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Ruling

Subject: Lump sum death benefit payment from foreign pension scheme

Question

Is a portion of the lump sum payment received from a foreign fund included in your assessable income as applicable fund earnings under section 305-70 of the Income Tax Assessment Act 1997?

Advice/Answers

Yes

This ruling applies for the following period

Year ending 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts

The Deceased was a member of a foreign fund (the Fund).

The Fund is a private sector pension fund located overseas. Benefits in the Fund are payable at normal retirement age but can be accessed in some instances earlier.

The Deceased was never a resident of Australia.

The Deceased passed away in the 2010-11 income year.

Following the death of the Deceased the Fund authorised payment to you of a discretionary lump sum.

The payment is exempt from tax overseas.

You became a resident of Australia in the 2008-09 income year.

You received the lump sum benefit is more than six months after you became an Australian resident.

The Deceased became a member of the Fund after you became a resident of Australia.

You are a permanent resident of Australia.

Relevant legislative provisions

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

Income Tax Assessment Act 1997 Section 305-70.

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

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

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

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

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 Subsection 995-1(1).

Income Tax Assessment Regulations 1997 Regulation 960-50.01.

Reasons for decision

Summary

The lump sum benefit you received from the Fund is assessable as 'applicable fund earnings'. The applicable fund earnings represents the increase or growth in Fund during the period you are a resident of Australia.

A superannuation death benefit is tax-free in Australia only when it is paid:

· by a complying Australian superannuation fund, and

· to a dependant of the deceased.

Detailed Reasoning

A death benefit payment made by a superannuation fund is tax-free in Australia only when it is paid:

· by a complying Australian superannuation fund, and

· to a dependant of the deceased.

In your case, the fund paying the death benefit is a foreign fund. Foreign funds are not regulated in Australia, and so can not be complying funds.

Consequently, the payment is not tax-free in Australia, even though it is not subject to tax overseas. Such payments are, however, taxable in Australia under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997).

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) 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.

The Fund, which was established and administered overseas, is not an Australian superannuation fund as defined in subsection 295-95(2) of the ITAA 1997. Based on the information available, 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.

You became a resident of Australia for tax purposes in the 2008-09 income year (the residency date). In the 2010-11 income year the Deceased passed away and you became entitled to the lump sum benefit from the Fund. The Fund paid you a lump sum benefit in the 2010-11 income year. The date on which you received the lump sum benefit is more than six months after you 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(2) of the ITAA 1997 because you were an Australian resident at all times to which the lump sum relates.

The calculation under this section effectively means that you will be assessed only on the increase in value of the Deceased's entitlement in the Fund while you were a resident of Australia. That is, you will only be assessed on the accretion in the Fund less any contributions made since you became a resident of Australia.

Furthermore, any amounts representative of contributions made to the Fund after your residency date 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.

Calculation of Assessable Amount

Paragraph 305-75(2)(a) of the ITAA 1997 excludes certain amounts comprising the lump sum from being assessable as applicable fund earnings.

The assessable amount excludes contributions that were made to the Fund after the residency date, either by the Deceased, their employer or a third party. Similarly, transfers made to the Deceased from other foreign superannuation funds, that accumulated in the period before you were a resident of Australia are also excluded.

You may need to contact the Fund for these amounts.