Edited version of private advice

Authorisation Number: 1051635328467

Date of advice: 21 April 2020

Ruling

Subject: Applicable fund earnings

Question

Q1. Are the pension payments received by you from the Pension Fund (the Scheme) included in your assessable income?

Q2. Can you claim a foreign income tax offset for the tax paid/withheld in the UK if this pension is assessable in Australia?

Q3. Is any part of the lump sum payment received by you from the Scheme assessable as applicable fund earnings under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Q1. Yes.

Q2. No.

Q3. Yes. The amount of applicable fund earnings is $xx,xxx.

This ruling applies for the following period:

Income year ending 30 June 2018

The scheme commences on:

1 July 2017

Relevant facts and circumstances

You migrated to Australia on DD MM YYYY (the Residency Date).

Before coming to Australia, you worked in the United Kingdom (UK) and joined the Scheme.

The value of your interest in the Scheme at the Residency Date was £xx,xxx.

The rules of the Scheme provide that benefits can be paid for retirement, incapacity and death.

A Retirement & payment instruction form with a payment date of DD MM 2018 includes the following options for the payment of your benefit:

1.    A pension of £xx,xxx a year.

2.    A reduced pension of £x,xxx a year plus a one-off tax-free cash lump sum of £xx,xxx.

You elected the second option of a reduced pension and the lump sum. The lump sum represented 25% of the total value of your pension account.

On DD MM 2018 an amount of £xx,xxx was paid from the Scheme to your bank account in UK. The amount represented the lump sum payment of £xx,xxx and an additional amount of £xx for late payment.

You also received pension payments which had tax deducted in the UK.

The exchange rate published on the ATO website for xx April 20xx was AUD 1 = GBP 0.xxxx.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 6-10

Income Tax Assessment Act 1997 Section 305-70

Income Tax Assessment Act 1997 Section 305-75

Income Tax Assessment Act 1997 Section 770-10

Income Tax Assessment Act 1997 Section 770-15

Income Tax Assessment Act 1997 Section960-50

Income Tax Assessment Act 1997 Section995-1

Income Tax Assessment Act 1936 Section 27H

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

International Tax Agreements Act 1953

Reasons for decision

Detailed reasoning

Pension - assessable income

As an Australian resident your assessable income will include ordinary and statutory income from all sources whether in or out of Australia (sections 6-5 and 6-10 of the ITAA 1997).

Section 27H of the Income Tax Assessment Act 1936 (ITAA 1936) provides that annuities and pensions paid from foreign superannuation funds or foreign pension schemes to provide superannuation benefits are included in assessable income.

A foreign superannuation fund is defined in subsection 995-1(1) of the ITAA 1997 as being a superannuation fund that is not an Australian superannuation fund. A superannuation fund has the meaning given by subsection 10(1) of the Superannuation Industry (Supervision) Act 1993, which requires that the fund is a 'provident, benefit, superannuation or retirement fund'.

Based on the rules of the Scheme it meets the definition of a superannuation fund and as it is not an Australian superannuation fund it is a foreign superannuation fund.

Accordingly, the pension is assessable income in accordance with section 27H of the ITAA 1936.

In determining your liability to pay tax in Australia it is also necessary to consider the operation of any applicable tax treaty contained in the International Tax Agreements Act 1953 (Agreements Act).

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

The Convention between Australia and the UK (the UK Convention) operates to avoid the double taxation of Australian and UK residents.

Article 17 of the UK Convention provides that a pension will only be taxable in the country of residence of the recipient.

Accordingly, the pension you receive from the Scheme is taxed only in Australia under Article 17 of the UK Convention and is assessable in Australia under section 27H of the ITAA 1936.

Foreign Income Tax Offset

Subsection 770-10(1) of theITAA 1997 provides for a foreign income tax offset for an income tax year for foreign income tax paid in respect of an amount that is included in assessable income.

Section 770-15 of the ITAA 1997 defines 'foreign income tax' to include a tax on income that is imposed by a law other than an Australian law.

A note to section 770-15 of the ITAA 1997 points out that 'foreign income tax' includes only that which has been correctly imposed under the foreign law, and where the foreign jurisdiction has a tax treaty with Australia under the Agreements Act, foreign income tax includes only tax which has been correctly imposed under the treaty.

Article 22(1) of the UK Convention confirms that a tax credit is only allowed against Australian tax for UK tax paid if the UK tax is paid in accordance with the Convention.

In your case, UK tax was withheld from the pension you received from the Scheme. However, we consider that the Convention does not allow the UK to tax the pension and it should only be taxed in Australia.

Therefore, the UK tax paid on the pension was not paid in accordance with the UK Convention and a foreign income tax offset is not allowable in Australia for the tax paid.

Lump sum payments from foreign superannuation funds

When a person receives a lump sum payment from a foreign superannuation fund more than six months after they became an Australian resident, an amount may be included in their assessable income as 'applicable fund earnings' under section 305-70 of the ITAA 1997.

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

Subsection 305-75(3) of the ITAA 1997 states:

If you become an Australian resident after the start of the period to which the lump sum relates, the amount of your applicable fund earningsis the amount (not less than zero) worked out as follows:

(a) work out the total of the following amounts:

(i) the amount in the fund that was 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 from the amount in the fund that was vested in you when the lump sum was paid (before any deduction for *foreign income tax);

(c) multiply the resulting amount by the proportion of the total days during the period when you were an Australian resident;

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

Where a person commences a pension from the foreign superannuation fund at the same time as the superannuation lump sum is paid, subsection 305-75(3) of the ITAA 1997 is applied on a proportionate basis relevant to the lump sum entitlement.

For the purposes of working out your applicable fund earnings in relation to the superannuation lump sum under section 305-75 of the ITAA 1997, the correct rule for translating foreign currency into AUD is the rule described in Item 11A of the table in subsection 960-50(6) of the ITAA 1997. In the circumstances of this case, each amount in a foreign currency that is an element in the calculation of your applicable fund earnings is to be translated to AUD at the exchange rate applicable at the time of receipt of the superannuation lump sum.

The table shows the calculation of the applicable fund earnings in relation to the lump sum paid from the Scheme using the proportionate approach as mentioned above:-

The UK Convention does not have an Article that specifically deals with lump sum payments from superannuation funds. This means that Article 20 of the UK Convention dealing with 'Other Income" will apply. In accordance with Article 20 of the UK Convention the lump sum payment is taxable in Australia.

Accordingly, the lump sum payment from the Scheme is taxable in Australia under Article 20 of the UK Convention and $xx,xxx is assessable in Australia under section 305-70 of the ITAA 1997 as applicable fund earnings.