Edited version of your private ruling

Authorisation Number: 1012498695795

Ruling

Subject: Payments from foreign superannuation fund

Question 1

Is any part of the lump sum paid from a foreign superannuation scheme to you, 'applicable fund earnings' under section 305-75 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Are the pension payments made to you from the foreign superannuation scheme assessable income under the ITAA 1997?

Answer

Yes.

This ruling applies for the following period:

2012-13 income year

The scheme commences on:

1 July 2012

Relevant facts and circumstances

You worked overseas before migrating to Australia.

You are a member of a foreign pension scheme.

You advised that you migrated to Australia a while ago.

You resigned from your employment in mid 199X and were entitled to pension benefits under the relevant pension scheme. Under the scheme you are entitled to pension benefits upon reaching the age of 55.

You advised that you were able to immigrate to Australia prior to your effective resignation date due to utilising accumulated leave entitlements.

You have provided a copy of a letter from the Treasury of the foreign Government regarding the payment of your deferred pension benefits on attaining the age of 55.

No contributions have been made by you or your employer in order to obtain benefits under the foreign pension scheme.

The benefit is calculated according to formulae relating to pensionable emoluments and length of service.

You have chosen to be paid your entitlements partly in a lump sum and partly by way of a monthly pension. You continue to hold an interest in the foreign pension scheme.

You receive an annual pension from the foreign scheme, which is taxable in that foreign country.

There is no double tax agreement between Australia and that foreign country.

You recently advised that a "deferred pension increase adjustment" was paid to you in the relevant income year from the foreign pension scheme.

This amount is converted to A$P at the exchange rate applicable on the date of payment.

Relevant legislative provisions

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

Income Tax Assessment Act 1997 Section 305-55

Income Tax Assessment Act 1997 Section 305-70

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

Income Tax Assessment Act 1997 Section 305-75

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

Income Tax Assessment Act 1997 Subsection 305-75 (3)

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

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

Income Tax Assessment Act 1997 Subsection 306-70

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

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

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

Income Tax Assessment Act 1936 section 27H

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

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 subsection 6-10(4)

Reasons for decision

Summary

The applicable fund earnings relating to the lump sum payment from the foreign pension scheme is $X. This amount is to be included in your assessable income for the relevant income year.

The foreign government pension you receive from the scheme is also assessable income and the total amount received for the relevant income year is to be included in your assessable income for the relevant income year.

The deferred pension increase adjustment you received in the relevant income year of $P is also assessable income. This amount is to be added to the total amount of the foreign pension received in the rellevant income year and declared in your relevant assessable income.

Reasons for Decision

Detailed reasoning

1. 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 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) 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.

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.

In the present case however, the entity making the payment is a statutory scheme established under the relevant laws of that 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. Benefits are paid out of the general revenue of that country.

Thus the statutory scheme referred to as the foreign pension scheme is not a superannuation fund and therefore 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 scheme is a statutory scheme established under the relevant laws of that country. The 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 outside Australia and it is neither an Australian superannuation fund nor a foreign superannuation fund.

Therefore, Subdivision 305-B of the ITAA 1997 will apply to payments made from the scheme to Australian residents.

Applicable fund earnings - calculation of assessable amount

You became a resident of Australia for tax purposes a while ago and received a lump sum payment from the scheme in the relevant income year. As this was more than six months after you became an Australian resident, section 305-70 applies to include any 'applicable fund earnings' in your assessable income.

The 'applicable fund earnings' are worked out under section 305-75. As mentioned earlier, subsection 305-75(3) applies where the person becomes an Australian resident after the start of the period to which the lump sum relates.

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, 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 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 growth in the scheme less any contributions you have made since becoming a resident of Australia. Any amounts representative of earnings during periods of non-residency, and transfers into the paying fund do not form part of the taxable amount when the overseas benefit is paid.

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 prior to you becoming an Australian resident (resident day).

In this case, as you became an Australian resident before your effective retirement date on which the commuted pension gratuity vested in you was determined to be $K.

Considering that the date of retirement is only a few months from the resident day and that the value of the pension benefits vested in you could only be accurately determined on the retirement date, it is accepted that the value of pension gratuity vested in you prior to becoming an Australian resident is also $K (i.e. the value of commuted pension gratuity determined on the date of retirement).

