Edited version of your written advice

Authorisation Number: 1051376542758

Date of advice: 22 May 2018

Ruling

Subject: UK Private Pension

Question 1

Is your UK Private pension earnings taxable in Australia, on earnings after you became an Australian resident?

Answer

Yes

Question 2

If I transfer my UK pension to a qualifying super account in Australia will I have a tax liability?

Answer

Yes

This ruling applies for the following period:

Period ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You are a permanent resident of Australia.

You have a self-invested pension fund in a foreign country.

The fund was established while you were living in the foreign country.

Benefits will be paid upon your retirement or your death.

You have made no contributions to the Fund while you have been residing in Australia.

The retirement annuity contract between you and the fund outlines governing aspects of the fund, such as suitable investments, taking benefits etc.

The Fund was recognised and regulated by the Financial Conduct Authority and is registered in the foreign company.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 25,

Income Tax Assessment Act 1936 Section 26AH,

Income Tax Assessment Act 1936 Section 6-5,

Income Tax Assessment Act 1936 Section 6-10,

Income Tax Assessment Act 1997 Subdivision 305-B,

Income Tax Assessment Act 1997 section 305-60,

Income Tax Assessment Act 1997 section 305-70,

Income Tax Assessment Act 1997 section 305-75,

Income Tax Assessment Act 1997 section 305-80,

Income Tax Assessment Act 1997 section 307‑15,

Income Tax Assessment Act 1997 section 960-50,

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

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

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

Division 6 of the Income Tax Assessment Act 1997 (ITAA 1997) sets out what amounts are included in the taxpayer's assessable income. It provides that the following amounts are included:

● income according to ordinary concepts; or

● an amount which is included by a specific provision about assessable income, that is statutory income.

Subdivision 305-B of the ITAA 1997 deals with the tax treatment of superannuation benefits paid from certain foreign superannuation funds.

In accordance with section 395-60 of the ITAA 1997, where a lump sum paid from a foreign superannuation fund is received within six months after Australian residency and relates only to a period of non-residency; or to a period starting after the residency and ending before the receipt of payment, the lump sum is not assessable income and is not exempt income.

If a person received a lump sum payment from a foreign superannuation fund more than six months after the person becomes a resident of Australia, the applicable fund earnings (if any) should be included in the person’s assessable income.

Meaning of ‘foreign superannuation fund’

(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.

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;

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.

Meaning of ‘superannuation fund’

Subsection 10(1) of the SISA 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.

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’ such as the example given by Justice Kitto of a funeral benefit.

Furthermore, Justice Kitto’s judgment 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 the SISA applies only to ‘regulated superannuation funds’ and foreign superannuation funds do not qualify as regulated superannuation funds as they are established and operate outside Australia, the Commissioner views the SISA 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.

The information provided indicates that you could access your benefits in the Fund only on your retirement, upon reaching a prescribed age or by reason of permanent and total disability.

As such, the Fund would meet the definition of a superannuation fund.

In addition, it is clear that the Fund is established outside of Australia and its central management and control is outside of Australia. Therefore, on the basis of information provided, we consider that the Fund is a foreign superannuation fund for the purposes of subdivision 305-B of the ITAA 1997.

Taxation of foreign lump sum payments

As you would receive the lump sum more than six months after you became a resident, the amount of applicable fund earnings (if any) in respect of the lump sum should be included in your assessable income.

Applicable fund earnings

The applicable fund earnings amount is worked out

Subsection 305-75(3) applies where the person becomes an Australian resident after the start of the period to which the lump sum relates.

As you became an Australian resident after the start of the period to which the lump sum relates, the applicable fund earnings is worked out in accordance with subsection 305-75(3) of the ITAA 1997 which states:

If you become an Australian resident after the start 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 following amounts:

(i) The amount in the fund that 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 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;

(c) add the total of all previously exempt fund earnings (if any) covered by subsections (5) and (6).

The effect of section 305-75 of the ITAA 1997 is that you are assessed only on the income you earned on your benefits in the Fund during the residency period. Earnings made during periods of non-residency, and contributions and transfers into the Fund, do not form part of the taxable amount when the lump sum benefit is paid.

Election under section 305-80 of the ITAA 1997

A person may choose to have a superannuation lump sum from a foreign superannuation fund transferred to a complying superannuation fund rather than being paid directly to the person. In such a case, the person may elect under section 305-80 of the ITAA 1997 for all or part of their applicable fund earnings amount to be included in the assessable income of the complying superannuation fund.

However, the choice can only be made if the following conditions are satisfied:

(i) the person is taken to have received the lump sum under section 307-15 of the ITAA 1997;

(ii) the whole of the lump sum is paid directly from the foreign superannuation fund into a complying superannuation fund; and

(iii) the person no longer has an interest in the foreign superannuation fund immediately after the lump sum is paid.

A person is taken to have received a payment under section 307-15 of the ITAA 1997 if it is made:

(i) for the person’s benefit; or

(ii) to another person or to an entity at the person’s direction or request.

Therefore, if a person meets the above requirements for election their complying superannuation fund will pay tax on the applicable fund earnings at the concessional rate of 15%.

If a person does not wish to make the election, or does not meet the conditions to allow them to make the election, they must include their applicable fund earnings in their assessable income.

Application to your circumstances

If you do not make an election to have the superannuation lump sum from your foreign superannuation fund transferred to a complying superannuation fund in Australia, the amount of applicable fund earnings (if any) in respect of the lump sum is included in your assessable income.