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Ruling

Subject: Lump sum payments from foreign superannuation fund

Question 1

Is any part of the lump sum payments from two United Kingdom pension schemes assessable as applicable fund earnings?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 2010

The scheme commences on:

1 July 2009.

Question 2

Is a United Kingdom pension scheme, paid as a lump sum in arrears, assessable in Australia in the year in which it is received?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 2010

The scheme commences on:

7 April 2010

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You were born in the 1960s.

In the 1990s you and your late spouse became a resident of Australia for tax purposes (the residency date).

You and your spouse had pension/retirement schemes from your years of employment in the overseas country.

Your spouse was a member of two superannuation pension schemes established in the overseas country, Fund A and Fund B.

Your spouse passed away several years ago.

In the 2009-10 income year, you received two lump sum payments from Fund A and one lump sum from Fund B. Each payment was received more than six months after the residency date.

No contributions were made to the Funds for, or by, you from any other foreign superannuation fund after you became a resident of Australia for tax purposes.

No amounts were transferred into the Funds from any other foreign superannuation fund after you became a resident of Australia for tax purposes.

You contacted an advisory service in the overseas country to claim a Widowed Parent's Allowance. As your claim was made more than three months after the date of death, you could only receive payments backdated three months from the date of your claim.

It was decided by the advisory service that you are entitled to a weekly Widowed Parent's Allowance from the second quarter of the 2008-09 income year. This allowance is paid into your bank account every four weeks.

You are not entitled to increases in your allowance as Australia does not apply the relevant rules on social security and does not have a reciprocal agreement with the overseas country.

In the 2009-10 income year, a lump sum in arrears payment in respect of the Widowed Parent's Allowance was paid into your bank account. Your first four weekly payment was paid into your bank account later in the income year.

The total amount of your Widowed Parent's Allowance for the year ending 30 June 2010, had tax deducted at source.

A foreign income tax offset was allowed in your 2009-10 income tax return for all your foreign income.

Assumptions

You have not provided the value of the lump sum payments received from Fund A and Fund B on the day immediately before your residency date.

You have agreed to an assumption being made in respect of the rate of return in the two overseas pension funds, between the day you became a resident of Australia and the date each lump sum payment was received.

The Commissioner has taken into account movements in the overseas country's Retail Prices Index over the period between your residency date and the date each lump sum payment was received. Based on these figures, the value of each lump sum on the day before you became a resident has been estimated.

The Commissioner is prepared to assume that these amounts represent the values of the lump sums as at the day before you became a resident, as these figures are based on data over the entire growth period.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 27H.

Income Tax Assessment Act 1936 Section 27H(3).

Income Tax Assessment Act 1936 Sections 159ZR-159ZRD

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

Income Tax Assessment Act 1997 Section 6-10.

Income Tax Assessment Act 1997 Subsection 6-10(4).

Income Tax Assessment Act 1997 Subsection 10-5

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

Income Tax Assessment Act 1997 Subsection 295-200(2).

Income Tax Assessment Act 1997 Subsection 295-200(3).

Income Tax Assessment Act 1997 Section 305-70.

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

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

Income Tax Assessment Act 1997 Subsection 305-70(3).

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 305-80.

Income Tax Assessment Act 1997 Subsection 305-80(2).

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.

International Tax Agreements Act 1953 Section 3AAA.

International Tax Agreements Act 1953 Section 5.

Superannuation Industry (Supervision) Act 1993 Section 10.

Reasons for decision

Issue 1

Summary

A portion of the lump sum benefits you received from Fund A and Fund B is assessable as 'applicable fund earnings'. The applicable fund earnings represent the increase or growth in the Funds during the period you are a resident of Australia.

The applicable fund earnings is calculated by translating the lump sum benefit received from the Funds at the exchange rate applicable on the day of receipt into Australian dollars, and deducting from this amount the Australian dollar equivalent of the lump sum benefit on the day just before the residency date at the exchange rate applicable on that day.

The applicable fund earnings are assessable in Australia. The remainder of the lump sum benefit is not assessable income and is not exempt income.

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 transferred or 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' is subject to tax at the person's marginal rate of tax.

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.

In this case, the lump sum payments are from Fund A and Fund B. It is evident that the respective funds, which were established in the overseas country, are not Australian superannuation funds as defined in subsection 295-95(2) of the ITAA 1997. Based on the information provided, the Commissioner considers that both Fund A and Fund B are foreign superannuation funds as defined in subsection 995-1(1).

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 becoming an Australian resident.

The lump sum payments were received by you more than six months after you became an Australian resident. Consequently, the exemption under section 305-60 of the ITAA 1997 will not apply. Therefore, a portion of the lump sum payments will be assessable under subsection 305-75(3).

