Edited version of your private ruling

Authorisation Number: 1012497555349

Ruling

Subject: Assessability of income

Questions and answers:

1. Is the lump sum bereavement payment that you have received included in your assessable income?

No.

2. Is the bereavement allowance that you are in receipt of included in your assessable income?

Yes.

3. Is any part of a lump sum payment made from a foreign superannuation fund assessable income to you as 'applicable fund earnings' under section 305-75 of the Income Tax Assessment 1997 (ITAA 1997)?

Yes.

4. Are you entitled to an annual deductible amount in respect of the undeducted purchase price (UPP) of the pensions made from the foreign superannuation funds?

No.

This ruling applies for the following periods:

Year ended 30 June 2012

Year ended 30 June 2013

Year ended 30 June 2014

The scheme commences on:

1 July 2011

Relevant facts and circumstances

Facts for Questions 1-2

You were formally a resident of country T.

You and your spouse moved to Australia and became residents of Australia for income tax purposes.

Your spouse recently passed away.

As a result of your spouse's passing you have received a lump sum bereavement payment and a bereavement allowance that is paid periodically for a set period.

Facts and assumptions for Questions 3-4

You formerly resided in country T and became a member of the country T Fund.

Under the rules of the country T Fund you are entitled to a pension payable during your lifetime.

You have not provided documentation from the country T Fund which show the amount of contributions made to the fund by you.

Your spouse migrated to Australia and became a resident for tax purposes.

After a short period, you migrated to Australia and became a resident for tax purposes.

You and your spouse are and were both under 65 years of age.

Scheme 1

Whilst residing in country T you became a member of Scheme 1, an employer sponsored superannuation fund in country T.

The information provided in relation to the terms and conditions of the Scheme 1, indicate the benefits are paid for retirement purposes or death.

The Scheme 1 rules permit you to surrender part of your pension payable in exchange for a lump sum retiring allowance.

A statement from scheme 1 states that you were entitled to receive a pension, and a lump sum.

You received a lump sum payment from Scheme 1.

In a letter scheme 1 has advised that your service in scheme 1 that the benefits increase with the Consumer Price Index (CPI).

You have advised that no contributions were made by you or anyone on behalf of you since you became a resident of Australia.

You have advised that you are unable to obtain the transfer value of your superannuation entitlement on the day before you became a resident of Australia from the administrator of scheme 1.

Scheme 3

In a letter your spouse was advised that the value of the benefits held with the Scheme 2 were transferred to the scheme 3. Scheme 3 provides the same type of benefits as are allowed under a pension scheme and is subject to the same Inland Revenue restrictions in country T.

Under the terms of scheme 3 a widow's pension is payable on death before State Pensionable Age, increased by 8.5% compound for each complete tax year a set date and the death of a member.

The benefits with scheme 3 were later transferred to the scheme 4 in country T.

Your spouse died and was under 65 years of age.

On the death of your spouse, you became entitled to receive benefits as a policy holder spouse and chose to receive a lump sum payment and a death benefit pension payment.

You received a lump sum death benefit payment from the scheme 3.

The country T end of year certificate shows you received a scheme 3 pension payment of with an amount of tax deducted.

You have advised that no personal contributions were made by your spouse or anyone on behalf of your spouse to scheme 2 or scheme 3 since your spouse became a resident of Australia.

The information provided in relation to the terms and conditions of scheme 3, indicate the benefits are paid for retirement purposes or death.

You were not a member of scheme 3 prior to the death of your spouse.

Assumptions

Section 357-110 of Schedule 1 to the Taxation Administration Act 1953 (TAA) gives the Commissioner a power to make assumptions which he considers to be most appropriate.

You were advised that, as you could not provide the total transfer value of your benefits in scheme 1 as at the day before you became an Australian resident, an assumption will be made.

You have agreed that the transfer value of your lump sum benefit the day before you became an Australian resident in scheme 1 was $XXXX.

The Commissioner considers it reasonable to assume this value, based on your benefit and changes to the country T Consumer Price Index (CPI).

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5.

Income Tax Assessment Act 1997 Subsection 6-10(4).

Income Tax Assessment Act 1997 Section 10-5.

Income Tax Assessment Act 1936 Section 27H.

