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Ruling

Subject: lump sum payment from an overseas pension scheme

Issue 1

Questions

1. Is any part of the lump sum payment from the overseas pension scheme included in assessable income as 'applicable fund earnings' if paid within six months of the recipient becoming an Australian resident?

2. Is any part of the lump sum payment from the overseas pension scheme included in assessable income as 'applicable fund earnings' if paid more than six months after the recipient became an Australian resident?

3. Will the assessability of the lump sum payment be any different if it is paid directly into an Australian or an offshore superannuation fund account for the benefit of the recipient within six months of the recipient becoming an Australian resident?

Answers

1. No

2. Yes

3. No

Issue 2

Questions

Is your client considered a temporary resident for the purposes of the exempt foreign income provisions stated in section 768-910 of the Income Tax Assessment Act 1997?

Are payments for pre-retirement leave accrued from a period of foreign service included in assessable income?

Answers

No

Yes

This ruling applies for the following period

Year ended 30 June 2012

The scheme commenced on

1 July 2011

Relevant facts and circumstances

Your client currently resides in an overseas country and has done so for a number of years.

During that time they have been continuously employed by the government of that overseas country.

In December 20XX they will commence pre-retirement leave on full pay for a number of months before officially ceasing employment on or about April 20XX, at which time they will become entitled to a commuted lump sum benefit amounting to 50% of his total retirement benefit from the government of that overseas country (overseas country 1).

He is a citizen of another overseas country (overseas country 2) and intends to relocate to Australia in early February 20XX together with his spouse who is an Australian citizen.

It is his intention to reside in Australia permanently from February 20XX.

As a passport holder of overseas country 2, they will arrive under a special category visa which allows the holder to live and work in Australia permanently as a resident.

Following the commencement of his Australian residency for tax purposes, they will be remunerated by "pre-retirement leave" prior to ceasing employment in April 20XX.

His pre-retirement leave is attributable to periods dating back to the period whilst employed in overseas country 1.

For a number of years, they has been a non-resident of Australia (for tax purposes) arising from the ownership of income producing property in Australia.

He joined his overseas pension scheme a number of years ago. His retirement benefit is calculated according to a formula relating to pensionable emoluments and length of service.

Under the respective rules and regulations of the overseas pension scheme, the factor for the computation of his annual pension under this pension scheme on retirement is a certain factor of his highest pensionable emoluments for each month of his pensionable service. He accrues a number of months pensionable service for each month of actual service after age 50.

He has already attained the age of 50 several years ago and during the period of his pre-retirement leave from December 20XX to April 20XX, they will continue to accrue pensionable service which will contribute to the calculation of his commuted lump sum benefit.

On the basis of his pensionable service and overseas salary, his commuted lump sum will be an approximate foreign currency amount of $A (the commuted lump sum benefit).

He wishes to pay as much of the lump sum benefit as possible (subject to the contributions caps) into an Australian complying superannuation fund as soon as they can.

Both the commuted lump sum benefit and the reduced retirement benefits (the 50% pension) will be paid by the government of overseas country 1.

The Treasury of the government of overseas country 1 is the paying authority and all benefits are paid out of the general revenue of the government.

Relevant legislative provisions

Social Security Act 1991 Section 7

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 6-15

Income Tax Assessment Act 1997 Section 11-15

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

Income Tax Assessment Act 1997 Subsection 305-55(2).

Income Tax Assessment Act 1997 Paragraph 305-55(2)(a)

Income Tax Assessment Act 1997 Paragraph 305-55(2)(b)

Income Tax Assessment Act 1997 Paragraph 305-55(2)(c)

Income Tax Assessment Act 1997 Subsection 305-55(3).

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 768-910

Income Tax Assessment Act 1997 Section 960-50.

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

Income Tax Assessment Act 1997 Section 995-1.

Income Tax Assessment Regulations 1997 Regulation 960-50.01.

Reasons for decision

Summary

No portion of the commuted lump sum payment from the overseas pension scheme is assessable as 'applicable fund earnings' earnings' if paid within six months of your client becoming an Australian resident. This remains the case if the lump sum is paid directly into an Australian or a foreign superannuation fund account for the benefit of your client within six months of your client becoming an Australian resident.

However, if the lump sum is paid more than six months after your client became an Australian resident, then a portion of the lump sum may be assessable as applicable fund earnings. Effectively, the applicable fund earnings is the income earnings in the overseas pension scheme from the period he became a resident of Australia to the payment date.

