Edited version of your private ruling

Authorisation Number: 1012585359057

Ruling

Subject: Assessability of foreign income

Question 1

Is the growth in the funds associated with your foreign life insurance policy assessable in the year of growth?

Answer

No.

Question 2

Will the lump sum paid on maturity of your foreign life insurance policy be assessable?

Answer

No.

Question 3

Are pensions paid to you by the Scheme included in your assessable income and subject to tax?

Answer

Yes.

Question 4

Where you receive a lump sum payment from the Scheme will section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997) apply?

Answer

Yes.

This ruling applies for the following periods

Year ended 30 June 2010

Year ended 30 June 2011

Year ended 30 June 2012

Year ended 30 June 2013

Year ended 30 June 2014

Year ended 30 June 2015

Year ended 30 June 2016

The scheme commences on

1 July 2009

Relevant facts and circumstances

You have been a resident of Australia for tax purposes for a number of years.

You hold an interest in a Superannuation Scheme (the Scheme), a pension fund in country Y.

You joined the scheme a number of years ago. You have since left the scheme.

No superannuation contributions have been made by you or your former employer since you left the Scheme.

None of the benefits in the Scheme will be rolled over into an Australian superannuation fund.

You are unable to have early access to the preserved pension.

You also hold a life insurance policy with a company registered in country Y.

You have held this policy for a number of years (more than 10 years, but after 1 July 1992).

Throughout the life of the Policy you pay a premium.

The Policy will pay a fixed lump sum if you die before the Policy matures.

You will be paid a sum assured plus bonuses on survival till the end of the period.

The cash surrender value (market value) as at 30 June 2010 of the FLP converted to Australian dollars is less than A$50,000.

The total cost of all your contributions, converted to Australian dollars using the conversion rate applicable on the day each payment was made, was also less than A$50,000 as at 30 June 2010.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 26AH.

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)

Income Tax Assessment Act 1997 Section 10-5

Income Tax Assessment Act 1997 section 118-300.

Income Tax Assessment Act 1997 Section 305-70

Income Tax Assessment Act 1997 Section 305-75

International Tax Agreements Act 1953 Section 4

International Tax Agreements Act 1953 Section 5.

Reasons for decision

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, whether in or out of Australia, during the income year.

Foreign Investment Funds (FIF)

The Foreign Investment Fund (FIF) rules were repealed and as of 1 July 2010 do not apply for future income years. The FIF rules will apply to your foreign life policy for the income year ending 30 June 2010.

FIF income is included in statutory income under section 529 of the Income Tax Assessment Act 1936 (ITAA 1936). The FIF measures can apply to a taxpayer's interest in a FLP.

The intent of the FIF measures is to tax Australian resident taxpayers on an accruals basis on the growth in value of, among other things, life insurance policies, issued by foreign resident entities, which have an investment component. The FIF measures may therefore apply to include in your assessable income an amount even though you have not received any income.

A foreign life policy (FLP) is defined in section 482 of the ITAA 1936 as a life assurance policy issued by an entity that was not a resident of Australia at any time in that year of income. There are four exclusions from the definition of a life assurance policy for the purposes of the FIF measures:

(a) An Australian policy.

(b) Policies providing payment on death or permanent disability only.

(c) Policies issued before 1 July 1992 which cannot after that date be cancelled, surrendered or redeemed and for which the terms have not after that date been altered in a material way.

(d) A contract of reinsurance between a resident insurer and a non-resident insurer in relation to life assurance policies which provide only life cover.

None of the above exclusions apply to you. Your policy was not an Australia policy. Your policy did not provide payment of money on death only. Your policy commenced after 1 July 1992 and it could be cancelled, surrendered or redeemed. There is no evidence of a contract or reinsurance between a resident insurer and a non-resident insurer in your case.

Accordingly, your foreign life insurance policy is considered to be a FLP as defined.

Subsection 485(4) of the ITAA 1936 provides that the FIF measures apply to a FLP where the following conditions exist:

(a) the taxpayer had an interest or interests in a FLP,

(b) the year of income is the 1992/1993 or a later year of income, and

(c) the taxpayer was an Australian resident at any time in that year of income.

Subsection 483(3) of the ITAA 1936 then provides that a person has an interest in a FLP if the person has the legal title to the FLP. As you are an Australian resident and have legal ownership of the policy, you have an interest in a FLP.

Section 515 provides an exemption from the FIF measures where a natural person (not being a trustee) has an interest in a FIF or FLP at the end of a notional accounting period of the FIF or the FLP, but the value of that interest and any interest in any other FIFs or FLPs that are held by the natural person, and by associates, at the end of the natural person's year of income in which the notional accounting period ended, does not exceed A$50,000. 

