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Authorisation Number: 1012689010048

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Ruling

Subject: Lump sum payment from a foreign pension fund

Question 1

Will any part of the lump sum payment from overseas retirement annuity be included in your assessable income as applicable fund earnings under section 305-70 of the Income Tax Assessment Act 1997 (1997)?

Answer

Yes

Question 2

Are you entitled to claim a credit for the tax paid in the overseas country in respect of the lump sum payments?

Answer

Yes

This ruling applies for the following periods:

The year ending 30 June 2014

The scheme commences on:

1 July 2013

Relevant facts and circumstances

You became an Australian resident prior to the 2013-14 income year.

You became a member of a retirement annuity policy in an overseas country (the overseas pension fund) prior to the 2013-14 income year.

As a result of legislative changes made in the overseas country several years ago, the rules of the overseas pension fund were amended such that if a person has formally emigrated from the overseas country the full value of the policy less tax, could be remitted overseas.

As required by the exchange control authorities in the overseas country, these payments would be paid directly into a bank account in the overseas country after tax had been deducted.

You have stated that under the rules of the overseas pension fund, the benefits are to be made to a member after attaining age 55 or at retirement age.

You declared formal emigration from the overseas country for tax purposes and this enabled you to make an exit from the overseas pension scheme. This would not have been available otherwise until you had reached retirement age.

A submission of an Income Tax Return for the overseas country's 2015 income year to the overseas country's taxation authority was required with the assessment issuing to you.

You have provided a copy of a document for the overseas country's 2015 income year which shows a retirement lump sum withdrawal benefit with an amount of tax withheld.

After you received the retirement lump sum withdrawal benefit in the 2013-14 income year, you transferred the amount to an Australian Superannuation Fund.

There have been no contributions to the overseas pension fund since you became a resident of Australia.

You no longer hold any interests in the overseas pension fund.

Relevant legislative provisions

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 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 770-10(1)

Income Tax Assessment Act 1997 Subsection 770-15(1)

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)

International Tax Agreements Act 1953 Subsection 4-1

International Tax Agreements Act 1953 Section 5

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 overseas pension fund to the Australian Superannuation Fund must be included as assessable 'applicable fund earnings' in your tax return for the 2013-14 income year.

You are entitled to a foreign income tax offset (FITO) for the tax paid overseas in respect of the lump sum payments from your overseas pension fund under section 770-10 of the ITAA 1997. However the amount of FITO you are entitled is capped at the Australian tax otherwise payable. Any excess FITO is not refundable.

Alternatively, as you no longer have an interest in the overseas pension scheme you are eligible to make an election to have these applicable fund earnings treated as assessable income in your Australian Superannuation Fund. It should be noted that, should the election be made, you will not be able to claim FITO for the tax paid in the overseas country in your tax return for the 2013-14 income year.

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.

Superannuation fund

'Superannuation fund' is defined in subsection 995-1(1) of the ITAA 1997 as having the meaning given by section 10 of the Superannuation Industry (Supervision) Act 1993 (the SIS Act 1993).

Subsection 10(1) of the SIS Act 1993 provides that:

superannuation fund means:

(a) a fund that:

(i) is an indefinitely continuing fund; and

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

(b) 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. 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 1993, 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 1993 applies only to 'regulated superannuation funds' (as defined in section 19 of the SIS Act 1993), 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 1993 (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 1993.

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 purpose of the Fund

In this case, the lump sum benefit was transferred from the overseas pension fund. It is evident that the overseas pension fund is not an Australian superannuation fund as defined in subsection 295-95(2) of the ITAA 1997.

The facts provided indicate your benefits in the overseas pension scheme are only payable upon retirement and the fund would meet the definition of a superannuation fund. In addition, it is clear that the overseas pension fund that made the lump sum payment to you 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.

Furthermore, as a result of legislative changes made in the overseas country several years ago, the rules of the overseas pension fund were amended such that if a person has formally emigrated from the overseas country the full value of the policy less tax, could be remitted overseas.

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

Applicable fund earnings

You received the lump sum payment in respect of your entitlement in the overseas pension scheme during the 2013-14 income year. As this was more than six months after you became an Australian resident for tax purposes, 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 of the ITAA 1997. 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 you are assessed only on the income you earned on the benefits in the overseas pension scheme less any contributions you made since you 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.

The table in subsection 960-50(6) of the ITAA 1997 sets out the translation rules. Only the following items are relevant to determining the issue in your case:

• item 11 which deals with a receipt or payment to which none of the other items apply, and

• item 11A which applies to amounts that are neither receipts nor payments and to which none of the other items apply.

Item 11 of the table in subsection 960-50(6) of the ITAA 1997 applies to a receipt or payment where none of the other items applies. The payment you will finally receive is not included in any of the other items in the table so it will fall within item 11. Under this item, the payment is translated into Australian dollars at the exchange rate applicable at the time of receipt.

When the amount in the foreign fund that was vested in you just before you became a resident of Australia (subparagraph 305-75(3)(a)(i) of the ITAA 1997) is determined, there is no actual receipt or payment of an amount. All that occurs is a determination of the vested amount expressed in the foreign currency.

Regulation 960-50.01 of the Income Tax Assessment Regulations 1997 (ITAR) modifies the table in subsection 960-50(6) of the ITAA 1997 to include item 11A that applies to amounts other than receipts and payments, and for which none of the other items apply. Consequently the vested amount is translated into Australian dollars at an exchange rate that is reasonable having regard to the circumstances.

