Edited version of your private ruling

Authorisation Number: 1012445330461

Ruling

Subject: International Pensions

Questions and answers:

1. Are your entire Foreign Government pension benefits exempt income pursuant to the provisions of former paragraph 23(q) of the Income Tax Assessment Act 1936 (ITAA 1936)?

No.

2. Are you required to include your monthly pension from the Foreign Government in your personal income tax return as part of your assessable income when you receive it?

Yes.

3. Is any part of a lump sum payment from a Foreign Government pension scheme included in assessable income as 'applicable fund earnings' under section 305-70 of the Income Tax Assessment 1997 (ITAA 1997)?

Yes

4. Does 'undeducted purchase price' apply to your pension benefits received?

No.

5. Will the pension benefits be regarded as Net Foreign Pension without an 'undeducted purchase price'?

Yes.

6. Will your Foreign Government pension benefits be treated or taxed in the same way as a Superannuation benefit from an Australian Superannuation Fund?

No.

7. Will the 'low rate cap' apply to you if you elect to receive your Foreign Government pension benefits between the ages of 55 and 60?

No.

8. If you elect to receive your Foreign Government pension benefits when you are 60 years or over, will the taxable component (if any) be tax free?

No.

9. If you elect to receive your Foreign Government pension benefits when you are 60 years or over, will these pension benefits be taxed at your marginal tax rate?

Yes.

This ruling applies for the following period

For the year ended 30 June 2015

This scheme commences on

1 July 2014

Relevant facts

You worked for the Foreign Government as a public servant.

In late 1999, you became a resident of Australia for taxation purposes.

The Foreign Government currently operates two statutory, non-contributory pension schemes for civil servants who are serving on pensionable terms.

· The old pension scheme.

· The new pension scheme.

The pension is normally granted to an employee upon retirement, or in other circumstances as provided under legislation.

This pension is calculated based on salary, length of service and a pension factor under each scheme.

Under the old pension scheme up to 25% may be paid as a lump sum. Under the new pension scheme up to 50% may be paid as a lump sum. The remaining pension amount will be paid monthly.

You are a member of the new pension scheme.

You have elected to receive a lump sum payment, and monthly payments after that.

The lump sum payment is not taxable in the Foreign Country.

The monthly payments are assessable in the Foreign Country.

This benefit is payable upon you turning 55 years of age.

You were not required make personal contributions to this pension.

Relevant legislative provisions

Income Tax Assessment Act 1936 Former Paragraph 23(q)

Income Tax Assessment Act 1997 Subsection 6-5(1)

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

Income Tax Assessment Act 1997 Subsection 6-5(4)

Income Tax Assessment Act 1997 Subsection 6-10(1)

Income Tax Assessment Act 1997 Subsection 6-10(2)

Income Tax Assessment Act 1997 Subdivision 305-B.

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

Income Tax Assessment Act 1997 Subsection 305-55(2).

Income Tax Assessment Act 1997 Section 305-70.

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

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 Subsection 305-80(2).

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

Income Tax Assessment Act 1997 Subsection 305-80(3).

Income Tax Assessment Act 1997 Subsection 770-10(1)

Income Tax Assessment Act 1997 Section 995-1.

Reasons for decision

Summary

The pension payments that you will receive from the Foreign Government, a lump sum and a monthly pension benefit, are assessable in Australia. They are not exempt income, and are not subject to the same concessions offered to benefits from complying Australian Superannuation funds.

Your monthly pension benefit will be taxed at your marginal rate of tax (your personal rate of tax) when you receive it. The tax applicable on your lump sum benefit will be determined at the time you receive the payment, and the applicable foreign exchange rate at that time. As no information has been provided which indicates that personal contributions were made to the pension, undeducted purchase price will not apply to the benefits.

Ordinary Income and Statutory Income

Subsection 6-5(1) of the Income Tax Assessment 1997 (ITAA 1997) provides that assessable income includes 'income according to ordinary concepts', which is called ordinary income.

