Edited version of your private ruling

Authorisation Number: 1012368005623

Ruling

Subject: Lump sum death benefit from a foreign superannuation fund

Question 1

Does section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997) apply to a lump sum benefit received by a taxpayer from a foreign superannuation fund after another person's death because the other person was a member of the fund?

Answer

Yes.

Question 2

If section 305-70 of ITAA 1997 applies to the lump sum, is any part of the lump sum received by your client after the death of their spouse assessable as applicable fund earnings in accordance with section 305-75 of the ITAA 1997?.

Answer

No

This ruling applies for the following periods:

Year ended 30 June 2012

The scheme commences on:

During the 2011-12 income year

Relevant facts and circumstances

Your client is a former resident of an overseas country.

Your client's late spouse (the Deceased) was employed by an overseas employer.

The Deceased joined the overseas employer's retirement scheme (the Overseas Scheme).

Contributions to the Overseas Scheme by the overseas employer and by the Deceased went into an account known as an individual retirement account.

In accordance with the employment agreement, the Deceased became entitled to a Life Assurance cover benefit being a multiple of the Deceased's basic salary payable to the dependants in the event of the Deceased's death while employed by the overseas employer.

A number of years ago, the Deceased accepted a temporary work assignment in Australia.

Several months after accepting the temporary work assignment, the Deceased and your client arrived in Australia.

At the time of their arrival, your client and the Deceased each held a Temporary Resident Visa.

Towards the conclusion of the period of the temporary work assignment, the assignment was extended for a further short period of time.

Several months later, your client and the Deceased were each issued with a Permanent Resident Visa.

Details of both the amount of the Deceased's basic salary and the amount in the Individual Retirement Account, at the time just before your client and the Deceased arrived in Australia, has been provided.

On commencing work in Australia, the Deceased ceased contributing to the Overseas Scheme.

The Deceased died in Australia during the relevant income year while still employed by the overseas employer.

As a consequence of the Deceased's death, your client received a lump sum payment from the Overseas Scheme.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 27CAA.

Income Tax Assessment Act 1936 Section 27A.

Income Tax Assessment Act 1997 Section 305-70.

Income Tax Assessment Act 1997 Subsection 305-70(1).

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

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

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(3).

Income Tax Assessment Act 1997 Section 770-10.

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

Income Tax Assessment Act 1997 Section 995-1.

Superannuation Industry (Supervision) Act 1993 Section 62.

Reasons for decision

Question 1

Summary of decision

The applicable fund earnings provision applies to a lump sum benefit received by a taxpayer from a foreign superannuation fund after another person's death because the other person was a member of the fund, in the same way that it would have applied to the other person had they received it during their lifetime.

Detailed reasoning

Legislative background to Subdivision 305-B of the ITAA 1997

Sections 305-70 and 305-75 of the ITAA 1997 are located in Subdivision 3-B of the ITAA 1997 which sets out the treatment of superannuation benefits received from non-complying plans, including foreign superannuation funds, as of 1 July 2007.

The equivalent provisions before 1 July 2007 were set out in the former section 27CAA of the Income Tax Assessment Act 1936 (ITAA 1936).

Former section 27CAA of the ITAA 1936 applied to include in a taxpayer's assessable income certain amounts received from an eligible non-resident non-complying superannuation fund (ENRNCSF) where the payment is made six months or more after the taxpayer became a resident of Australia. An ENRNCSF is the pre-July 2007 equivalent of a foreign superannuation fund.

Central to the operation of former section 27CAA of the ITAA 1936 was the condition in paragraph 27CAA(1)(d) that if the paying fund (i.e. the ENRNCSF) was a superannuation fund the payment, ignoring paragraph (ma) of the definition of 'eligible termination payment' (the ETP definition) under former subsection 27A(1), would have been an ETP. This clearly indicates an intention that any payment from an ENRNCSF that satisfies this condition would be subject to tax under former section 27CAA.

Any payment made directly to either a dependant or non-dependant of a deceased estate by an ENRNCSF could have qualified as an ETP on that basis under paragraph (ba) of the ETP definition under former subsection 27A(1) of the ITAA 1936, which ensured all death benefits paid directly to beneficiaries are taxed as ETPs.

An examination of the linkages between former section 27CAA of the ITAA 1936 and the relevant parts of former section 27A in relation to ETPs points to the underlying policy intention that former section 27CAA captured all death benefits received from ENRNCSFs.

It can be said that former section 27CAA of the ITAA 1936 was clearly not designed to exclude death benefits received from ENRNCSFs. The deliberate cross-references between former section 27CAA and the ETP definition under former subsection 27A(1) evidences an intention to cover the full range of benefits taxed as ETPs, including death benefits. Further, the purpose of former section 27CAA was to confer substantially equivalent tax treatment on death benefits coming under former section 27CAA as they would have had under paragraph (ba) of the ETP definition under former subsection 27A(1) if received from an Australian fund.

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. Former subsection 27CAA(6) states that former subsection 27A(3) applies for the purposes of section 27CAA in a corresponding way in which it applies for the purposes of the ETP definition under former subsection 27A(1).

We have considered whether the wording of former subsection 27CAA(6) of the ITAA 1936 lends itself to the suggestion that former section 27CAA only applied to a death benefit paid to a trustee of a deceased estate. A purposive interpretation of former section 27CAA suggests the better view is that it is equally applicable to both a death benefit paid to a trustee of a deceased estate, and a death benefit paid directly to a dependant or non-dependant of the deceased member.

Application of Subdivision 305-B of the ITAA 1997

The Explanatory Memorandum to the Tax Laws Amendment (Simplified Superannuation) Bill 2006, which introduced Subdivision 305-B of the ITAA 1997, states (at paragraph 2.86) that the existing tax treatment of superannuation benefits paid from non-complying superannuation plans would be maintained.