International Tax Agreements Act 1953 Section 4.

International Tax Agreements Act 1953 Schedule Sch1.

International Tax Agreements Act 1953 Subsection Sch1-Art17(1).

International Tax Agreements Act 1953 Subsection Sch1-Art17(2).

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

Income Tax Assessment Act 1997 Paragraph 295-95(2)(a)

Income Tax Assessment Act 1997 Paragraph 295-95(2)(b)

Income Tax Assessment Act 1997 Paragraph 295-95(2)(c)

Income Tax Assessment Act 1997 Subsection 295-95(3)

Income Tax Assessment Act 1997 Section 305-70

Income Tax Assessment Act 1997 Section 305-75

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(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 305-75(5)

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

Income Tax Assessment Act 1997 Section 960-50

Income Tax Assessment Act 1997 Subsection 960-50(1)

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

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

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

Superannuation Industry (Supervision) Act 1993 Section 10

Superannuation Industry (Supervision) Act 1993 Section 19

Superannuation Industry (Supervision) Act 1993 Section 62

Taxation Administration Act 1953 Section 357-110 of Schedule 1

Income Tax Assessment Regulations 1997 Regulation 960-50.01.

Reasons for decision

Reason for decision for questions 1-2

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year. Ordinary income is income according to ordinary concepts which is not specifically defined in the legislation.

However, characteristics of ordinary income that have evolved from case law include receipts that: 

· are earned;

· are expected;

· are relied upon; and

· have an element of periodicity, recurrence or regularity.  

Payment for personal services, whether received in the capacity of an employee or otherwise in connection with employment or other personal services is income according to ordinary concepts. Similarly, any payment (for example- compensation) to replace income is also considered to be income according to ordinary concepts.

Bereavement lump sum payment 

In your case, you have received a bereavement lump sum payment, as a result of your spouse passing away. The payment does not have the characteristics of ordinary income. It was not earned by you and was not a payment for any personal services that you provided. Further to this, the payment did not seek to compensate you for any loss of earnings which would have otherwise been assessable as ordinary income. It was paid in order to assist you with any expenses as a result of your spouse passing away. As a one-off payment it had no element of periodicity, recurrence or regularity. 

Hence the bereavement payment is not ordinary income according to ordinary concepts, and therefore not assessable under section 6-5 of the ITAA 1997. Further the payment is not statutory income as no specific provision in either the ITAA 1936 or the ITAA 1997 includes the payment in assessable income. 

Accordingly, the one-off bereavement lump sum payment that you have received is not included in your assessable income under section 6-5 or section 6-10 of the ITAA 1997.

Bereavement allowance

You have received a bereavement allowance that is sourced in Country X. 

Income sourced in an overseas country is considered to be foreign sourced income when paid to an Australian resident for tax purposes. 

Double tax agreement

"In determining your liability to pay tax in Australia it is necessary to consider not only the domestic income tax laws but also any applicable double tax agreements.

Section 4 of the International Tax Agreements Act 1953 (Agreements Act) incorporates that Act with the ITAA 1936 and the ITAA 1997 so that all three Acts are read as one. The Agreements Act overrides both the ITAA 1936 and ITAA 1997 where there are inconsistent provisions (except in some limited situations).

Section 5 of the Agreements Act states that, subject to the provisions of the Agreements Act, any provision in a Convention listed in section 5 has the force of law. The Convention listed for Country X is listed in section 5 of the Agreements Act.

The Convention is located on the Austlii website (www.austlii.edu.au) in the Australian Treaties Series database. The Convention operates to avoid the double taxation of income received by residents of Australia and Country X.

Article 17(1) of the Convention advises that pensions and annuities paid to a resident of Australia shall only be assessable in Australia.

Further Article 17(2) of the Convention advises that the term "annuity" means a stated sum payable periodically at stated times during life or during a specified or ascertainable period of time under an obligation to make the payments in return for adequate and full consideration in money or money's worth.'

For the purposes of Article 17 of Schedule 1 of the Agreements Act, a bereavement allowance is considered to be a pension or annuity and therefore will be exempt from tax in the Country X. A bereavement allowance may be assessable in Australia under Australian tax law if assessed under a provision of the ITAA 1997 or the Income Tax Assessment Act 1936 (ITAA 1936). 