Subsection 6-5(2) of the ITAA 1997 provides that, if you are an Australian resident, your assessable income includes the ordinary income you derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

Subsection 6-10(1) of the ITAA 1997 provides that assessable income also includes amounts that are not 'ordinary income', but which are included as income by statutory provisions. Subsections 6-10(2) and 6-10(4) of the ITAA 1997 refer to these amounts as statutory income, and if you are an Australian resident, include all amounts (from inside and outside Australia) within assessable income.

Income According to Ordinary Concepts

'Income according to ordinary concepts' is not defined within the legislation; however case law discussion has provided the following characteristics:

· It is received periodically

· It is earned as a result of work performed

· It is expected

· It is relied upon

· It replaces income or has the characteristics of income

In your case, you are a resident taxpayer entitled to Foreign Government pension benefits as a result of your previous civil service for the Foreign Government. You have elected to receive these pension benefits as a 50% lump sum payment, and 50% monthly pension benefit payment.

The Commissioner considers that your pension payments will be ordinary income pursuant to subsection 6-5(1) of the ITAA 1997 as these payments have the characteristics of ordinary income: they have been earned as a result of work performed, are expected, and will be relied upon. Your monthly pension benefits will also be received periodically.

The fact that your pension income is the result of your public service in the Foreign Country will not affect its character as ordinary income in Australia (subsection 6-5(2) of the ITAA 1997).

Derivation of income

Income is assessable when it is 'derived'. The case of The Commissioner of Taxes (South Australia v The Executor, Trustee and Agency Company of South Australia Limited (1938) 63 CLR 108 provides some guidance on the meaning of derived. This case noted that payments for services rendered are generally derived when they are received, regardless or whether the payment is for current, future, or past services.

Further, legislative guidance on the meaning of derived is contained within subsection 6-5(4) of the ITAA 1997. This section provides that, in working out whether you have derived an amount of ordinary income, and (if so) when you have derived it, you are taken to have received the amount as soon as it is applied or dealt with in any way on your behalf or as you direct.

Therefore, the Commissioner considers that your Foreign Government pension benefits will be derived when you receive them. You have sought clarification on whether your pension benefits will be classified as exempt income under former paragraph 23(q) of the ITAA 1936. This paragraph allowed the exemption of certain income; however it does not apply to income derived after 1 July 1987. As your pension benefits will be derived when you receive them, the payments will not be exempt under former paragraph 23(q) of the ITAA 1936.

Assessability of Foreign Pension Benefits

Most foreign pensions and annuities are taxable in Australia, even if tax was withheld from the payment by the country from which the payment came. Foreign funds do not meet the definition of a complying superannuation fund. Therefore, as they are not governed under Australian Superannuation law, the fund, and importantly, the benefits paid, are not entitled to the same concessional taxation treatment as most Australian Superannuation funds receive.

Therefore, in determining the assessability of your pension benefits from the Foreign Government, it is necessary to identify whether the payments are being made from a '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 the present case, however, the entity making the payment is a statutory scheme established under the relevant laws of the Foreign Country. It is not a superannuation fund as that term is normally understood. Monies are not set aside or pooled together in a separate fund (Mahony v. Commissioner of Taxation (Cth) (1967) 41 ALJR 232; (1967) 14 ATD 519 and Scott, Associated Provident Funds Ltd & Belvidere Investments Pty Ltd v Commissioner of Taxation (Cth) [No 2] (1966) 10 AITR 290; (1966) 14 ATD 333; 40 ALJR 265). Benefits are paid out of the general revenue of the Foreign Country.

Thus the statutory scheme established under the new pension scheme of the Foreign Government is not a superannuation fund and thus, not a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997.

However, subsection 305-55(2) of the ITAA 1997 extends the application of Subdivision 305-B, which deals with the taxation of superannuation benefits from foreign superannuation funds, to payments (other than pension payments) received from a scheme for the payment of benefits in the nature of superannuation upon retirement or death, provided the scheme:

- is not, and never has been, an Australian superannuation fund or a foreign superannuation fund; and

- was not established in Australia; and

- is not centrally managed or controlled in Australia.

