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Ruling

Subject: Lump sum payment from a foreign superannuation fund

Question 1:

Is any part of the lump sum payment from Pension Account 1, a pension scheme in a foreign country made to your client as a result of the death of the fund member assessable as applicable fund earnings?

Answer:

Yes

Question 2:

Is any part of the lump sum payment from Pension Account 2, a pension scheme in a foreign country made to your client as a result of the death of the fund member assessable as applicable fund earnings?

Answer:

Yes

Question 3:

Is any part of the lump sum payment from Pension Account 3, a pension scheme in a foreign country made to your client as a result of the death of the fund member assessable as applicable fund earnings?

Answer:

Yes

Question 4:

Is any part of the lump sum payment from Pension Account 4, a pension scheme in a foreign country made to your client as a result of the death of the fund member assessable as applicable fund earnings?

Answer:

Yes.

This ruling applies for the following period:

1 July 2010 to 30 June 2011

The scheme commenced on:

1 July 2010

Relevant facts:

Your client been a resident of Australia at all times.

Your client's sibling (the deceased) passed away in the foreign country when the deceased was over 55 years of age.

The deceased was a resident of the foreign country and was never a resident of Australia.

At the time of death of the deceased your client was not a financial dependant of the deceased.

Your client received a lump sum payment from Pension Account 1 in the relevant income year.

Your client received a lump sum payment from Pension Account 2 in the relevant income year.

Your client received a lump sum payment from Pension Account 3 in the relevant income year.

Your client received a lump sum payment from Pension Account 4 in the relevant income year. Fund 4 has advised this is a discretionary payment made by the Trustees to your client as he is related to the deceased. Further they have advised that under the foreign country's tax legislation it is tax free to your client and does not form part of the deceased's estate.

Relevant legislative provisions:

Income Tax Assessment Act 1997 Section 305-55.

Income Tax Assessment Act 1997 Section 305-65.

Income Tax Assessment Act 1997 Section 305-70.

Income Tax Assessment Act 1997 Section 305-75.

Income Tax Assessment Act 1997 Subsection 305-75(1).

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

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

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

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

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

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

Income Tax Assessment Act 1997 Section 307-65.

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

Income Tax Assessment Act 1997 Subsection 960-50.

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

Superannuation Industry (Supervision) Act 1993 Section 10.

Superannuation Industry (Supervision) Act 1993 Section 62.

Reasons for decision

Summary

The amount of applicable fund earnings to be declared in your client's 2010-11 assessable income will be the amount received from each fund less any contributions made to the funds by the deceased or the deceased's employers. Your client will need to ascertain these contributions from the four overseas funds.

Detailed reasoning

Death Benefit

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 client's case, the funds paying the death benefit are foreign funds. Foreign funds are not regulated in Australia and so cannot be complying funds.

Consequently, the payments are not tax-free in Australia and are taxed 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 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 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 305-75(2) or (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 was not an Australian resident at all times during 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 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.

Under the definition of Australian superannuation fund in subsection 295-95(2) of the ITAA 1997 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.

Subsection 995-1(1) of the ITAA 1997 defines a superannuation fund as having the same meaning given by section 10 of the Superannuation Industry (Supervision) Act 1993 (SIS Act), which requires that the fund is a provident, benefit, superannuation or retirement fund.

Provident, benefit, superannuation or retirement fund

The issue of what constitutes a provident, benefit, superannuation or retirement fund was discussed by the Full Bench of the High Court in Mahony v. Federal Commissioner of Taxation (1967) 41 ALJR 232; (1967) 14 ATD 519 (Mahony).

In that case, Justice Kitto's judgement indicated that a fund does not satisfy any of the three provisions, that is, 'provident, benefit or superannuation fund', if there exist provisions for the payment of benefits 'for any other reason whatsoever'. In other words, though a fund may contain provisions for retirement purposes, it could not be accepted as a superannuation fund if it contained provisions that benefits could be paid in circumstances other than those relating to retirement.