Paragraph 73 of Taxation Ruling TR 2004/3 Income tax: taxation of foreign life assurance which deals with the taxation of FLPs provides that for the purposes of subsection 515(1) of the ITAA 1936, the value at the end of the year of income or a person's interest in a FIF or FLP is taken to be:

(a) the cost incurred by the person in acquiring the interest in the FIF or FLP, or

(b) the market value of the interest in the FIF or FLP, as at the end of the year of income; whichever is the greater amount.

In your case, the cash surrender value (market value) as at 30 June 2010 of the FLP converted to Australian dollars is less than A$50,000.

The cost incurred in acquiring the interest is the total cost of contributions. If the total cost of all your contributions, converted to Australian dollars using the conversion rate applicable on the day each payment was made, is also less than A$50,000 as at 30 June 2010, the exemption in section 515 of the ITAA 1936 will apply. 

In your case the exemption under section 515 of the ITAA 1936 will apply to your FLP.

Ordinary and statutory income

Ordinary income has generally been held to include three categories, namely, income from rendering personal services, income from property, and income from carrying on a business.

Other characteristics of income that have evolved from case law included receipts that:

· are earned

· are expected

· are relied upon, and

· have an element of periodicity, recurrence or regularity.

The annual growth amounts and the lump sum amount received on maturity of a FLP does not have the characteristics of ordinary income and is therefore not ordinary income.

Your assessable income includes your statutory income from all sources under Section 6-10(4) of the ITAA 1997.

Statutory income also includes income which falls within the provisions of section 26AH of the Income Tax Assessment Act 1936 and capital gains events.

Bonuses received on surrender or maturity of a life policy can be considered to be statutory income and would be assessable income under section 26AH of the ITAA 1936.

Where it is more than 10 years from the commencement of the policy or if the amount of premium paid has not increased by more than 25% in the last 10 years, then the bonuses received on maturity of a life policy are not considered to be statutory income as they do not fall within the operation of section 26AH of the ITAA 1936 and are not included in assessable income (paragraph 3 of IT 2504 Income tax: deductibility of interest on borrowed funds - life assurance policies).

Capital gains tax

A capital gain or capital loss may arise if a capital gains tax event (CGT event) happens to a capital gains tax asset (CGT asset).

Under section 118-300 of the ITAA 1997, a capital gain or loss made under a life insurance policy is disregarded and does not need to be included in a tax return.

The annual growth and lump sum proceeds of the FLP policy are capital and not assessable as income.

NHS pension

In determining liability of Australian tax for foreign sourced income received by an Australian resident, it is necessary to consider not only the income tax laws but also any applicable tax treaty contained in the International Tax Agreements Act 1953 (the Agreements Act).

Section 4 of the Agreements Act incorporates that Act with the ITAA 1936 and ITAA 1997 so that those Acts are read as one. The Agreements Act effectively overrides the ITAA 1936 and ITAA 1997 where there are inconsistent provisions (except for some limited provisions).

Section 5 of the Agreements Act lists the current double tax agreements Australia has with other countries. Included in that list is the tax treaty between Australia and Country y (the Convention). The text of this convention and notes is set out in Australian Treaty Series 2003 No. 22 ([2003] ATS 22 located in the Australian Treaties database on the Department of Foreign Affairs and Trade website.

The Convention operates to avoid the double taxation of income received by Australian and Country y residents. In the case of Australia, it applies to income or gains for the income year beginning on 1 July 2004 and thereafter.

Article XX (1) of the Convention provides that pensions (including government pensions) and annuities paid to a resident of Australia shall be taxable only in Australia.

Article XX (2) of the Convention provides that the term 'annuity' means a stated sum payable periodically to an individual at stated times during life 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.

You are an Australian resident for taxation purposes.

Where you receive a pension from the Scheme it will be an annuity within the meaning of Article XX (2) of the Convention and is taxable only in Australia under Article XX (1).

Therefore, the pension you will receive is wholly included in your assessable income under section 27H of the ITAA 1936 and forms part of your ordinary income under section 6-5 of the ITAA 1997.

Where you receive a lump sum payment from the Scheme section 305-70 of the ITAA 1997 may apply.

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 ITAA 1997. The remainder of the lump sum payment is not assessable income and is not exempt income.

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. Alternatively, where the necessary conditions have been satisfied, a person can choose for all, or part, of their applicable fund earnings to be included in the assessable income of the complying superannuation plan.

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.

In this case subsection 305-75(3) would apply as you were not an Australian resident at all times during the period to which the lump sum relates

The calculation of this portion effectively means that you will be assessed only on the income earned while you were a resident of Australia. That is, you will only be assessed on the accretion in your benefits less any contributions made since you became a resident of Australia.

Furthermore, any amounts representative of earnings during periods of non-residency and certain capital amounts previously transferred into the paying fund do not form part of the taxable amount when the overseas benefit is paid.