As noted above, the new pension scheme is a statutory scheme established under the relevant laws of the Foreign Country. The new pension scheme is set up for the express purpose of providing for the payment of benefits in the nature of superannuation upon retirement or death. Its central management and control is clearly not in Australia and it is neither an Australian superannuation fund or a foreign superannuation fund.

Therefore, Subdivision 305-B of Part 3-30 of Chapter 3 of the ITAA 1997 will apply to payments from the new pension scheme made to Australian residents.

Low Rate Cap

The low rate cap does not apply to non-complying superannuation funds. As subdivision 305-B of Part 3-30 of Chapter 3 of the ITAA 1997 applies to the payments from the new pension scheme made to Australian residents, the low rate cap will not apply.

As the low rate cap does not apply, pension and annuity income will be taxed at marginal rates (your personal rate of tax), and they will not contain either taxed or untaxed elements (as these are only for complying superannuation funds).

Foreign Income Tax Offsets

Taxpayers may claim a foreign income tax offset in relation to this income if the country from which the foreign pension or annuity came withheld tax from the payment, they were not entitled to seek a refund of the foreign tax from that country, and the foreign pension or annuity is also taxable in Australia.

Subsection 770-10(1) of the ITAA 1997 provides that a taxpayer is entitled to a foreign income tax offset for an amount of foreign income tax if they paid it in respect of an amount that is all or part of an amount included in their assessable income for the year.

To qualify for the offset, foreign income tax must have been paid on an amount that is included in your assessable income; it is not enough that foreign tax has accrued, or that a liability has arisen.

Double Tax Agreements

Further, a refund may result from the terms of an agreement between Australia and that country to prevent double taxation. If the pension or annuity is paid from a country with which Australia has a tax treaty, taxpayers may be able to make arrangements to not have tax withheld from future payments from that country.

However, Australia does not have a tax treaty with the Foreign Country.

Assessability of Monthly Pension Benefits

In your case, you have stated that you have elected to receive 50% of the retirement benefit as a lump sum and 50% as a monthly pension. You have also stated that the lump sum payment will not be taxable in the Foreign Country; however the monthly pension benefit is assessable in the Foreign Country, although no tax will be paid as these payments will be below the personal allowance allowed in that country.

Based on the information you have provided the Commissioner considers that the monthly pension benefit that you will receive will be assessable income and is to be included in your income tax return. The reasons for this are as follows:

· The income will be derived when you receive it

· The income has the hallmarks of ordinary income

· The income is not exempted under former paragraph 23(q) of the ITAA 1936

· You are not entitled to a foreign income tax offset as Australia does not have a DTA with the Foreign Country.

The assessability of your lump sum pension benefit has been determined below.

Assessability of Lump Sum Pension Benefit

The 'applicable fund earnings' in respect of the lump sum payment being paid from the new pension scheme is to be translated into Australian currency on the date the payment is made and is included in your assessable income for that income year.

As you will still have an interest in the new pension scheme you will not be eligible to elect for the applicable fund earnings to be included in the assessable income of the Australian superannuation fund.

Lump sum payments 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 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 becomes an Australian resident after the start of the period to which the lump sum relates.

In determining whether an amount is assessable under subsection 305-70(2) 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 subsection 305-70(2) will not have any application.

As identified above, even though the payments will not be made by a foreign 'superannuation fund' subdivision 305-B of Part 3-30 of Chapter 3 of the ITAA 1997 will apply to payments from the new pension scheme made to Australian residents.

Applicable fund earnings

You became an Australian resident for tax purposes in late 1999 (the residency date) and the proposed lump sum payment will be made more than six months after you became an Australian resident. Therefore, a portion of your lump sum payment may be assessable under subsection 305-75(3) of the ITAA 1997.

