Edited version of private advice

Authorisation Number: 1051787275353

Date of advice: 03 December 2020

Ruling

Subject: Lump sum payment from a foreign superannuation fund

Question

Where you withdraw the total benefits from your UK pension scheme, will the payment be taxed in Australia as a lump sum payment pursuant to section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes. The payment in this case meets the definition of a lump sum and will be taxed in accordance with Subdivision 305-B of the ITAA 1997.

This ruling applies for the following period:

1 July 2017 to 30 June 2021

Relevant facts and circumstances

You are an Australian resident.

You currently hold benefits in United Kingdom (UK) pension schemes - Fund's A & B.

In late 2017 you commenced a Flexi-access drawdown (FAD) pension in UK Fund A by withdrawing an amount as a pension commencement lump sum (PCLS).

Further amounts were subsequently withdrawn from UK Fund A.

You intend to rollover all benefits from Fund B to Fund A with the view of crystallising all remaining benefits by commencing a FAD.

You will then withdraw your total benefits from Fund A and transfer the money to Australia.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 305-B

Income Tax Assessment Act 1997 section 305-70

Income Tax Assessment Act 1997 section 307-65

Superannuation Industry (Supervision) Regulations 1994 subregulation 1.06(1)

Superannuation Industry (Supervision) Regulations 1994 subregulation 1.06(9A)

Case law

Tubemakers of Australia Ltd v Federal Commissioner of Taxation [1993] FCA 175

Reasons for Decision

A superannuation lump sum is a superannuation benefit that is not a superannuation income stream benefit pursuant to section 307-65 of the ITAA 1997.

The phrase 'income stream' was considered in the case of Tubemakers of Australia Ltd v Federal Commissioner of Taxation [1993] FCA 175 (Tubemakers case). In light of the Tubemakers case, the Commissioner considers the phrase 'income stream' refers to a series of periodic (including a series of annual) payments made from a member's interest in the superannuation fund over an identifiable period of time. A liability to make a single payment for one year would not constitute an income stream.

The series of periodic payments envisaged in the Tubemakers case would also need to satisfy the requirements of subregulation 1.06(1) and by extension subregulation 1.06(9A) of the Superannuation Industry (Supervision) Regulations 1994 (SISR).

Subregulation 1.06(9A) of the SISR requires amongst other things that the payment of the pension is made at least annually.

A PCLS is a tax-free payment which a UK pension scheme member can receive when they start accessing their FAD pension benefits. The benefits supporting the FAD pension become crystallised. While an initial PCLS and subsequent withdrawals relating to the FAD are considered pensions by the UK authority, such a classification cannot be sustained under Australian law. Subsequently, the facts will determine whether FAD payments constitute a series of periodic payments over an identifiable period for the purpose of being classed as pension (income stream) payments.

You are currently considering transferring your total FAD pension benefits in UK Fund A to Australia. Under Australian law, the UK Fund A payment would be akin to a full commutation of a pension entitlement.

For this reason, the total withdrawal and payment of benefits from UK Fund A to Australia, would be considered a lump sum payment and should be taxed accordingly under section 305-70 of the ITAA 1997.

When a person receives a lump sum from a foreign superannuation fund more than six months after they became an Australian resident, the growth they earned on their foreign superannuation during the period when they were a resident of Australia is included in their assessable income as 'applicable fund earnings' under section 305-70 of the ITAA 1997.