In section 62 of the SIS Act, a regulated superannuation fund must be 'maintained solely' for the 'core purposes' of providing benefits to a member when the events occur:

· on or after retirement from gainful employment; or

· attaining a prescribed age; and

· on the member's death. (this may require the benefits being passed on to a member's dependants or legal representative).

Notwithstanding the SIS Act applies only to 'regulated superannuation funds' (as defined in section 19 of the SIS Act), and foreign superannuation funds do not qualify as regulated superannuation funds as they are established and operate outside Australia, the Commissioner views the SIS Act (and the SIS Regulations) as providing guidance as to what 'benefit' or 'specific future purpose' a superannuation fund should provide.

In view of the legislation and the decisions made in Scott and Mahony, the Commissioner's view is that for a fund to be classified as a superannuation fund, it must exclusively provide a narrow range of benefits that are characterised by some specific future purpose. That is, the payment of superannuation benefits upon retirement, invalidity or death of the individual or as specified under the SIS Act.

Therefore, in order for the lump sum payment from the overseas fund to be considered a payment from a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997, it must also satisfy the requirements set out in subsection 295-95(2) of the ITAA 1997. This means that it should not be an Australian superannuation fund as defined in that subsection but must be a provident, benefit, superannuation or retirement fund as discussed above.

In relation to the four overseas funds it would appear benefits are only paid on retirement and the funds would meet the definition of superannuation fund. In addition, it is clear the payer of the lump sum payments are established outside of Australia with their central management and control outside of Australia. Therefore, on the basis of the information provided, the Commissioner considers the lump sum payments your client received are from foreign superannuation funds 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.

We will now briefly discuss the legislative background to Subdivision 305-B of the ITAA 1997.

Former section 27CAA of the ITAA 1936 was rewritten and absorbed into Subdivision 305-B as section 305-75.

The Explanatory Memorandum to the Tax Laws Amendment (Simplified Superannuation) Bill 2006, which introduced section 305-75, states that the existing tax treatment of superannuation benefits paid from non-complying superannuation plans would be maintained.

It should also be noted that subsection 1-3(2) of the ITAA 1997 states that where the ITAA 1936 expressed an idea in a particular form of words, and the ITAA 1997 appears to have expressed the same idea in a different form of words in order to use a clearer or simpler style; the ideas are not to be taken to be different just because different forms of words were used.

The intention of former section 27CAA of the ITAA 1936 is to include in a taxpayer's assessable income any amounts that accrue in a foreign superannuation fund that are attributable to the period that the taxpayer is a resident of Australia. This will usually be the investment earnings that accrue in the foreign superannuation fund during that period. This gives effect to the general policy that Australian residents should be taxed on their income from all - Australian and foreign - sources.

Central to the operation of former section 27CAA of the ITAA 1936 was the condition in former paragraph 27CAA(1)(d) that if the paying fund, that is, the foreign superannuation fund, was a superannuation fund the payment, ignoring former paragraph (ma) of the definition of 'eligible termination payment' under former subsection 27A(1) (the ETP definition), would have been an ETP.

This clearly indicates an intention that any payment from a foreign superannuation fund that satisfies this condition would be subject to tax under former section 27CAA of the ITAA 1936

Any payment made directly to either a dependant or non-dependant of a deceased by a foreign superannuation fund trustee could have qualified as an ETP on that basis under former paragraph (ba) of the ETP definition, which ensured all death benefits paid directly to beneficiaries are taxed as ETPs.

Former subsection 27CAA(6) of the ITAA 1936 provided a link to death benefit payments by its application to ETPs that were death benefits of deceased estates including both a death benefit paid to a trustee of a deceased estate, and a death benefit paid directly to a dependent or non-dependent of the deceased member.

It should be noted that a death benefit ETP under former paragraph (ba) of the ETP definition would recognise the period of membership of the deceased in the eligible service period of the ETP. Similarly, the undeducted contributions component of this death benefit ETP would also include the deceased's own contributions to the fund.

Paragraph 27A(3)(b) of the ITAA 1936 ensures that the trustee of the deceased estate is assessed to the extent that the taxpayer would have been had the payment been made to the taxpayer immediately before death. Similarly former section 27CAA should recognise the contributions made by or on behalf of the deceased in the same way. This would make it consistent with the treatment given to the payment had it been a death benefit ETP paid directly to your client.

