals for such non-retirement purposes. Withdrawals from the particular overseas plan are not permitted until the plan participant reaches the minimum retirement age as prescribed in the policy.

As the particular overseas fund is established outside Australia and has it central management and control outside Australia, it qualifies as a foreign superannuation fund. Consequently, section 305-70 of the ITAA 1997 will apply to the benefits from the particular overseas plan.

Issue 1 Question 2

Detailed reasoning

Lump sum payment(s) from an overseas superannuation fund

You received a redundancy payment which you were required to put into the particular overseas retirement savings plan. You became a resident of Australia for tax purposes some years later on a particular day (the residency date) and the lump sum payment (LSP) from the overseas retirement savings plan was made to you on a particular day during the 2009-10 income year which was more than 6 months after you became an Australian resident. Therefore the exemption under section 305-60 of the ITAA 1997 will not apply.

A portion of the LSP will be assessable under subsection 305-70(2) of the ITAA 1997. This effectively means that you will be assessed only on the income earned in the overseas plan while you were a resident of Australia. That is, you are only assessed on the accretion in the overseas plan less any contributions made since you became a resident of Australia.

The amount included as assessable income, and taxed at marginal rates of tax, is worked out under subsection 305-75(3) of the ITAA 1997 because you were not an Australian resident at all times during the period to which the lump sum payment relates.

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

If you become an Australian resident after the start of 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 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 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 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 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).

Subsection 305-75(5) defines previously exempt fund earnings as follows:

You have an amount of previously exempt fund earnings in respect of the lump sum if:

(a) part or all of the amount in the fund that was vested in you when the lump sum was paid (before any deduction for foreign tax) is attributable to the amount; and

(b) the amount is attributable to a payment received from a foreign superannuation fund; and

(c) the amount would have been included in your assessable income under subsection 305-70(2) by the application of this section, but for the payment having been received by another foreign superannuation fund.

Subsection 305-75(6) states:

The amount of your previously exempt fund earnings is the amount mentioned in paragraph (5)(c) (disregarding the addition of previously exempt fund earnings under subsection (2) or (3) of this section).

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 (AUD). The applicable fund earnings is the result of a calculation from two other amounts and subsection 960-50(4) states 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 to 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 7 which relates to an amount of statutory income

· 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 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.

Statutory income is defined in subsection 6-10(2) of the ITAA 1997 as 'amounts that are not ordinary income, but are included in your assessable income by provisions about assessable income'.

Item 7 deals with the translation of an amount of statutory income. The statutory income under consideration is represented by the difference between the lump sum on the day of payment and the amount vested on residency. Each of these two amounts is a separate element in the calculation of another amount (statutory income) and requires translation prior to calculating that other amount as stated above.

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 payment you finally receive 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 into AUD at the exchange rate applicable at the time of receipt.

When the amount in the foreign fund that was vested in you just before becoming a resident of Australia (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.

Regulation 960-50.01 of the Income Tax Assessment Regulations 1997 (ITAR) 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, and for which none of the other items apply. Consequently the vested amount is translated into AUD 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 amount received from the foreign fund at the exchange rate applicable on the day of receipt to AUD (item 11 of the table to subsection 960-50(6)) and deducting from this amount the AUD equivalent of the amount vested in the fund at the exchange rate applicable just before the day you first became an Australian resident (item 11A of the table to subsection 960-50(6)).

Calculation of the assessable amount of the payment from foreign superannuation fund

· The total of the amounts mentioned in paragraph 305-75 (3)(a) of the ITAA 1997 will equal the value of your benefit in the foreign fund on the day before you became an Australian resident.

· The amount vested in you when the lump sum was paid by the foreign fund (as per paragraph 305-75(3)(b) of the ITAA 1997) will equal the value of the lump sum benefit paid to you on the day you received the lump sum.

Paragraphs 305-75(3)(b) and 305-75(3)(c) of the ITAA 1997 require:

· the total amount of paragraph 305-75(3)(a) be subtracted from the total amount of the lump sum that was vested in you when the lump sum was paid (before any deduction for *foreign tax) and

· that amount is then multiplied by the proportion of the total days during the period when you were an Australian resident; and

· the total of all previously exempt fund earnings (if any) is then added to that amount

In your case, there are no previously exempt fund earnings in relation to the lump sum. The 'period to which the lump sum relates' for the purposes of subsection 305-75(3) of the ITAA 1997 is the period your monies were held in the overseas plan.

However, 'the period' for the purposes of paragraph 305-75(3)(c) of the ITAA 1997 is from the residency date to the day you received the lump sum. As you were a resident for the whole of that period, the Australian resident days and the total days are the same, and so the proportion to be used in the calculation is 1.

As noted previously, the amount of the lump sum payment from the foreign fund on the day you received the lump sum is translated into AUD at the exchange rate applicable at the time the payment was made. The exchange rate applicable on this day is not available as it was a Sunday. Therefore the exchange rate on the next working will be used. Hence the foreign lump sum payment amount as converted to AUD is used in the calculation.

Therefore the value for the purposes of paragraph 305-75(3)(b) of the ITAA 1997 is this converted AUD amount.

The amount in the foreign fund that was vested in you when you first became a resident, is translated into AUD at the exchange rate applicable on the day just before the day you became an Australian resident.

The exchange rate applicable on this day is not available as this was a Sunday. Therefore the exchange rate on the next working day will be used.

Hence the vested amount converted to AUD is used in the calculation.

Based on the above, subtracting the AUD equivalent of the vested amount from the AUD equivalent of the lump sum payment produces the result, which, in accordance with section 305-70 of the ITAA 1997, is the applicable fund earnings amount that is to be included in your assessable income for the 2009-10 income year.

Issue 2 Question 1

Reasons for decision

Detailed reasoning

Foreign income tax offset (FITO)

In determining liability to Australian tax on foreign source income 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).

The particular Schedule to the Agreements Act contains the tax treaty between Australia and the particular overseas country.

The relevant article in the particular Schedule provides that, subject to the provisions of the law of Australia, a credit for any tax paid in the particular overseas country will be allowed against Australian tax paid on income from the overseas country.

Under the Foreign Income Tax Offset (FITO) rules where your total foreign income tax paid is less than or equal to $1,000, you are not required to calculate the FITO, i.e. your FITO will equal the foreign income tax paid on amounts included in your assessable income. However where the total foreign income is more than $1,000, you can choose to offset only $1,000 of foreign tax (and not formally calculate the FITO entitlement) or calculate the offset limit to determine the maximum FITO entitlement.

The FITO should also be apportioned where only part of the foreign source income is included in your assessable income.

Further information is available from the Tax Office publication Guide to foreign income tax offset rules 2009-10 on the Tax Office website.