Edited version of your private ruling

Authorisation Number: 1012499031862

Ruling

Subject: Lump sum payment from a foreign pension scheme

Questions:

1. Is any part of a lump sum payment (LSP) received from a foreign pension fund exempt from tax under section 305-65 of the Income Tax Assessment Act 1997?

2. Is any part of the LSP from a foreign pension fund received in consequence of the termination of foreign employment exempt from tax under section 23AG of the Income Tax Assessment Act 1936?

3. Is any part of a LSP received from a foreign pension fund assessable as applicable fund earnings?

Advice/Answers:

1. No.

2. No.

3. Yes.

This ruling applies for the following period:

1 July 2012 to 30 June 2013

The scheme commenced on:

1 July 2012

Relevant facts:

Your client is over 55 years of age.

Your client commenced employment in a foreign country with a company which was taken over by another company (the employer).

Your client joined an expatriate superannuation plan which was managed by an Australian entity, which was subsequently closed.

Your client joined another superannuation fund (the Fund). Contributions were made to the Fund by the employer. No contributions were made by your client to the Fund.

All contributions were made in Australian dollars.

Your client's benefits in the original fund were transferred to the Fund.

Your client resigned from employment.

Your client received a lump sum superannuation payment from to the Fund with tax withheld.

You have advised that contributions are made monthly by the employer.

Documentation from the Fund states that withdrawals of funds can only be made on ceasing employment on reaching the age of 55 years, on death, on becoming permanently or totally incapacitated, on permanently leaving the country or when transferring to a new superannuation fund.

Your client was a resident of Australia during the period of employment in the foreign country.

The lump sum payment is not exempt from taxation under the law of the foreign country.

Assumptions:

Your client has been unable to obtain the amount of employer contributions made to the Fund for some years. However, documentation from the Fund states that a percentage of the employee's total annual salary is contributed by the Company to the employee's Fund account.

In a phone call you agreed that we could estimate the contributions by using an estimate of your client's salary and the percentage of it contributed by the employer for the relevant years.

An estimate of the annual salary and the percentage contributed has been provided by your client. From the figures provided the amount of employer contributions has been estimated.

Relevant legislative provisions:

Income Tax Assessment Act 1936 Section 23AG

Income Tax Assessment Act 1936 Subsection 23AG(1AA)

Income Tax Assessment Act 1997 Section 305-55

Income Tax Assessment Act 1997 Section 305-65

Income Tax Assessment Act 1997 Section 305-70

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(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(5)

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

Income Tax Assessment Act 1997 Section 307-65

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

Income Tax Assessment Act 1997 Subsection 960-50

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

Superannuation Industry (Supervision) Act 1993 Section 10

Superannuation Industry (Supervision) Act 1993 Section 62

Reasons for decision

Summary

No part of the lump sum paid by the foreign fund (the Fund) in the foreign country received in consequence of the termination of foreign employment is exempt from tax under section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936).

Part of the lump sum paid by the Fund in the foreign country is assessable as 'applicable fund earnings'.

The applicable fund earnings is the assessable amount to be declared in your client's income tax return in the 2012-13 income year (the income year in which he received the payment) and will be subject to your client's marginal rate of tax.

The remainder of the retirement lump sum is not assessable income and is not exempt income. As such, this amount does not have to be declared in your client's income tax return.

Detailed reasoning

Lump sum superannuation payment - Australian resident period

In relation to a termination of employment in a foreign country and receipt of a superannuation lump sum payment, section 305-65(1) of the Income Tax Assessment Act 1997 states the following:

A superannuation lump sum you receive is not assessable income and is not exempt income if:

(a) you receive it in consequence of:

(i) the termination of your employment as an employee, or as the holder of an office, in a foreign country; or

(ii) the termination of your engagement on qualifying service on an approved project (within the meaning of section 23AF of the Income Tax Assessment Act 1936), in relation to a foreign country; and

(b) it relates only to the period of that employment, holding of office, or engagement; and

(c) you were an Australian resident during the period of the employment, holding of office or engagement; and

(d) you receive the lump sum within 6 months after the termination; and

(e) the lump sum is not exempt from taxation under the law of the foreign country; and

(f) for a period of employment or holding an office - your foreign earnings from the employment or office are exempt from income tax under section 23AG of the Income Tax Assessment Act 1936; and

(g) for a period of engagement on qualifying service on an approved project - your eligible foreign remuneration from the service is exempt from income tax under section 23AF of that Act

For a payment from a foreign superannuation fund to be tax free all of the conditions in subsection 305-65(1) of the ITAA 1997 must be satisfied.

