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Ruling

Subject: Pension scheme payment

Question

Is the lump sum payment from your foreign pension scheme assessable income in Australia?

Answer

No.

This ruling applies for the following period

Year ended 30 June 2012

The scheme commenced on

1 July 2011

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 are an Australian resident for tax purposes.

You became a resident of Australian several years ago.

You previously worked overseas and contributed to a pension scheme.

The terms of the scheme provide that at a certain age, a member receives a lump sum equal to a multiple of the annual pension payable.

The lump sum is a commutation of a life pension.

The pension scheme provides retirement benefits. The fund also offered an injury benefit scheme where a temporary injury allowance could be received in certain circumstances.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 6-10.

Income Tax Assessment Act 1997 Section 6-15.

Income Tax Assessment Act 1997 Section 305-70.

Income Tax Assessment Act 1997 Section 995.

Reasons for decision

The assessable income of an Australian resident includes ordinary income and statutory income from all sources, whether in or out of Australia (sections 6-5 and 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997)).

Ordinary income is income according to ordinary concepts (subsection 6-5(1) of the ITAA 1997).

Statutory income is not ordinary income but is included in assessable income by specific provisions in the income tax law (section 6-10 of the ITAA 1997).

Subsection 6-15(1) of the ITAA 1997 provides that if an amount is not ordinary income and is not statutory income, it is not assessable income.

The lump sum payment from your pension scheme is not assessable as ordinary income.

Where a lump sum payment from a foreign superannuation fund is received more than six months after a person has become an Australian resident, the applicable fund earnings in relation to that lump sum payment 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 persons 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 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.

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.

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 (subsection 295-95(2) of the ITAA 1997). 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 meaning given by section 10 of the Superannuation Industry (Supervision) Act 1993 (SIS Act), that is:

(a) a fund that:

(i) is an indefinitely continuing fund; and

(ii) is a provident, benefit, superannuation or retirement fund; or

(b) a public sector superannuation scheme;

Provident, benefit, superannuation or retirement fund

The High Court examined both the terms superannuation fund and fund in Scott v Commissioner of Taxation of the Commonwealth (No. 2) (1966) 10 AITR 290; (1966) 40 ALJR 265; (1966) 14 ATD 333 (Scott). In that case, Justice Windeyer stated:

I have come to the conclusion that there is no essential single attribute of a superannuation fund established for the benefit of employees except that it must be a fund bona fide devoted as its sole purpose to providing for employees who are participants money benefits (or benefits having a monetary value) upon their reaching a prescribed age. In this connexion fund, I take it, ordinarily means money (or investments) set aside and invested, the surplus income there from being capitalised. I do not put this forward as a definition, but rather as a general description.

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 Commissioner of Taxation (Cth) (1967) 41 ALJR 232; (1967) 14 ATD 519 (Mahony). In that case, Justice Kitto held that a fund had to exclusively be a provident, benefit or superannuation fund and that connoted a purpose narrower than the purpose of conferring benefits in a completely general sense. This narrower purpose meant that the benefits had to be characterised by some specific future purpose such as the example given by Justice Kitto of a funeral benefit.

Furthermore, Justice Kittos 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 following events occur:

(i) on or after retirement from gainful employment; or

(ii) attaining a prescribed age; and

(iii) on the members death. (This may require the benefits being passed on to a members dependants or legal representative).

Though section 62 of the SIS Act also allows a superannuation fund to provide benefits for ancillary purposes, such as, benefits paid on the termination of employment in the event of ill-health and benefits for dependants following the death of a member after retirement or attaining the prescribed age, it should be noted that they do not extend to general or non-retirement purposes such as education, home purchases or medical expenses.

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 its 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 Commissioners 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, notwithstanding the fact that a foreign superannuation fund may possess some features for the provision of funds in retirement, the Commissioner considers such a fund as not being a superannuation fund for Australian tax purposes if the fund:

(i) can also be used as a savings plan for non-retirement purposes; and/or

(ii) contains provisions for pre-retirement withdrawals for general non-retirement purposes such as housing, education and medical expenses.

The pension scheme satisfies some of the requirements of a foreign superannuation fund as it is established outside of Australia and the central management and control is outside of Australia. However, the fund is not regarded as a provident, benefit, superannuation or retirement fund as a member of the fund can receive a payment for reasons other than death, invalidity or retirement.

Consequently, the fund is not a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997. Therefore section 305-70 of the ITAA 1997 will not have any application to the payment from the fund.

There is no other provision in the Australian taxation provisions that apply to your pension fund payment. Therefore the payment is not regarded as assessable income.