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).

In short, you are assessed only on the income earned (the accretion) in the new pension scheme less any contributions made since your residency date. Further, any amounts representative of earnings/growth during periods of non-residency and certain capital amounts previously transferred into the paying scheme 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. The applicable fund earnings is the result of a calculation from two other amounts and subsection 960-50(4) states 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.

Amounts to be used in calculation

To determine the applicable fund earnings under subsection 307-75(3) of the ITAA 1997 it is necessary to know the value of pension benefits vested in you on the day before you became an Australian resident, that is, late 1999.

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

The documentation that you have provided states that when you turn 55 you are entitled to a certain amount. This amount is to be transferred as a lump sum payment into your Australian bank account.

Accordingly, the amount that you ultimately become entitled to receive is converted into Australian dollars at the exchange rate that applied on that day (or such later date when the payment is ultimately made).

The Commissioner's view is that 'the period' for the purposes of paragraph 305-75(3)(c) of the ITAA 1997 commences on the day on which the person first became an Australian resident and ceases on the day the lump sum is paid. In your case, that period is from late 1999 until the date the payment is made and you were a resident for the whole of that period.

Calculation of the assessable amount of the payment from foreign superannuation fund

In accordance with 305-75 (3) of the ITAA 1997 the amounts determined at sub-paragraphs 305-75(3)(a)(i), (ii) and (iii) are added.

You are currently entitled to receive an amount. Therefore this amount (or the cumulative commuted pension gratuity amount that is ultimately made to you) is to be converted to Australian dollars at the daily rate of exchange applying on the day you turn 55 (or the daily exchange rate on the date the payment is ultimately made).

Please note, as the lump sum gratuity has not yet been made we cannot advise if there will be an amount to include as assessable 'applicable fund earnings'.

If you choose to receive a reduced pension and lump sum gratuity you will need to convert the lump sum amount from foreign currency to Australian dollars at the daily rate of exchange that applied on that day or the next working day. You will be assessed only on the income earned in the fund, that is the accretion in the fund (if any) since the date you became a resident of Australia.

If the converted amount is less than the amount you were entitled to receive at your residency date, no amount is to be included as assessable income as the 'applicable fund earnings' is nil.

However, if the converted amount when received is more than the amount you were entitled to receive at your residency date, you will need to include the excess in your assessable income in the year that it is received.

Election

A taxpayer transferring their overseas superannuation directly to an Australian complying superannuation fund more than six months after becoming a resident, may be able to elect under subsection 305-80(2) of the ITAA 1997 to have all or part of the payment treated as assessable income of the Australian superannuation fund.

As a result, any amount the taxpayer specifies in an election notice will be included as assessable income of their Australian superannuation fund and subject to tax at 15% rather than being included in the taxpayer's assessable income and subject to tax at the taxpayer's marginal rate.

To qualify, a taxpayer must, immediately after the relevant payment is made, no longer have an interest in the paying fund under subsection 305-80(1) of the ITAA 1997. Under subsection 305-80(3), the election must be in writing, specify the amount to be covered by the election and comply with any requirements specified in the Income Tax Regulations.

In this case, you will still have an interest in the new pension scheme as you will be receiving your annual pension. Therefore you will not be eligible to make an election under subsection 305-80(1) of the ITAA 1997.

Undeducted Purchase Price

The undeducted purchase price (UPP) represents the amount of a taxpayer's personal contributions to their superannuation fund for which they did not receive a tax deduction. The UPP is an amount which is claimed over the life of the pension or the life expectancy of the recipient at the time the pension commences to be paid.

You were not required to make personal contributions to your pension. Therefore, if no contributions were made to the pension scheme there is no UPP, and therefore you are not eligible to claim a UPP deductible amount.

If a UPP cannot be claimed the full amount of the pension should be reported in your income tax return at Question 20 Label L 'Net Foreign Employment or Annuity Income WITHOUT an Undeducted Purchase Price'.