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Ruling

Subject: Foreign Lump Sum

Questions

Is a portion of a lump sum payment you 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?

Are pension payments received from a foreign fund included in your assessable income?

Advice/Answers

Yes.

Yes.

This ruling applies for the following period

Year ending 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts

You originally lived and worked overseas.

You subsequently became a resident of Australia for tax purposes.

Whilst overseas you became a member of a foreign fund for your eventual retirement.

Contributions to the foreign fund were made solely by you from your net wages.

Your overseas employer did not contribute any amounts to the foreign fund.

The foreign fund does not allow for access of benefits prior to retirement age.

A letter from the foreign fund shows that you are entitled to a pension.

In the 2010-11 income year the foreign fund deposited a lump sum payment into your Australian bank account.

The date on which you received the lump sum benefit is more than six months after you became an Australian resident

You did not make any contributions to the foreign fund after you became a resident of Australia.

No amounts were transferred into the foreign fund from other foreign superannuation funds after you became a resident of Australia.

Relevant legislative provisions

Income Tax Assessment 1936 Section 27H

Income Tax Assessment 1997 Subsection 6-5(2)

Income Tax Assessment 1997 Section 6-10

Income Tax Assessment 1997 Subsection 6-10(4)

Income Tax Assessment 1997 Section 10-5

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 960-50(1).

Income Tax Assessment Act 1997 Subsection 960-50(4).

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

International Tax Agreements Act 1953 Section 4

International Tax Agreements Act 1953 Section 5

Reasons for decision

Summary

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

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

As you received the lump sum benefit in the 2010-11 income year, the applicable fund earnings is included in that income year.

The applicable fund earnings of a lump sum benefit from a foreign superannuation fund is included in an individual's supplementary tax return under item 20 'Foreign source income and foreign assets or property'.

The pension from the foreign fund you are in receipt of is an 'annuity' within the meaning of the tax treaty between Australia and the foreign country.

Therefore, the pension you are receiving is wholly included in your assessable income and forms part of your statutory income.

Pension payments are included in the income year in which they are received.

The pension payments from a foreign superannuation fund are included in an individual's supplementary tax return under item 20 'Foreign source income and foreign assets or property'.

Detailed Reasoning

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 Income Tax Assessment Act 1997 (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.

It is evident that the foreign fund, which is established in overseas, is not an Australian superannuation fund as defined in subsection 295-95(2) of the ITAA 1997. Based on the information provided, the Commissioner considers that the foreign fund is a foreign superannuation fund 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 a person has become an Australian resident.

The date on which you will receive 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(3) of the ITAA 1997 because you 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).

The calculation of this portion effectively means that you will be assessed only on the income earned in the foreign fund while you were a resident of Australia. That is, you will only be assessed on the accretion in the foreign fund less any contributions made since you 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. Together with the application of subsection 960-50(4) this has the result that the payment you received is translated into AUD at the exchange rate applicable at the time of receipt. Similarly, the amount vested in the fund on the day before you became an Australian resident is converted to AUD at the exchange rate that applied on that day.

As you received the lump sum benefit in the 2010-11 income year, the applicable fund earnings is included in that income year.

The applicable fund earnings of a lump sum benefit from a foreign superannuation fund is included in an individual's supplementary tax return under item 20 'Foreign source income and foreign assets or property'.

Pension payments transferred from foreign superannuation funds

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 the 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 superannuation pensions paid from a foreign superannuation fund are included in assessable income.

In determining liability of Australian tax for foreign sourced income received by an Australian resident, 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).

You are an Australian resident for taxation purposes.

The pension you are in receipt of from the foreign fund is an annuity within the meaning of the tax treaty between Australia and the foreign country.

Therefore, the pension you are receiving is wholly included in your assessable income under section 27H of the ITAA 1936 and forms part of your ordinary income under section 6-5 of the ITAA 1997.

Pension payments are included in the income year in which they are received.

The pension payments from a foreign superannuation fund are included in an individual's supplementary tax return under item 20 'Foreign source income and foreign assets or property'.

Please note a portion of the undeducted purchase price (UPP), the amount you personally contributed towards the purchase price of your foreign pension, can be used to reduce the pension income in your tax return. To determine whether you are entitled to this reduction please complete the enclosed form entitled 'Undeducted Purchase Price Foreign Source Pensions'.