While your client was employed in the foreign country your client was a member of the Fund, an employer sponsored fund. Your client resigned from his employment and received a lump sum payment (the payment) from the Fund within six months of termination of their foreign employment. Therefore, the payment is received as a consequence of the termination of your client's employment in the foreign country. As a result paragraph (a) is satisfied.

The payment relates to your client's period of employment, as the retirement savings plan was set up for employees of the employer. Therefore paragraph (b) is satisfied.

Your client was a resident of Australia during their period of employment in the foreign country so paragraph (c) is satisfied.

Your client's employment in a foreign country terminated and they received a lump sum payment from the Fund within 6 months of their termination of employment in the foreign country. Therefore paragraph (d) is satisfied.

The payment was not exempt from tax in the foreign country as stated in the statement from the Fund. Therefore paragraph (e) has been satisfied.

Exemption of income earned in overseas employment

Paragraph (f) requires that for the period of employment or holding of an office, one's foreign earnings from that employment or office be exempt from income tax under section 23AG of the ITAA 1936.

Section 23AG of the ITAA 1936 effectively operates to exempt foreign earnings derived from certain activities by an Australian resident taxpayer for at least 91 days of continuous employment in a foreign country. However, from 1 July 2009 the scope of the exemption under section 23AG is substantially restricted by the operation of subsection 23AG(1AA).

Subsection 23AG(1AA) of the ITAA 1936 states:

However, those foreign earnings are not exempt from tax under this section unless the continuous period of foreign service is directly attributable to any of the following:

(a) the delivery of Australian official development assistance by the person's employer;

(b) the activities of the person's employer in operating a public fund that:

(i) is covered by item 9.1.1 or 9.1.2 of the table in subsection 30-80(1) of the Income Tax Assessment Act 1997 (international affairs deductible gift recipients); and

(ii) meets the special conditions mentioned in that item.

(c) the activities of the person's employer, if the employer is exempt from income tax because of paragraph 50-50(c) or (d) of the Income Tax Assessment Act 1997 (prescribed institutions located or pursuing objectives outside Australia);

(d) the person's deployment outside Australia as a member of a disciplined force by:

(i) the Commonwealth, a State or a Territory; or

(ii) an authority of the Commonwealth, a State or a Territory;

(e) an activity of a kind specified in the regulations.

The Explanatory Memorandum (EM) to the Tax Laws Amendment (2009 Budget Measures No 1) Act 2009 which inserted subsection 23AG(1AA) into the ITAA 1936 states that foreign employment income derived by an Australian resident from not less than 91 days continuous foreign service will only be exempt if the foreign service is directly attributable to:

· the delivery of Australia's overseas aid program by the individual's employer;

· the activities of the individual's employer in operating a developing country relief fund or an overseas public disaster relief fund;

· the activities of the individual's employer, being a prescribed institution that is exempt from Australian income tax;

· the individual's deployment outside Australia by an Australian government (or an authority thereof) as a member of a disciplined force; or

· an activity of a kind specified in regulations.

It is noted that currently there are no regulations enacted for subsection 23AG(1AA) of the ITAA 1936.

You have asked whether there is a difference in the tax treatment of the lump sum with respect to section 23AG of the ITAA 1936 regarding income received pre 1 July 2009 and post 1 July 2009.

Therefore the question that arises is whether section 305-65 of the ITAA 1997 applies to Australian residents who have foreign earnings only part of which are exempt under section 23AG of the ITAA 1997.

Section 305-65(1)(f) of the ITAA 1997 specifies that for the section to apply, foreign earnings from the employment or office must be exempt under section 23AG of the ITAA 1936.

The Commissioner considers that for section 305-65 of the ITAA 1997 to apply, all the earnings from the employment to which the termination payment relates must be covered entirely by section 23AG of the ITAA 1936.

