Edited version of your written advice

Authorisation Number: 1012772224750

Ruling

Subject: Foreign pension payment - lump sum

Question 1

Is any part of a foreign pension lump sum payment to the Taxpayer assessable as applicable fund earnings under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

Is the foreign pension lump sum payment assessable to the Taxpayer as income under subsection 6-5(2) of the ITAA 1997?

Answer

Yes.

This ruling applies for the following periods:

Income year ended 30 June 2014

The scheme commences on:

1 July 2013

Relevant facts and circumstances

The Taxpayer arrived in Australia several years ago and has been an Australian resident for tax purposes since that date.

After becoming a resident, the Taxpayer became eligible to receive a pension from the Foreign Pension fund.

The Foreign Pension is paid from a fund (the Fund) which was established to provide unemployment benefits, sickness benefit, retirement pensions and other non-retirement benefits in cases where individuals meet the contribution and other qualifying conditions.

The Taxpayer elected to defer the receipt of the Foreign Pension for a specified period in exchange for a lump sum payment at the end of the specified period.

The Taxpayer received a lump sum payment representing the deferred amount of the Foreign Pension in the relevant income year.

The Taxpayer currently receives a regular Foreign Pension payment from the Fund.

The Taxpayer has not made any contributions into the Fund since they became a resident of Australia.

Relevant legislative provisions

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

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

Income Tax Assessment Act 1997 section 305-70

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

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

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

International Tax Agreements Act 1953 section 4

International Tax Agreements Act 1953 section 5

International Tax Agreements Act 1953 Schedule 1 Article 17

Superannuation Industry (Supervision) Act 1993 section 10

Superannuation Industry (Supervision) Act 1993 subsection 10(1)

Superannuation Industry (Supervision) Act 1993 section 19

Superannuation Industry (Supervision) Act 1993 section 62

Reasons for decision

Summary

No part of the Foreign Pension lump sum payment received by the Taxpayer is assessable as applicable fund earnings under section 305-70 of the ITAA 1997 because the entity making the payment is not a foreign superannuation fund.

The Foreign Pension lump sum payment is assessable to the Taxpayer as income under subsection 6-5(2) of the ITAA 1997.

Detailed reasoning

Applicable fund earnings

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 applicable fund earnings amount is subject to tax at the person's marginal tax rate. The remainder of the lump sum payment is not assessable income and is not exempt income.

The applicable fund earnings amount is worked out under either subsection 305-75(2) or 305-75(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.

Meaning of '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 (SISA).

In accordance with subsection 10(1) of the SISA, 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.

Meaning of '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'.

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 SISA, 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 that the SISA applies only to 'regulated superannuation funds' (as defined in section 19 of the SISA), and foreign superannuation funds do not qualify as regulated superannuation funds as they are established and operate outside Australia, the Commissioner views the SISA (and the Superannuation Industry (Supervision) Regulations 1994 (SISR)) 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 SISA and the SISR.

In this case, the Foreign Pension lump sum payment received by the Taxpayer is not received from a foreign superannuation fund. While it is true that the fund, under which the pension is paid, is similar to a superannuation fund in some respects, the fund does not ultimately provide the narrow range of benefits required by the definition of a superannuation fund. Even though the majority of payments from the Fund are for the purpose of providing benefits upon retirement, the contributors to the Fund are also eligible to receive payments for other non-retirement purposes before retirement. Examples include the Christmas bonus payment, unemployment benefits, maternity allowances and bereavement benefits.

It is considered that the Foreign Pension is a government social security pension similar to the Australian Age Pension. The lump sum payment received by the Taxpayer was thus not received from a foreign superannuation fund. As such, section 305-70 of ITAA 1997 does not apply to the lump sum payment.

Is the lump sum pension payment assessable as income under subsection 6-5(2) of the ITAA 1997?

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.

Pension income is ordinary income assessable under subsection 6-5(2) of the ITAA 1997.

In determining the Taxpayer's liability to pay tax in Australia it is necessary to consider not only the domestic income tax laws but also any applicable double tax agreements.

Section 4 of the International Tax Agreements Act 1953 (Agreements Act) incorporates that Act with the Income Tax Assessment Act 1936 (ITAA 1936) and the ITAA 1997 so that all three Acts are read as one. The Agreements Act overrides both the ITAA 1936 and ITAA 1997 where there are inconsistent provisions (except in some limited situations).

Section 5 of the Agreements Act states that, subject to the provisions of the Agreements Act, any provision in an Agreement listed in section 5 has the force of law. The overseas Country Agreement is listed in section 5 of the Agreements Act.

The agreement operates to avoid the double taxation of income received by residents of Australia and The overseas Country.

Article 17 of the agreement provides that pensions paid to a resident of Australia shall be taxable only in Australia.

An amount received as a lump sum representing a deferred pension is ordinary income and forms part of the assessable income of the taxpayer in the year of receipt.

As the Taxpayer was a resident of Australia for taxation purposes, the Foreign Pension lump sum payment they received is assessable income in Australia under subsection 6-5(2) of the ITAA 1997.