Therefore, for the purposes of section 305-70 of the ITAA 1997, the 'applicable fund earnings' should be calculated by translating the amount received from the foreign fund at the exchange rate applicable on the day of receipt to Australian dollars and deducting from this amount the Australian dollar equivalent of the amount vested in the fund at the exchange rate applicable just before the day you first became an Australian resident. Relevant exchange rates are published on the ATO's website.

Amounts to be used in calculation

Your total vested amount in the overseas fund on the day before you became an Australian resident is converted into Australian dollars at the exchange rate that applied on the day before you became an Australian resident.

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

The amount received in the 2013-14 income year is converted into Australian dollars at the exchange rate that applied on the date the payment was received.

'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 for tax purposes and ceases on the day the lump sum is paid. In your case, that period would have been from the date you became an Australian resident to the date you received the payment and you were a resident for the whole of that period.

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

Calculation of the assessable amount of the payment from the overseas 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 you before you 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 lump sum payment transferred from the overseas pension scheme to the Australian superannuation fund must be included as assessable 'applicable fund earnings' in your tax return for the 2013-14 income year.

Foreign income tax offset

Section 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that amounts that are not ordinary income but may be assessable under another provision are called statutory income.

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

Section 10-5 of the ITAA 1997 lists section 305-70 of the ITAA 1997 as a provision which includes statutory income in assessable income.

Section 305-70 of the ITAA 1997 provides that an Australian resident taxpayer who receives a lump sum from a foreign superannuation fund more than six months after becoming an Australian resident must include the 'applicable fund earnings' of the lump sum in their assessable income.

In determining liability to tax on foreign sourced income received by a resident, it is necessary to consider not only the income tax laws but also any applicable tax treaty which Australia has entered into with the foreign country. Australia has a tax treaty with the overseas country (the Overseas Agreement).

The Overseas Agreements Act gives the Overseas Agreement the force of law in Australia. The Overseas Agreements Act provides that the ITAA 1936 and ITAA 1997 must be read as one with the Overseas Agreements Act.

The Overseas Agreement provides that items of income not dealt with in a specific article of the agreement shall be taxed in the country of residence.

However, the Overseas Agreement also provides that income of an Australian resident not dealt with in the Overseas Agreement from sources in the overseas country may also be taxed in the overseas country.

Your lump sum payment from the foreign superannuation fund is not covered by the Overseas Agreement. As you derive the income as an Australian resident, applicable fund earnings are included in your assessable income under section 305-70 of the ITAA 1997. However as the income is from an overseas country, it may be taxable also in the overseas country.

Subsection 770-10(1) of the ITAA 1997 provides that a taxpayer is entitled to a foreign income tax offset (FITO) for foreign tax paid in respect of an amount that is included in assessable income.

Subsection 770-15(1) of the ITAA 1997 defines 'foreign income tax' as tax imposed by a law other than an Australian law, and is:

• tax on income; or

• tax on profits or gains, whether of an income or capital nature; or

• any other tax, being a tax that is subject to an agreement having the force of law under the International Tax Agreements Act 1953 (the Agreements Act).

The Overseas Agreement provides that where the overseas tax paid under the law of overseas country and in accordance with this Agreement, whether directly or by deduction, in respect of income derived by a person who is a resident of Australia from sources in the overseas country shall be allowed as a credit against Australian tax payable in respect of that income. If eligible, this amount will be provided in the form of a FITO.

The entitlement to a FITO does not arise until the taxpayer has included an amount in their assessable income for an income year and has also paid foreign income tax in respect of that amount.

To determine the amount of FITO in any particular year, a person must first calculate the total foreign income tax paid on amounts included in their assessable income for the year.

Furthermore, there is a FITO limit. Where the total foreign income tax paid by a person is less than or equal to $1,000, the person is not required to calculate the FITO, i.e. the person's FITO will equal the foreign income tax paid on amounts included in their assessable income.

The offset limit is in place to ensure that the tax offset only relieves double taxation and does not, in effect, fund part of the foreign income tax. If there were no limit, this situation could occur where the foreign tax rate was higher than the Australian tax rate. The offset limit attempts to avoid this outcome by limiting the tax offset to the amount of Australian tax that would be payable on the foreign income to which the foreign tax relates.

In your case, as a resident of Australia for tax purposes, the applicable fund earnings of the lump sum amount you received from your overseas pension fund is included in your assessable income under section 305-70 of the ITAA 1997. You provided a statement which shows a tax amount being deducted from the lump sum payment. Under the Overseas Agreement, the overseas country has the right to also tax the payment you received. Accordingly, Australia is required to provide taxation relief the Overseas Agreement.

Therefore, you are entitled to a FITO for the tax paid in the overseas country in respect of the lump sum payments from your superannuation fund in the overseas country under section 770-10 of the ITAA 1997. However the amount of FITO you are entitled is capped at the Australian tax otherwise payable. Any excess FITO is not refundable.

Election

A taxpayer who is transferring their overseas superannuation directly to an Australian complying superannuation fund more than six months after becoming a resident, may be able to elect under subsection 305-80(2) of the ITAA 1997 to have part of the payment treated as assessable income of the Australian superannuation fund.

As a result, the amount specified in the election notice will be included as assessable income of the superannuation fund and subject to tax at 15% rather than being included in the taxpayer's assessable income and subject to tax at the taxpayer's marginal rate.

To qualify, the taxpayer must, immediately after the relevant payment is made, no longer have an interest in the paying fund under subsection 305-80(1) of the ITAA 1997.

As you no longer have an interest in the overseas pension fund you are eligible to make the election.

It should be noted that, should the election be made, you will not be able to claim FITO for the tax paid in the overseas country in your tax return for the 2013-14 income year.