Accordingly, paragraph 305-65(1)(f) of the ITAA 1997 will not apply where only part of the earnings from employment are exempt, for example where only earnings received before 1 July 2009 are exempt from tax under section 23AG of the ITAA 1936.

In this case your client was an employee of the employer. Employment with the employer does not fall within the activities listed under subsection 23AG(1AA) of the ITAA 1936 and currently there are no regulations gazetted.

Therefore, the exemption provided under section 23AG of the ITAA 1936 would not apply to the salary your client received from the employer after 1 July 2009. Consequently all earnings (including those earned before July 2009) are not exempt under paragraph 305-65(1)(f) of the ITAA 1997.

Therefore the condition under paragraph 305-65(1)(f) of the ITAA 1997 is not satisfied.

Consequently section 305-65(1) will not apply to exclude the lump sum payment from the superannuation fund from being assessable income of your client.

If section 305-65 of the ITAA 1997 is not satisfied, section 305-70 of the ITAA 1997 has to be considered.

Lump sum payments received after termination of foreign employment

Subsection 305-70(1) of the ITAA 1997 states that section 305-70 applies to a superannuation lump sum from a foreign superannuation fund if the recipient is a resident when the lump sum is received and sections 305-60 and 305-65 of the ITAA 1997 do not apply. As stated above, section 305-65 does not apply to your client.

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 of the ITAA 1997 will not have any application.

Under subsection 305-70(2) of the ITAA 1997 applicable fund earnings calculated under section 305-75 are to be included in assessable income. The 'applicable fund earnings' is the amount worked out under either subsections 305-75(2) or 305-75(3). As your client was a resident at all times during the period to which the lump sum relates the applicable fund earnings will be calculated under subsection 305-75(2) of the ITAA 1997 if the Fund is a foreign 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 will be assessable under section 305-70 of the ITAA 1997.

The applicable fund earnings are 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.

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 of the ITAA 1997 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.

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), which requires that the fund is a provident, benefit, superannuation or retirement fund.

Provident, benefit, superannuation or retirement fund

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. Federal Commissioner of Taxation (1967) 41 ALJR 232; (1967) 14 ATD 519.

In that case, 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.

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 it is evident that the retirement savings plan in the foreign country (the Fund) which is a retirement savings plan established overseas, is not an Australian superannuation fund as defined in subsection 295-95(2) of the ITAA 1997.

Further, withdrawals from the Fund can only be made on ceasing employment on reaching the age of 55 years, on death, on becoming permanently or totally incapacitated, on permanently leaving the country or when transferring to a new superannuation fund.

Therefore it is clear that the benefits paid under the above provisions are payable upon events common to superannuation funds, that is, on retirement, disability or death.

Consequently, the Fund is a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997.

Applicable fund earnings

Your client was a resident of Australia for tax purposes and received the lump sum payment from the foreign fund during the relevant income year. Section 305-70 of the ITAA 1997 applies to include the 'applicable fund earnings' (if any) in your client's assessable income in their relevant income tax return.

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

Subsection 305-75(2) of the ITAA 1997 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 your previously exempt fund earnings (if any) covered by subsections (5) and (6).

Amounts to be used in calculation

The following paragraphs show how the 'applicable fund earnings' are calculated.

305-75(2)(a)(i) - Contributions made for your client or in respect of your client after the date your client became a member of the Fund is the sum of all employer contributions including vested contributions.

305-75(2)(a)(ii) - Amounts transferred into the Fund from any other foreign superannuation fund during the period are the amounts transferred from the old overseas fund.

305-75(2)(b) - The policy was paid out to your client in the form of a lump sum. Therefore this is the amount vested in your client when the lump sum was paid. The amount paid is the amount payable by the Fund before deduction of foreign income tax.

305-75(2)(c) - There are no previously exempt fund earnings in relation to the lump sum.

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

In accordance with subsection 305-75(2) of the ITAA 1997 the amounts determined at sub-paragraphs 305-75(2)(a)(i) and (ii) are added.

This total is then subtracted from the amount determined under paragraph 305-75(2)(b),

Previously exempt fund earnings are added to the above result under paragraph 305-75(2)(c).

The result of the above calculation is the applicable fund earnings.