Detailed reasoning

Lump sum payments from foreign superannuation funds

A superannuation lump sum payment received from a foreign superannuation fund within six months after a person became an Australian resident is not assessable income and not exempt income so long as the payment relates only to a period when the person was not an Australian resident or, it relates to a period starting after the person became a resident and ending before the payment is received (section 305-60 of the Income Tax Assessment Act 1997 (ITAA 1997)).

However, if the lump sum payment is made more than six months after a person became an Australian resident , a portion may be assessable as applicable fund earnings under section 305-70 of the 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.

Before determining whether an amount is assessable under subsection 305-70(2), 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 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 the overseas country (overseas country 1). 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 government of overseas country 1.

Thus the statutory scheme referred to as the overseas pension scheme is not a superannuation fund and thus, not a foreign superannuation fund as defined in subsection 995-1(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 overseas pension scheme is a statutory scheme established under the relevant laws of overseas country 1. The overseas pension 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 overseas pension scheme made to Australian residents.

You advised your client intends to become a resident of Australia for tax purposes in February 2012 (the residency date) and the retirement lump sum is expected to be paid to him in April 2012. Therefore, on the basis of the information provided, if the commuted lump sum payment from the overseas pension scheme is paid within six months of your client's residency date, then no portion of the lump sum payment will be assessable under section 305-70 of the ITAA 1997.

Lump sum payments from foreign superannuation funds paid more than 6 months after becoming an Australian resident

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 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 are the amount worked under either subsection 305-75(2) or subsection 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.

The amount included as assessable income would be calculated under subsection 305-75(3) if 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 earnings accrued in the overseas pension scheme during the period he was a resident of Australia. That is, your client will only be assessed on the accretion in the overseas pension scheme less any contributions (if any) made since he became a resident of Australia.

Furthermore, any amounts representative of earnings during periods of non-residency and certain capital amounts previously transferred into the scheme do not form part of the taxable amount when the lump sum 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 (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, one needs to:

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

· then, calculate the other amounts.

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

translating the lump sum payment received from the overseas pension 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 overseas pension 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, as the lump sum payment has not yet been made, the calculation will be dependent on the final amount of the commuted lump sum payment and the value of the benefit vested in the overseas pension scheme on the day just before your client's residency date. If necessary, this documentation should be obtained from the overseas pension scheme.

Dependent on the actual amounts calculated when translated into AUD, there may or may not be a portion that is assessable as applicable fund earnings. If there is an assessable amount, then that part of the lump sum payment received by your client is to be included in his income tax return for the 2011-12 income year.

To be eligible for the exemptions in section 768-910 of the Income Tax Assessment Act 1997 (ITAA 1997), a person must be a "temporary resident" when the ordinary or statutory income is derived.

A temporary resident is a person who satisfies three tests (definition of "temporary resident", section 995-1(1)) of the ITAA 1997. The person:

· must hold a temporary visa granted under the Migration Act 1958

· must not be an Australian resident within the meaning of the Social Security Act 1991, and

· must not have a spouse who is an Australian resident within the meaning of the Social Security Act 1991.

Under subsection section 7(2) of the Social Security Act 1991 an Australian resident is a person who resides in Australia and is an Australian citizen.

As your client's spouse who is an Australian citizen will accompany your client to Australia, she will reside in Australia. Therefore your client does not satisfy the third limb of the temporary resident test and consequently will not be able to apply to temporary resident exemptions provided in section 768-910 of the ITAA 1997.

Change in residential status

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

Characteristics of ordinary income that have evolved from case law include receipts that:

· Are earned

· Are expected

· Are relied upon, and

· Have an element of periodicity, recurrence or regularity.

Amounts of leave paid to you whilst an Australian resident are therefore ordinary income.

Subsection 6-15(2) of the ITAA 1997 provides that if an amount is exempt income it is not included in assessable income. Section 11-15 of the ITAA 1997 lists those provisions dealing with income which may be exempt.

Where a taxpayer performs foreign service while a foreign resident, but receives (and therefore derives), a payment in respect of such service after becoming an Australian resident, is not listed under Section 11-15 of the ITAA 1997 as an exempt payment.
Accordingly, amounts of leave paid to you whilst an Australian resident are included in your assessable income.