Also, subsection 1-3(2) of the ITAA 1997 states that where the ITAA 1936 expressed an idea in a particular form of words, and 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 a different forms of words were used.

The Guide to Division 305 (which includes sections 305-70 and 305-75), contained in section 305-1, states:

This Division sets out the tax treatment of superannuation benefits received by members of non-complying plans (including foreign superannuation funds).

Whilst a literal reading of this Guide might suggest that it is only applicable to the actual member of the non-complying plan, we contend that this Guide should not operate to preclude death benefit lump sum payments from foreign superannuation funds from the operation of Subdivision 305-B of the ITAA 1997. We believe 'member' is used in a descriptive rather than technical sense. Alternatively, it is simply describing the ordinary case of a benefit paid to a member without acknowledging the less usual case of a benefit payable on a member's death.

We come to this position having taken into account the stated intention of Subdivision 305-B of the ITAA 1997 to maintain the pre-1 July 2007 tax treatment of superannuation benefits paid from non-complying superannuation plans. Also taken into account was the fact that the Guide to Division 302, which has an express application on the tax treatment of death benefits paid to trustees of deceased estates, as well as directly to dependants and non-dependants of the deceased member, also stated:

This Division sets out the tax treatment of superannuation death benefits received by members of complying plans etc…

Division 302 of the ITAA 1997 would have no operation if the words in the Guide were to receive a literal reading. Logically, the actual (deceased) member of such complying plans cannot be the recipient of their own death benefit. Thus, the Guide must be read to be referring to the tax treatment of death benefits to trustees of deceased estates, and dependants and non-dependants of the deceased member.

As such, it is our view that Subdivision 305-B of the ITAA 1997 (including sections 305-70 and 305-75) apply 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.

It is our view that, in keeping with what we understand to be the original policy intention and position under former section 27CAA of the ITAA 1936, the beneficiaries of death benefits from foreign superannuation funds under section 305-75 of the ITAA 1997 should also be taxed as if they were in the place of the deceased member.

We believe this better achieves the intent of the relevant provisions. This is in line with our interpretation and understanding of the way in which the formula should operate for both a death benefit paid to a trustee of a deceased estate, and a death benefit paid directly to a dependant or non-dependant of the deceased member.

Based on the above, sections 305-70 and 305-75 of the ITAA 1997 apply to the lump sum received by your client from the Overseas Scheme on the death of the Deceased in the same way that it would have applied to the Deceased had the Deceased received it during their lifetime. Therefore, your client should include in their assessable income so much of the lump (if any) as equals their applicable fund earnings worked out in accordance with section 305-75.

Question 2

Summary of decision

The 'applicable fund earnings' in respect of the lump sum received from the Overseas Scheme in the relevant income year is zero. Therefore, no amount of the lump sum received from the Overseas Scheme is to be included in your client's assessable income for the relevant income year.

Detailed reasoning

Applicable fund earnings

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 is assessable under section 305-70 of the ITAA 1997. The remainder of the superannuation lump sum 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 was not an Australian resident at all times during the period to which the lump sum relates.

In this instance, the Deceased became a resident of Australia for income tax purposes a number of years ago (the residency date) and the lump sum death benefit was paid by the Overseas Scheme to your client during the relevant income year. Therefore, a portion of the lump sum received by your client is assessable under section 305-70 of the ITAA 1997.

The assessable amount is worked out under subsection 305-75(3) of the ITAA 1997 because your client and the Deceased were not residents of Australia at all times during the period to which the superannuation lump sums relates.

In accordance with subsection 305-75(3) of the ITAA 1997, the 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. 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 payment your client received is translated into Australian dollars at the exchange rate applicable at the time of receipt. Similarly, the amount vested in the fund on the day before your client (and the Deceased) became an Australian resident is converted to Australian dollars at the exchange rate that applied on that day.

Calculation of Assessable Amount

In this case, no contributions were made to the Overseas Scheme after the residency date, and no transfers were made to the fund from other foreign superannuation funds. Your client and the Deceased were residents of Australia at all times during this period.

You advised the value of amount vested in the Deceased just before the residency date. This is converted into Australian dollars at the exchange rate applicable on that day.

Paragraph 305-75(3)(b) of the ITAA 1997 requires that the amount calculated above be subtracted from the total amount of the lump sum paid by the Overseas Scheme.

As noted above, your client received a payment of a lump sum death benefit from the Overseas Scheme. This amount is converted into Australian dollars at the exchange rate applicable on the day that payment was received (or the next working day).

Based on the above, subtracting the Australian dollar equivalent of the lump sum benefit vested in the Deceased just before the date of residency from the Australian dollar equivalent of the lump sum death benefit received during the relevant income year results in a negative amount.

Under paragraph 305-75(3)(c) of the ITAA 1997, the result above is multiplied by proportion of days the Deceased (and your client) was a resident to the total number of days from when the Deceased (and your client) was a resident until the date the payment was made. In your client's case, the resident days and the total days are the same, and so the proportion to be used in the calculation is '1'. Therefore, the result remains the same.

As the amount calculated under paragraph 305 -75(3)(b) is less than zero, no amount of the lump sum death benefit from the Overseas Scheme is to be included in your client's assessable income for the relevant income year as 'applicable fund earnings'.

Paragraph 305-75(3)(d) 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 the Deceased (and your client) became a resident of Australia. In your client's case, there are no previously exempt fund earnings.

Therefore, your client's applicable fund earnings in accordance with subsection 305-75(3) of the ITAA 1997 for this lump sum is NIL.