This is converted into Australian dollars at the exchange rate that applied on the day just before you became an Australian resident, which converts the amount of $K to A$A.

From the facts provided no contributions have been made to the scheme since you became a resident of Australia.

In the relevant income year, some of your benefits in the scheme were paid out to you in the form of a lump sum of $L. Therefore this is the amount vested in you when the lump sum was paid. This amount is converted into Australian dollars at the exchange rate that applied on that day, which converts $L to A$B.

'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, you were a resident for the whole of this period. Therefore, the Australian resident days and the total days are the same, and so the proportion to be used in the calculation is 1.

There are no previously exempt fund earnings in relation to the lump sum.

Applying subsection 305-75(3) of the ITAA 1997 to your circumstances, the amounts to be used in calculating the applicable fund earnings are as follows:

305-75(3)(a)(i) $A

305-75(3)(a)(ii) Nil

305-75(3)(a)(iii) Nil

305-75(3)(b) $B

305-75(3)(c) 1

305-75(3)(d) Nil

Calculation of the assessable amount of the lump sum payment from the scheme

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

$A + nil + nil = $A

This total is then subtracted from the amount determined under paragraph 305-75(3)(b):

$B less $A is $X

This figure is multiplied by the proportion of the total days determined under paragraph 305-75(3)(c):

$X x 1 = $X

To this figure we add the amounts determined under paragraph 305-75(3)(d):

$X + nil = $X

Therefore, $X is the amount of 'applicable fund earnings' in relation to the lump sum from the foreign fund that is assessable income.

2. Assessability of foreign source pension

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

Section 6-10 of the ITAA 1997 provides that a taxpayer's assessable income includes statutory income amounts that are not ordinary income but are included in assessable income by another provision. The assessable income of an Australian resident includes statutory income from all sources, whether in or out of Australia (subsection 6-10(4) of the ITAA 1997).

Section 27H of the Income Tax Assessment Act 1936 (ITAA 1936) provides that annuities or pensions paid from a foreign superannuation fund or source, or a pension paid from a scheme that is not, and has never been, an Australian superannuation fund are included in your assessable income.

Therefore, the foreign government pension you receive is taxable in Australia.

General advice

If you paid foreign tax on income you received from outside Australia in an income year you may be entitled to a foreign income tax offset which provides relief from double taxation.

To be entitled to a foreign income tax offset:

· you must have actually paid, or be deemed to have paid, an amount of foreign income tax; and

· the income on which you paid foreign income tax must be included in your assessable income for Australian income tax purposes.

You will need written evidence of payment of foreign tax, such as:

· a notice of assessment from the foreign tax authority and a receipt for the tax paid; or

· a statement from the foreign tax authority setting out the particulars that would normally be recorded on a notice of assessment and a receipt for payment; or

· a certificate for deduction of withholding tax issued by the person who pays the income that is subject to foreign tax.

When completing your relevant income tax return you will need to record the amount of the foreign pension you receive plus the amount of the deferred pension increase at question 20 Foreign source income and foreign assets or property in the Supplementary section. You can also claim the foreign income tax offset at this question.

Where foreign tax is taken out of your foreign pension you will need to add the amount of foreign tax to the amount of the foreign pension you received before recording it in the return.

This advice provides you with the following level of protection:

Interest and penalty protection

You can rely on this advice to provide you with protection from interest and penalties in the way explained below.

If the advice turns out to be incorrect and you underpay your tax as a result, you will not have to pay a penalty. Nor will you have to pay interest on the underpayment provided you reasonably relied on the advice in good faith. However, even if you don't have to pay a penalty or interest, you will have to pay the correct amount of tax.

Conclusion:

The applicable fund earnings relating to the lump sum payment from the foreign country scheme is $X. This amount is to be included in your assessable income for the relevant income year.

The foreign government pension you receive from the scheme and the deferred pension increase adjustment is also assessable income and the total amount (of both) received for the relevant income year is to be included in your assessable income for the relevant income year.

If foreign tax is taken out of your foreign pension you will need to add the amount of foreign tax to the amount of the foreign pension you received before recording it in the return. You are then entitled to also claim the foreign tax offset for the foreign tax paid (if any) on the government pension.