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Ruling

Subject: Foreign Superannuation Lump Sum Payment

Question

Is any part of the lump sum payment transferred from a foreign superannuation fund to an Australian superannuation assessable as 'applicable fund earnings' under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Advice/Answers

Yes.

This ruling applies for the following period

Year ending 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts

Your client commenced employment with an overseas government from 19xx to 19xx.

Your client became an Australian resident for taxation purposes during 1991.

Under the Overseas Ordinance and their respective regulations, your client is entitled to a retirement benefit upon reaching age 55. Your client turned 55 years of age during 2010.

The Overseas Treasury is the paying authority and all benefits are paid out of the general revenue of the overseas government.

Section 4 of the Pension Benefits Ordinance, states 'there shall be charged on and paid out of the general revenue all such sums of money as may from time to time be granted by way of pension, gratuity, or other allowance in pursuance of this Ordinance.'

Section 6 of the Pension Benefits Ordinance, states 'there shall be charged on and paid out of the general revenue all sums of money as may from time to time be granted by way of pension benefits.'

No contributions were made by your client or an employer in order to obtain benefits under the Overseas Ordinances after your client became a resident of Australia.

The benefit is calculated according to a formulae relating to pensionable emoluments and length of service.

Under the Pension Benefits Ordinance your client may elect to take up to a maximum of 50% of the retirement as a lump sum with the balance payable as a pension. In the present case, your client elected to receive 50% of the retirement benefit as a lump sum and 50% as a pension.

In a document entitled Statement of Pension Benefits (Deferred Pensions) dated 30 June 2009, the following information is provided:

· Unreduced Annual Pension at date of resignation: $X

· Reduced Annual Pension finally opted for before payment: 50%

· Commuted Pension Gratuity at date of resignation: $Y

· Cumulative Pension Increase Factor approved since the date of resignation/retirement: A

· Cumulative Commuted Pension Gratuity payable: $Z

During 2009, your client received a lump sum payment of $Z.

The lump sum payment will not be taxable in the overseas country.

A document from a representative from the Pensions Division shows that the cumulative pension increase factor is B.

Assumptions

None.

Relevant legislative provisions

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

Income Tax Assessment Act 1997 Subsection 305-70.

Income Tax Assessment Act 1997 Subsection 305-70(2).

Income Tax Assessment Act 1997 Subsection 305-75.

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

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

Income Tax Assessment Act 1997 Subsection 305-75(3)(a).

Income Tax Assessment Act 1997 Subsection 305-75 (3)(b).

Income Tax Assessment Act 1997 Subsection 305-75 (3) (c).

Income Tax Assessment Act 1997 Subsection 305-75 (3)(d).

Income Tax Assessment Act 1997 Subsection 960-50(1).

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

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

Taxation Administration Act 1953 Subsection 357-110.

Summary of decision

A portion of the lump sum paid by the Pension Benefits Ordinance (the Scheme) to your client is assessable as 'applicable fund earnings'. Accordingly, the 'applicable fund earnings' is to be included in your client's income tax return for the 2009-10 income year.

Detailed reasoning

Lump sum payments from foreign superannuation funds

The amount of applicable fund earnings in relation to a lump sum payment from a foreign superannuation fund that is received or transferred more than six months after a person has become an Australian resident will be assessable under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997). The applicable fund earnings are 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 out under either subsection 305-72(2) or (3) of the ITAA 1997. Subsection 305-75(2) of the ITAA 1997 applies where the person was an Australian resident at all times during the period to which the lump sum relates. Subsection 305-75 (3) of the ITAA 1997 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) 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 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:

(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, the entity making the payment is a statutory scheme established under the relevant laws of an overseas country. It is not a 'superannuation fund' as that term is normally understood. Monies are not set aside or pooled together in a separate fund (Mahony v. Commissioner of Taxation (Cth) (1967) 41 ALJR 232; (1967) 14 ATD 519 and Scott, Associated Provident Funds Ltd & Belvidere Investments Pty Ltd v Commissioner of Taxation (Cth) [No 2] (1966) 40 ALJR 265; (1966) 14 ATD 333; [1966] LB Co's Tax Serv 80; (1966) 10 AITR 290). Benefits are paid out of the general revenue of the overseas country.