As previously stated, subsection 6-5(2) of the ITAA 1997 provides that the assessable income of an Australian resident taxpayer includes the ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year. 

If an amount is not ordinary income, the amount may be still included in the taxpayer's assessable income by virtue of section 6-10 of the ITAA 1997 (statutory income) where the amount is included in the taxpayer's income by a provision in the ITAA 1936 or the ITAA 1997. 

Subsection 6-10(4) of the ITAA 1997 states the assessable income of an Australian resident taxpayer includes the statutory income from all sources, whether in or out of Australia, during the income year. 

Particular types of statutory income are listed in section 10-5 of the ITAA 1997. 

Section 27H of the ITAA 1936 includes in a taxpayer's income the amount of any annuity derived by the taxpayer during the year of income. 

An annuity is defined to include a 'superannuation pension' (subsection 27H(4) of the ITAA 1936) and at common law, is a series of payments payable for the remainder of the life of the recipient or for a fixed term. 

As the bereavement allowance is a series of payments payable to you for a fixed term, the payments will be considered an annuity for the purposes of section 27H of the ITAA 1936. 

As you are an Australian resident for tax purposes, an amount of ordinary income and statutory income are included in your assessable income whether the source of the income is in or out of Australia. 

Therefore, the bereavement allowance that you are in receipt of is included in your assessable income under section 27H of the ITAA 1936.

Reason for decision Questions 3-4

Summary

The amount $XXX is calculated as the 'applicable fund earnings' in relation to the lump sum payment received by you from scheme 1.

The amount of $XXX in relation to the lump sum payment you received from scheme 3 is assessable as the applicable fund earnings.

The amounts calculated as the applicable fund earnings are to be included in your assessable income and is subject to tax at your marginal rates.

No personal contributions were made to scheme 1 or scheme 3 therefore no undeducted purchase price applies to the pension payments made to you.

Detailed reasoning

Lump sum payments from foreign superannuation funds

The applicable fund earnings in relation to a lump sum payment (LSP) from a foreign superannuation fund that is transferred or 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 LSP 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 subsection 305-75(3) of the ITAA 1997.

Subsection 305-75(2) of the ITAA 1997 applies where the person was an Australian resident at all times during the period to which the lump sum relates and 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 you previously exempt fund earnings (if any) covered by subsections (5) and (6).

Subsection 305-75(3) of the ITAA 1997 applies where the person becomes an Australian resident after the start of the period to which the lump sum relates and 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).

Subsection 305-75(5) defines previously exempt fund earnings as follows:

You have an amount of previously exempt fund earnings in respect of the lump sum if:

(a) part or all of the amount in the fund that was vested in you when the lump sum was paid (before any deduction for foreign tax) is attributable to the amount; and

(b) the amount is attributable to a payment received from a foreign superannuation fund; and

(c) the amount would have been included in your assessable income under subsection 305-70(2) by the application of this section, but for the payment having been received by another foreign superannuation fund.

Subsection 305-75(6) states:

The amount of your previously exempt fund earnings is the amount mentioned in paragraph (5)(c) (disregarding the addition of previously exempt fund earnings under subsection (2) or (3) of this section).

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 an 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 fund's 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.

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), that is:

(a) a fund that:

(i) is an indefinitely continuing fund; and

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

(a) 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 therefrom 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 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 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). 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 the present case it is evident that the two funds established in country T, scheme 1 and scheme 3 are not Australian superannuation funds as defined in subsection 295-95(2) of the ITAA 1997.

From the information provided, the benefits in scheme 1 and scheme 3 can only be paid on retirement or due to death. As the benefits are paid in circumstances solely relating to retirement purposes, scheme 1 and scheme 3 would meet the definition of a superannuation fund.

Therefore, on the basis of the information provided, the Commissioner considers the LSPs you received from scheme 1 and scheme 3 were made from foreign superannuation funds as defined in subsection 995-1(1) of the ITAA 1997.

Foreign currency conversion

Subsection 960-50(1) of the ITAA 1997 requires that an amount in a foreign currency is to be translated into Australian dollars before being included in a person's assessable income.

