Edited version of your private ruling

Authorisation Number: 1012538378659

Ruling

Subject: Lump Sum Payment from a Foreign Super Fund

Question 1

Is any part of a lump sum payment from a foreign pension fund assessable as applicable fund earnings?

Answer

Yes.

Question 2

Is the taxpayer entitled to a foreign income tax offset for tax paid on the lump sum in an overseas country?

Answer

Yes.

This ruling applies for the following periods:

The year ending 30 June 2013.

The scheme commences on:

1 July 2012.

Relevant facts and circumstances

Your client migrated to Australia prior to the 2012-13 financial year.

Your client held an interest in a pension scheme established and controlled in an overseas country.

You have advised us of the value of the pension fund before your client migrated to Australia.

There have been no contributions to the pension scheme since your client migrated to Australia.

Your client cannot access their benefits in the pension scheme other than at retirement or migrating to another country.

Your client's benefits in the pension scheme were transferred to your client's bank account in Australia during the 2012-13 financial year.

Tax was withheld on the transfer.

The gross value of the transfer in Australian dollars is based on the actual amount received in Australian dollars in addition to the amount of tax paid in Australian dollars.

Your client no longer has any interests in the pension scheme.

Relevant legislative provisions

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

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 305-80(1)

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

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

Reasons for decision

Summary

A portion of the lump sum payment transferred from the pension scheme to your client's bank account must be included as assessable 'applicable fund earnings' in their tax return for the 2012-13 income year.

As your client has paid an amount of foreign income tax, they will be eligible to claim a foreign income tax offset.

Detailed reasoning

Lump sum payments transferred 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.

An amount is only assessable under section 305-70 of the ITAA 1997 if the entity making the payment is a foreign superannuation fund.

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 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.

In this case, the lump sum benefit was transferred from the overseas pension scheme. It is evident that the pension is not an Australian superannuation fund as defined in subsection 295-95(2) of the ITAA 1997. Based on the information provided, the Commissioner considers that the pension scheme satisfies the definition of a foreign superannuation fund under subsection 995-1(1).

Provident, benefit, superannuation or retirement fund

The High Court examined both the terms superannuation fund and fund in Scott v. Federal Commissioner of Taxation (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. Federal Commissioner of Taxation (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 from the overseas fund 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) of the ITAA 1997. 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.

The documentation provided indicates your client's benefits in the pension scheme are only payable upon retirement, which would meet the definition of a superannuation fund. In addition, it is clear that pension scheme who made the lump sum payment to your client was established outside of Australia with their central management and control outside of Australia.

Therefore, on the basis of the information provided, the Commissioner considers the lump sum payment received was from a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997.

Applicable fund earnings

Your client became a resident of Australia for tax purposes prior to the 2012-13 financial year and received the lump sum payment in respect of their entitlement in the pension scheme during the 2012-13 financial year. As this was more than six months after your client became an Australian resident, section 305-70 applies to include the '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).

This means your client is assessed only on the income they earned on their benefits in the pension scheme less any contributions they made since they became a resident of Australia. Any earnings made 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.

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 (A$). The applicable fund earnings is the result of a calculation from two other amounts and subsection 960-50(4) states that 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.

All exchange rates are on the ATO's website.

Amounts to be used in calculation

The benefits in the pension fund on the day before your client became a resident of Australia are converted into Australian dollars at the exchange rate that applied on that day.

From the facts provided no contributions have been made to the pension fund since you migrated to Australia.

During 2012-13 income year, your client's benefits in the pension fund were paid out to your client in the form of a lump sum which was directly deposited into his bank account. This sum was converted into Australian dollars. Tax was withheld on the transfer. The gross value of the amount received is the actual amount received in addition to the tax withheld. Therefore this is the amount vested in your client when the lump sum was paid.

'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. Your client was a resident for the whole of both those periods. 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 sums.

Calculation of the assessable amount of the payment from the pension 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.

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

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

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

Because the amount, in Australian dollars, vested in your client before they became a resident of Australia is lower than the actual amount of the lump sum payment of benefits received, in Australian dollars, the result of this calculation is positive.

As the amount is greater than zero, a portion of the amount of the lump sum payment from the Pension Fund will be included as assessable 'applicable fund earnings' in your client's 2012-13 income year.

Foreign income tax offset

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

To be entitled to a foreign income tax offset:

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

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

Your client 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.

Conclusion

A portion of the lump sum payment transferred from the overseas pension scheme must be included as assessable 'applicable fund earnings' in your client's tax return for the 2012-13 income year.

As your client has paid an amount of foreign income tax, they will be eligible to claim a foreign income tax offset.