Edited version of your written advice

Authorisation Number: 1051220424483

Date of advice: 8 May 2017

Ruling

Subject: Foreign pension payment – lump sum

Questions

1. Is any part of a United Kingdom State 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)?

2. Is the lump sum payment you received as a deferred pension payment from a foreign pension scheme assessable in Australia?

3. Are the contributions you made to a foreign national insurance scheme deductible?

4. Are you entitled to the tax offset in section 159ZRA of the Income Tax Assessment Act 1936 in relation to the foreign lump sum payment you received?

Answers

1. No

2. Yes

3. No

4. Yes

This ruling applies for the following periods:

Income year ended 30 June 2016

The scheme commences on:

1 July 2015

Relevant facts and circumstances

The Taxpayer arrived in Australia from the United Kingdom (UK) in December 1990.

While living in Australia, the Taxpayer made contributions to UK National Insurance from their after-tax Australian salary.

The Taxpayer became eligible to receive the UK State Pension (the UK Pension) but deferred payment of the UK Pension for two years.

In late 2015, the Taxpayer received a lump sum payment of $xxxxxx from the UK Government Pension Centre for the two years deferred.

The lump sum payment was paid to an Australian superannuation fund.

During the 2015-16 income year, the Taxpayer’s other income was comprised of $ xxxxx salary and an Australian government pension of $ xxxx.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 159ZR(1)

Income Tax Assessment Act 1936 Section 159ZRA

Income Tax Assessment Act 1936 Subsection 159ZRA(1)

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

Income Tax Assessment Act 1997 Section 8-1

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 Schedule 1

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

The contributions made to UK National insurance will not be deductible under section 8-1 of the ITAA 1997.

The lump sum in arrears tax offset will apply to the payment.

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.

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 lump sum payment received by the Taxpayer is not received from a foreign superannuation fund. While it is true that the National Insurance Scheme, under which the UK Pension is paid, is similar to a superannuation fund in some respects, the National Insurance Scheme 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 scheme are for the purpose of providing benefits upon retirement, the contributors to the scheme are also eligible to receive payments for other purposes before retirement. Examples include the Christmas bonus payment, unemployment benefits, maternity allowances and bereavement benefits.

It is considered that the UK 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.

Assessability of foreign lump sum pension amount

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 liability to Australian tax on foreign sourced income 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 1997 so that those Acts are read as one. The Agreements Act effectively overrides the ITAA 1997 where there are inconsistent provisions (except in some limited situations).

Schedule 1 to the Agreements Act contains the tax treaty between Australia and the United Kingdom (UK) of Great Britain and Northern Ireland (the UK Agreement). The UK Agreement operates to avoid the double taxation of income received by Australian and UK residents.

Article 17 of the UK 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.

Accordingly, the deferred pension amount is included in the Taxpayer’s assessable income under subsection 6-5(2) of the ITAA 1997.

Deduction for payments made to a foreign national insurance scheme

Section 8-1 of the ITAA 1997 states that you can deduct from your assessable income any loss or outgoing to the extent that it is incurred in gaining or producing your assessable income. You cannot claim a deduction if the loss or outgoing is of a capital, private or domestic nature.

For a deduction to be allowable there must be sufficient connection between the loss or outgoing and the assessable income. The expense must give rise to, or help produce, assessable income for it to be deductible.

In this case, the Taxpayer made voluntary UK National Insurance contributions from your after tax Australian salary over a number of years. A voluntary contribution is not the same as an expense that you have to incur to earn your assessable income.

Consequently, the contributions the Taxpayer made are not expenses that are deductible as they were of a private nature and are therefore, not deductible under section 8-1 of the ITAA 1997.

Lump sum in arrears tax offset

Income in the nature of employment income and pension income is generally derived only when received. Accordingly, back payments of income that relate to an earlier income year or years will be assessable only in the year of receipt.

Section 159ZRA of the Income Tax Assessment Act 1936 (ITAA 1936) allows an income tax offset in relation to certain lump sum payments that accrued in a prior year or years.

The lump sum payment in arrears tax offset is designed to alleviate the problem of more tax being payable in the year in which the lump sum payment is received than would have been payable if the lump sum payment had been taxed in the years in which it accrued.

The offset will be available in the year an 'eligible lump sum’ is included in a taxpayer’s assessable income and the total arrears amount is not less than 10% of the amount remaining after deducting that total arrears amount from the normal taxable income of the current year (subsection 159ZRA(1) of the ITAA 1936).

Eligible lump sum payments include those relating to back payments of repatriation and social welfare pensions, allowances or payments, including those paid by foreign governments (subsection 159ZR(1) of the ITAA 1936).

In this case, the Taxpayer received a lump sum pension payment in the 2016 income tax year that related to a period that included part of the 2014 tax year, all of the 2015 year and part of the 2016 year. Further, based on the Taxpayers other income for the 2016 year, it is evident that the total arrears amount was greater than the 10% requirement as mentioned above.

Therefore, the Taxpayer is eligible to claim the offset in relation to the deferred foreign lump sum pension amount you received in the 2016 income tax year.

Additional information

When lodging the income tax return for the year ended 30 June 2016, the Taxpayer will need to follow the 2016 supplementary income tax return instructions and provide the following information:

■ the full amount of the lump sum pension payment in arrears you were credited with to be shown at label 24 in the supplementary tax return.

■ the tax years to which the payment related and the amount attributable to each tax year (in Australian dollars).

The ATO will calculate the tax offset.