Because applicable fund earnings is the result of a calculation from two or more other amounts, subsection 960-50(4) of the ITAA 1997 requires each foreign currency amount in that calculation to be individually translated into Australian dollars before the applicable fund earnings amount is calculated.

Applicable fund earnings - lump sum payment from the FLPS

The 'applicable fund earnings' are worked out under section 305-75 of the ITAA 1997. As mentioned earlier, subsection 305-75(2) applies where the person was an Australian resident at all times during the period to which the lump sum relates.

In this case, you and your late spouse became residents of Australia for tax purposes.

Upon the death of your spouse, you became entitled to a benefit from scheme 3 as a policy holder spouse and chose to receive a LSP and pension payment. Prior to this date you were not a member of the scheme 3, and had no interest in that fund.

Amount to be used in calculation

The LSP that was made to you from scheme 3 is converted into Australian dollars at the exchange rate that applied on that day.

Applicable fund earnings on the FLPS lump sum is calculated under subsection 305-75(2) of the ITAA 1997 as follows.

The total of the amounts mentioned in paragraph 305-75(2)(a) of the ITAA 1997 is Nil, comprising:

· the amount that is attributable to contributions after you became an Australian resident = Nil;

· amounts transferred into the fund from any other foreign superannuation fund = Nil.

Paragraph 305-75(2)(b) of the ITAA 1997 requires that the amount calculated above be subtracted from the total amount of the LSP made by scheme 3.

Finally, paragraph 305-75(2)(c) of the ITAA 1997 requires that any previously exempt fund earnings calculated under subsections 305-75(5) and (6) are added to the total as stated under paragraph 305-75(3)(d). In this case, the total amount of your previously exempt fund earnings is Nil.

Therefore the applicable fund earnings assessable to you in respect of the LSP made by scheme 3 is $XXX. As you were a resident at all times during the period when your entitlement to the benefit with scheme 3 existed, the total amount that you received from the scheme 3 is assessable as applicable fund earnings in accordance with subsection 305-75(2) of the ITAA 1997.

Applicable fund earnings - lump sum payment from the NHS

As mentioned earlier, the 'applicable fund earnings' for the scheme 1 payment are worked out 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 related.

In the facts of this case, documentation from scheme 1 shows that your service in scheme 1 $xxx and that the benefits increase with the Consumer Price Index (CPI).

You have advised that you were unable to obtain the transfer value of your superannuation entitlement on the day before you became a resident of Australia from the administrator of scheme 1.

Undeducted purchase price

The deductible amount represents the undeducted purchase price (UPP) of the pension apportioned over the term that the pension is paid, or expected to be paid. The UPP of a pension payable from a foreign superannuation fund is the total amount of the personal contributions made by the member to secure entitlement to the pension. It does not, however, include contributions made by an employer.

Basically, the deductible amount is calculated as the UPP divided by the life expectancy of the recipient (or, where appropriate, the reversionary pensioner, if greater), or the term of the pension if it is payable for a fixed term. The resultant figure represents the amount that a taxpayer may claim each year as a deduction against his or her pension. The figure is determined in the foreign currency and then converted to Australian dollars each year using the average exchange rate for that particular year.

It should also be noted that in cases where a tax free commuted lump sum (compared to a payment in arrears lump sum) and pension is paid from a fund, the amount of the personal contributions is pro rated between the lump sum and the pension in accordance with the method set out in Taxation Ruling IT 2272. The amount attributable to the lump sum payment does not form part of the UPP of the pension.

Undeducted contributions applicable to country T pensions

Taxation Ruling TR 93/13 explains how to calculate the UPP of the pension made from scheme 4 either the 'exact method' or 'alternative 8% method'. Generally the alternative 8% method is used when documentation cannot be provided by scheme 4. A copy of the TR 93/13 is provided.

No documentation has been provided which show the amount of contributions made to scheme 4 therefore the exact method cannot be calculated.

Please note, these methods in TR 93/13 cannot be used in relation to the UPP calculations for the scheme 1 or scheme 3.

In this case, you have advised that no personal contributions were made by you or your late spouse to scheme 1 or scheme 3 in the period before you both became residents of Australia.

As no personal contributions were made to these funds, the UPP is not required to be calculated.

Consequently, the taxable amount of the pensions made from the scheme 1 or scheme 3 to you will not be reduced by a deductible amount.