This calculation effectively means that you will be assessed only on the income earned in the foreign funds while you were a resident of Australia. That is, you will only be assessed on the accretion in the foreign funds less any contributions made since you became a resident of Australia.

Further, any amounts representative of earnings during periods of non-residency, and transfers into the paying funds do not form part of the taxable amount when the overseas benefits are paid.

The applicable fund earnings in relation to the lump sum payments are calculated under subsection 305-75(3) of the ITAA 1997. In this instance, subsection 305-75(3) applies because you became an Australian resident after the start of the period to which the lump sums relate. 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 (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).

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 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.

Consequently, the lump sum payments you received are translated into AUD at the exchange rate applicable at the time of receipt. Similarly, the amount vested in the funds on the day before you became an Australian resident is converted to AUD at the exchange rate that applied on that day.

Calculation of assessable amount

In total, you received three lump sum payments from Fund A and Fund B. Based on the information you have provided, the Commissioner is prepared to assume the values of your lump sum benefits in the foreign superannuation funds on the date before you became a resident of Australia.

First Lump Sum - Fund A

In respect of the first lump sum received from Fund A in the 2009-10 income year, you advise that this amount represented a return of your spouse's contributions to Fund A. Accordingly, none of this amount would be categorised as representing applicable fund earnings and therefore section 305-70 of the ITAA 1997 will not apply to this amount.

Second Lump Sum - Fund A

In respect of the second lump sum received from Fund A in the 2009-10 income year, the Commissioner is prepared to make an assumption of the value of your lump sum in Fund A on the day before you became a resident of Australia.

No contributions were made to the fund after the residency date, and no transfers were made to the fund from other foreign superannuation funds. You were a resident at all times during this period.

Applicable fund earnings in accordance with subsection 305-75(3) of the ITAA 1997 for this lump sum have been determined.

Third Lump Sum - Fund B

In respect of the lump sum received from Fund B in the 2009-10 income year, the Commissioner is prepared to make an assumption of the value of your lump sum in Fund B on the day before you became a resident of Australia.

No contributions were made to the fund after the residency date, and no transfers were made to the fund from other foreign superannuation funds. You were a resident at all times during this period.

Applicable fund earnings in accordance with subsection 305-75(3) of the ITAA 1997 for this lump sum have been determined.

Issue 2:

Summary

As you are a resident of Australia for income tax purposes, the allowance from the Scheme is included in your assessable income.

Detailed Reasoning

Subsection 6-5(2) of the 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.

Section 6-10 of the ITAA 1997 provides that a taxpayer's assessable income includes statutory income amounts that are not ordinary income but are included in assessable income by another provision. The assessable income of an Australian resident includes statutory income from all sources, whether in or out of Australia (subsection 6-10(4)).

Section 10-5 of the ITAA 1997 lists those provisions about assessable income. Included in this list is section 27H of the Income Tax Assessment Act 1936 (ITAA 1936) which provides that annuities and pensions paid from a foreign superannuation fund or foreign scheme for the payment of superannuation benefits are included in assessable income.

In determining liability to Australian tax on foreign sourced income received by a resident it is necessary to consider not only the income tax laws but also any applicable tax treaty between Australia and the foreign country from where the pension is derived.

Australia has a tax treaty with Country X. This treaty operates to avoid the double taxation of income received by residents of Australia and Country X.

The term 'pension' is not defined in the tax treaty and takes the meaning it has under domestic law. A pension is defined in the Macquarie Dictionary (version 5.0.0, 01/10/01) as:

1. a fixed periodical payment made in consideration of past services, injury or loss sustained, merit, poverty, etc.

2. an allowance or annuity.

The essential characteristic of a pension is that there be periodical payments.

Article 17 of Country X's convention provides that pensions and annuities paid to a resident of Australia shall be taxable only in Australia.

Therefore, the allowance you receive from Country X is taxable only in Australia.

As you are a resident of Australia for income tax purposes, the allowance is included in your assessable income under section 27H of the ITAA 1936.

Other relevant comments

Lump sum in arrears rebate

For Australian taxation purposes, pension income is derived when it is received. Although your first payment included an amount from a previous year, it is still assessable in the year when it is received.

Individual taxpayers who receive certain income in a lump sum payment containing an amount that accrued in earlier income years may be entitled to a rebate of tax (sections 159ZR-159ZRD of the ITAA 1936). Eligible income includes assessable pensions, benefits and allowances or similar payments made under a law of a foreign country, state or province.

The rebate is designed to alleviate the problem of more tax being payable in the year in which the lump sum is received than would have been payable if the lump sum had been taxed in each of the years in which it accrued.

To be eligible for the rebate, the amount of the eligible lump sum which accrued before the year of receipt must not be less than 10% of the taxable income of the year of receipt after deducting the amount of eligible lump sum that accrued in the earlier years.