Edited version of your written advice

Authorisation Number: 1051520801475

Date of advice: 23 May 2019

Ruling

Subject: Transfer from a foreign fund

Question

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

Answer

Yes

Question

Is the pension that your client receives from the Fund assessable in Australia?

Answer

Yes.

This ruling applies for the following period:

30 June 2018

The scheme commences on:

1 July 2017

Relevant facts and circumstances

Your client is an Australian resident for income tax purposes.

For a number of years, until 2017, they were employed in the office of an international organisation. The income they received from employment was exempt income.

During their employment, your client joined a pension fund established and managed outside Australia.

The Pension Fund is a foreign superannuation fund (as defined in subsection 995-1(1) of the ITAA 1997) for the purposes of paragraph 275-20(4)(c) of the ITAA 1997.

In 2018, your client received a lump sum from the Pension Fund. This was received within six months of the termination of their employment.

You have stated that your client was an Australian resident during the period of employment, and the lump sum relates only to the period of employment.

From 2018, your client began to receive a monthly pension from Pension Fund.

Relevant legislative provisions

Income Tax Assessment Act 1997 paragraph 275-20(4)(c)

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

Income Tax Assessment Act 1997 section 305-55

Income Tax Assessment Act 1997 section 305-60

Income Tax Assessment Act 1997 section 305-65

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

Superannuation Industry (Supervision) Act 1993 section 10

Superannuation Industry (Supervision) Act 1993 section 62

Reasons for decision

Summary

The lump sum payment received by your client from a foreign superannuation fund within 6 months of his termination of employment in the foreign country is not tax free as it was not received in consequence of his termination in a foreign country or on an approved project in relation to a foreign country. Your client must include in his assessable income so much of the lump sum as equals the “applicable fund earnings” under section 305-70(2) of the ITAA 1997.

The pension your client is receiving is assessable income in Australia.

Detailed Reasoning

Question 1

The tax treatment of superannuation lump sums received by a resident taxpayer from certain foreign superannuation funds is set out in Subdivision 305-B of the ITAA 1997 and depends whether the taxpayer receives it within, or after, six months after their residency commences or foreign employment ends.

Relevantly, in accordance with subsection 305-65(1) of the ITAA 1997, a superannuation lump sum received by person in consequence of the termination of their employment in a foreign country is not assessable and is not exempt income, that is, it is tax-free if:

(a) you receive it in consequence of:

(i) the termination of your employment as an employee, or as the holder of an office, in a foreign country; or

(ii) the termination of your engagement on qualifying service on an approved project (within the meaning of section 23AF of the Income Tax Assessment Act 1936), in relation to a foreign country; and

(b) it relates only to the period of that employment, holding of office, or engagement; and

(c) you were an Australian resident during the period of the employment, holding of office or engagement; and

(d) you receive the lump sum within 6 months after the termination; and

(e) the lump sum is not exempt from taxation under the law of the foreign country; and

(f) for a period of employment or holding an office — your foreign earnings from the employment or office are exempt from income tax under section 23AG of the Income Tax Assessment Act 1936; and

(g) for a period of engagement on qualifying service on an approved project — your eligible foreign remuneration from the service is exempt from income tax under section 23AF of that Act.

For a payment from a foreign superannuation fund to be tax free all of the conditions in subsection 305-65(1) of the ITAA 1997 must be satisfied.

Based on the above, the lump sum payment which your client received from the Pension Fund during the 2017-18 income year in consequence of the termination of employment does not fall under section 305-60 of the ITAA 1997 because all of the conditions have not been met.

The payment was not received in consequence of the termination of your client’s employment in a foreign country or the termination of his engagement on qualifying service on an approved project (within the meaning of section 23AF of the Income Tax Assessment Act 1936 (ITAA 1936)), in relation to a foreign country.

Accordingly, section 305-65 of the ITAA 1997 has not been satisfied. As your client was a resident at all times during the period to which the lump sum relates, and as section 305-65 of the ITAA 1997 does not apply, the lump sum would fall for consideration under section 305-70 of the ITAA 1997 as to whether any part of the lump sum payment is assessable.

Question 2

Section 6-5 and section 6-10 of the 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 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 an international organisation came before a Taxation Board of Review where a pension recipient sought exemption from tax under former paragraph 23(y) of the 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 their former employment 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 this case the pension your client is receiving is assessable income in Australia.