Thus the statutory scheme referred to as the Pension Benefits Ordinance (the Scheme) is not as superannuation fund and thus, not a foreign superannuation fund as defined in subsection 995-(1) of the ITAA 1997.

However, subsection 305-55(2) of the ITAA 1997 extends the application of Subdivision 305-B, which deals with the taxation of superannuation benefits from foreign superannuation funds, to payments (other than pension payments) received from a scheme for the payment of benefits in the nature of superannuation upon retirement or death, provided the scheme:

· is not and never has been, an Australian superannuation fund or a foreign superannuation fund; and

· was not established in Australia; and

· is not centrally managed or controlled in Australia.

As noted above, the Scheme is statutory scheme established under the relevant laws of the overseas country. The Scheme is set up for the express purpose of providing for the payment of benefits in the nature of superannuation upon retirement or death. Its central management and control is clearly not in Australia and it is neither an Australian superannuation fund or a foreign superannuation fund.

Therefore, Subdivision 305-B of Part 3-30 of Chapter 3 of the ITAA 1997 will apply to payments from the Scheme made to Australian residents.

Assessable Amount

Your client became a resident of Australia for tax purposes during 1991 (the residency date) and the retirement lump sum was made to your client more than 6 months after they became an Australian resident. Accordingly, a portion of the lump sum 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 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).

This calculation effectively means that your client will be assessed only on the income earned in the Scheme while they were a resident of Australia. That is, your client will only be assessed on the accretion in the Scheme 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 AUD. For the purposes of section 305-701 of the ITAA 1997, the 'applicable fund earnings' should be calculated by:

· translating the lump sum payment received from the Scheme 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 payment vested in the Scheme at the exchange rate applicable just before the residency date (item 11A of the table to subsection 960-50(6)).

Calculation of Assessable Amount

In your client's case, you have provided documentation from the Government of the overseas country which advises the commuted pension gratuity as at 2010. Based on this information the assessable amount has been calculated as of that date.

The commuted pension gratuity amount as at January 2010 is $Z. According to the documentation provided by you from the overseas Government, the total value of your client's entitlement was calculated as follows:

Step 1:

= A × [1 - B] × 14

Where:

A is the unreduced annual pension at date of resignation/retirement; and

B is the rate of reduced annual pension finally opted for before payment.

= $X × [1 - 50%] × 14

= $Y

Step 2:

Where:

D is the commuted pension gratuity at date of resignation/retirement; and

E is the cumulative pension increase factor since the date of resignation/retirement.

The $Z translated into Australian dollars at the relevant exchange rate in 2009, as determined by the Reserve Bank of Australia, is $AZ.

However, to determine the applicable fund earnings under subsection 307-75(3) of the ITAA 1997 it is necessary to know what the commuted pension gratuity at the date your client became a resident of Australia. To do this, component E of the formula at Step 2 above would need to be the cumulative pension increase factor at the date of Australian residency.

In a document from a representative from the Pensions Division of the overseas Treasury it is shown the cumulative pension increase factor at the date your client became an Australian resident was B.

Accordingly, the commuted pension gratuity at the date your client became a resident of Australia is calculate as follows:

The total of the amounts mentioned in paragraph 305-75(3)(a) of the ITAA 1997 is $W comprising:

· amount of the lump sum payment vested in your client prior to becoming an Australian resident = $W

· contributions made to the Scheme for or by your client = NIL

· amount transferred into the Scheme from any other foreign superannuation fund = NIL

The $W, translated into Australian dollars at an exchange rate on the date before the residency date, as determined by the Reserve Bank of Australia, is $AW.

Paragraph 305-73(3)(b) of the ITAA 1997 requires that the amount calculated above be subtracted from the total amount of the lump sum payment paid by the Scheme.

In your client's case:

$AZ -$AW = Applicable fund earnings

The above calculation shows that there was growth in the Scheme while your client was a resident of Australia. Accordingly, a portion of the lump sum payment received by your client from the Scheme is to be included in their income tax return for the 2009-10 income year.