From 1 July 2007 the 'applicable fund earnings' in relation to a superannuation lump sum from a foreign superannuation fund that is received more than six months after a person has become an Australian resident will be assessable under subdivision 305-B of the ITAA 1997. The remainder of the superannuation lump sum is not assessable income and is not exempt income.

As mentioned above, subdivision 305-B of the ITAA 1997 replaces former section 27CAA of the ITAA 1936 which, prior to 1 July 2007, assessed a portion of the payment from a foreign superannuation fund representing the earnings or growth that accrued in the fund during the period that the taxpayer was an Australian resident.

Subdivision 305-B of the ITAA 1997, which includes section 305-75, applies to death benefit lump sum payments from foreign superannuation funds paid directly to a dependant or non-dependant of the deceased member in the same manner that it applied to these payments under former section 27CAA of the ITAA 1936 as detailed above.

Your client has always been a resident of Australia for tax purposes. Your client's sibling passed away and your client became entitled to the lump sum benefit from Pension accounts 1-4. The Pension funds paid your client lump sums on 4 different dates in the relevant income year. The dates on which your client received the lump sum benefits are more than six months after your client 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 your client was an Australian resident at all times to which the lump sums relate.

Subsection 305-75(2) of the ITAA 1997 states:

If you were an Australian resident at all times during the period to which the lump sum relates, 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 part of the lump sum that is attributable to contributions made by or in respect of you on or after the day when you became a member of the fund (the start day);

(ii) the part of the lump sum (if any) that is attributable to amounts transferred into the fund from any other foreign superannuation fund during 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 income tax);

(c) add the total of all your previously exempt fund earnings (if any) covered by subsections (5) and (6).

The calculation under this section effectively means that your client will be assessed only on the increase in value of the deceased's entitlement in Pension Accounts 1 to 4 while your client was a resident of Australia. That is, your client will only be assessed on the accretion in Pension Accounts 1 to 4 less any contributions made to the funds by the deceased or any of the deceased's employers [per subparagraph 305-75(2)(a)(i)].

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 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 relevant pension plan at the exchange rate applicable on the day of receipt to AUD; and

· deducting from this amount the AUD equivalent of the payment vested in the relevant pension plan.

Calculation of Assessable Amount

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

The assessable amount excludes contributions that were made to Pension Accounts 1 to 4 either by your client's sibling, your client's sibling's employer or a third party. Similarly, transfers made to Pension Accounts 1 to 4 from other foreign superannuation funds, that accumulated in the period are also excluded.

You will need to contact the four funds (Pension Accounts 1 to 4) for these amounts.

Pension Account 1

Paragraph 305-75(2)(b) of the ITAA 1997 requires that the amount calculated above be subtracted from the amount that was vested in your client when the lump sum was made by Pension Account 1.

The lump sum benefit in Pension Account 1 (less contributions and transfers mentioned above) is translated into Australian dollars at the exchange rate applicable at the time your client became entitled to the lump sum payment. The daily exchange rate which prevailed on the date your client became entitled to the lump sum is used to translate the foreign currency into Australian dollars

Taking the value of the lump sum benefit your client received as an example, the conversion to Australian dollars would be:

· Foreign currency ÷ exchange rate = Australian dollars.

Paragraph 305-75(3)(c) of the ITAA 1997 concerns previously exempt fund earnings calculated under subsections 305-75(5) and (6). Previously exempt fund earnings are the applicable fund earnings of any amounts transferred from one foreign superannuation fund to another foreign superannuation fund after your client became a resident of Australia. In your client's case, there are no previously exempt fund earnings.

Thus the applicable fund earnings in relation to the lump sum benefit from Pension Account 1 would be the amount received less any contributions that were made to Pension Account 1 either by your client's sibling, your client's sibling's employer or a third party.

Pension Account 2, 3 and 4

The applicable fund earnings in relation to the lump sum benefit from Pension Account 2, 3 and 4 would be calculated in the same manner as shown above for Pension Account 1.