Edited version of your written advice

Authorisation Number: 1051414272079

Date of advice: 14 August 2018

Ruling

Subject: Foreign pension

Question 1

Is any part of the lump sum received by a person (the Taxpayer) from the X Joint Staff Pension Fund (the Fund) assessable as applicable fund earnings under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Question 2

Is the Taxpayer’s foreign pension assessable income?

Answer

Yes

This ruling applies for the following period:

Income year ended 30 June 2016

The scheme commences on:

1 July 2015

Relevant facts and circumstances

More than ten years ago, the Taxpayer joined the Fund while working overseas for an entity (the Employer).

Several years later, the Taxpayer retired from the Employer and elected to receive a lump sum payment equal to one-third of their entitlements, along with a retirement pension payment.

Subsequently, the Taxpayer became a resident of Australia for taxation purposes.

In the 2015-16 income year, the Taxpayer received the following payments from the Employer:

● a lump sum payment into their Australian bank account; and

● a retroactive pension amount which represents seven months pension at a defined monthly rate.

In the 2015-16 income year, the Taxpayer commenced receiving the foreign pension.

Subsequently, the Taxpayer was notified that the monthly rate of their pension had increased.

No contributions or transfers have been made to the Fund since the Taxpayer arrived in Australia.

The Taxpayer is unable to provide the total value of their interest in the Fund after the lump sum payment was made.

The transfer value of the total benefits in the on the day before the client arrived in Australia was an amount.

The benefits in the Fund can only be withdrawn in the following circumstances:

● the member retires on or after 60 years of age;

● the member separates from Employment between 55 and 60 years of age;

● in the case of permanent mental or physical disability;

● in the case of the member’s death; or

● the member leaves the Fund.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 6-5

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

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

Income Tax Assessment Act 1997 Section 305-60

Income Tax Assessment Act 1997 Subsection 305-60(1)

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

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

As the Taxpayer received the lump sum payment of XX within six months of becoming a resident of Australia for taxation purposes, the payment is non-assessable, non-exempt income as per section 305-60 of the Income Tax Assessment Act 1997 (ITAA 1997). The amount is therefore not required to be included in your income tax return for the 2015-16 income year.

Detailed reasoning

Lump sum payments from foreign superannuation funds

Under section 305-60 of the ITAA 1997, a lump sum payment from a foreign superannuation fund is non-assessable, non-exempt income if:

(a) you receive it within 6 months after you become an Australian resident; and

(b) it relates only to a period:

(i) when you were not an Australia resident; or

(ii) starting after you became an Australian resident and ending before you receive the payment; and

(c) It does not exceed the amount in the fund that was vested in you when you received the payment.

Before determining whether section 305-60 of the ITAA 1997 applies, it is necessary to ascertain whether the payment is being made from 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.

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 (SIS Act), which requires that the fund is a provident, benefit, superannuation or retirement fund.

Provident, benefit, superannuation or retirement fund

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’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, 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 applies only to ‘regulated superannuation funds’ (as defined in section 19 of the SIS Act), 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 (and the SIS Regulations) as providing guidance as to what ‘benefit’ or ‘specific future purpose’ a superannuation fund should provide.

Based on the rules of the Fund, benefits are only paid to members on retirement and therefore the fund would meet the definition of superannuation fund. Therefore, as the payer of the lump sum was established outside of Australia and has its central management and control outside of Australia, the Commissioner accepts that the lump sum payment was made from a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997.

The remaining requirements under section 305-60 of the ITAA 1997 have been satisfied as:

● You received the payment within six months of becoming an Australian resident;

● The payment relates to a period where you were a non-resident; and

● The payment does not exceed the amount that was vested in you when the payment was made.

Based on the above, the payment you received from the Fund is non-assessable, non-exempt income. The amount is therefore not required to be included in your income tax return for the 2015-16 income year.

Question 2

Section 6-5 and section 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes ordinary and statutory income they derived directly or indirectly from all sources, whether in or out of Australia during the income year.

Pensions and annuities are ordinary income for the purposes of subsection 6-5(2) of the ITAA 1997.

Salaries and emoluments received from an international organisation by a 'person who holds an office' in that organisation may be exempt from Australian income tax under regulations made under the International Organisations (Privileges and Immunities) Act 1963 (IO(P+I)A).

It is considered that the phrase 'person who holds an office' in relation to a prescribed international organisation covers those people who work as employees for that organisation. A pension received from a prescribed international organisation, such as the Employer, is not exempt from tax in Australia as the IO(P+I)A does not extend tax exemptions to former officers of an international organisation.

The assessability of pensions paid by an international organisation to a former officer of the Employer came before a Taxation Board of Review where a pension recipient sought exemption from tax under former paragraph 23(y) of the Income Tax Assessment Act 1936 (ITAA 1936). The Board dismissed the taxpayer's claim that the pension was an emolument of an official of a prescribed organisation, holding that the term emolument related to a monetary benefit paid to a serving officer, rather than as including pension payments to a former official.

Consequently, the pension received as a result of former employment with the XX was not exempt under former paragraph 23(y): Case M90 80 ATC 648; 24 CTBR (NS) Case 65. See also: Taxation Ruling TR 92/14; Taxation Determination TD 92/153.

Therefore, in your case the pension you are receiving from the Employer is assessable income in Australia.