Edited version of private advice

Authorisation Number: 1051857783039

Date of advice: 11 October 2021

Ruling

Subject: Taxation of lump sum payments received from overseas retirement benefit scheme

Question 1

Will any part of lump sum payments received by the Taxpayer from the foreign Fund held in overseas country 2 be assessable income under Subdivision 305-B of the Income Tax Assessment Act 1997 (ITAA 1997) or section 99B of the Income Tax Assessment Act 1936 (ITAA 1936).

Answer 1

No

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The Taxpayer joined the overseas pension schemes.

The Taxpayer left overseas country 1 and moved to overseas country 2.

The Taxpayer left the overseas pension scheme they had in overseas country 1 and transferred the balance to the their retirement benefit scheme they established at overseas country 2.

The Fund that provides this Taxpayer with the retirement benefit scheme in overseas country 2 is governed by the rules set out in its Trust Deed.

The Fund is registered in the overseas country 2 and is governed by and construed in accordance with the law of this country as an investment-regulated pension scheme.

The Plan Deed (the Deed) has been provided.

The Taxpayer transferred 40% of their balance held in the overseas pension scheme from their overseas country 1 to the retirement benefit scheme established in the overseas country 2. This was the 'unlocked' portion from the fund.

The Taxpayer transferred 60% of their balance held in the overseas pension scheme from their overseas country 1 to the retirement benefit scheme established in the overseas country 2. This is the 'locked in' portion till age 55.

The Taxpayer became a permanent resident of Australia after leaving overseas country 2.

The Taxpayer intends to commence withdrawals in 2021-22 income year.

There have been no transfers into the retirement benefit scheme held in the overseas country 2 from other foreign funds since the Taxpayer became an Australian resident.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 99B

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

Income Tax Assessment Act 1997 Subsection 6-10(4)

Income Tax Assessment Act 1997 Section 10-5

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

Income Tax Assessment Act 1997 Section 305-5

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

International Tax Agreements Act 1953 Section 4

International Tax Agreements Act 1953 Subsection 4(2)

International Tax Agreements Act 1953 Section 5

International Tax Agreements Act 1953 Subsection 5(1)

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

Superannuation Industry (Supervision) Act 1993 Section 19

Reasons for decision

Question 1

Will any part of lump sum payments received by the Taxpayer from their foreign Fund established in overseas country 2 be assessable income under Subdivision 305-B of the Income Tax Assessment Act 1997 (ITAA 1997) or section 99B of the Income Tax Assessment Act 1936 (ITAA 1936).

Summary

None of the lump sum payments received from the foreign Fund established in overseas country 2 by the Taxpayer represent assessable income under Subdivision 305-B of the ITAA 1997 or section 99B of the ITAA 1936. Any amount released from the Taxpayer's foreign Fund established in overseas country 2 should not be included in their Australian income tax return.

Detailed reasoning

The assessable income of an Australian resident taxpayer includes ordinary income and statutory income derived directly or indirectly from all sources, in or out of Australia, during the income year, as per subsections 6-5(2) and 6-10(4) of the ITAA 1997.

Lump sum withdrawn from a foreign fund is not an ordinary income under subsection 6-5(2) of the ITAA 1997 as generally lump sums represent statutory income that are included in assessable income by a specific provision of the Australian tax legislation.

Taxation treatment of lump sum payments received from foreign superannuation funds

Subdivision 305-B of the ITAA 1997 sets out the tax treatment of superannuation lump sum benefits paid from foreign superannuation funds and other foreign schemes for the payment of similar retirement or death benefits, as defined in section 305-55 of the ITAA 1997.

Where a lump sum paid from a foreign superannuation fund is received more than six months after Australian residency, section 305-70 of the ITAA 1997 applies to include any applicable fund earnings in assessable income.

Taxation treatment of lump sum payments received from a foreign entity that is not a superannuation fund

Section 10-5 of the ITAA 1997 lists the provisions for statutory income, including section 99B of the ITAA 1936, which deals with income received from a trust, where the trust income has not previously been subject to tax.

Subsection 99B(1) of the ITAA 1936 provides that where, during an income year, a beneficiary who was an Australian resident at any time during the year is paid a distribution from a trust, or has an amount of trust property applied for their benefit, that amount is to be included in the assessable income of the beneficiary.

Subsection 99B(2) of the ITAA 1936 modifies the rule to exclude any amount that is either:

a)    the corpus of the trust estate

b)    amounts that would not have been included in the assessable income of an Australian resident taxpayer

c)    amounts included in the beneficiary's income under section 97 of the ITAA 1936

d)    amounts included in the assessable income of any taxpayer (other than a company) under section 102AAZD or

e)    if the beneficiary is a company, amounts included in the assessable income of the beneficiary under section 102AAZD.

Tax treaty between Australia and overseas country 2

A tax treaty is also referred to as a tax convention or double tax agreement (DTA)

In determining liability to Australian tax on income received by a resident receiving income sourced from another country (or contracting state as it is referred to in the treaty), it is necessary to consider both Australian domestic income tax laws and any applicable DTA. Section 4 of the International Tax Agreements Act 1953 (ITAA 1953) identifies that the ITAA 1936 and the ITAA 1997 are incorporated and to be read as one with the ITAA 1953. Subsection 4(2) of the ITAA 1953 provides that in the case of any inconsistency with the provisions contained in the Assessment Acts, other than for Part IVA of the ITAA 1936 or an Act imposing Australian tax, the provisions of the ITAA 1953, prevail (refer also to paragraphs 5 and 6 of Taxation Ruling TR 2001/13 - Income tax: Interpreting Australia's Double Tax Agreements).

Section 5 of the ITAA 1953 provide that the agreements listed within subsection 5(1) have the force of law according to their tenor on and after the date of entry into force. The Australia-overseas country 2 DTA is listed in section 5 of the ITAA 1953 and came into force on a specified date.

In Thiel v Commissioner of Taxation [1990] HCA 37; (1990) 90 ATC 4717, at 4727 and 4720, and as acknowledged in paragraphs 88 to 92 of TR 2001/13, the High Court accepted that the OECD Model's official Commentaries may be relevant to the interpretation of DTAs based on the OECD Model.

Paragraph 94 of TR 2001/13 provides, in relation to the interpretation of tax treaties, that the rules of construction will not be as detailed and rigid as they might be if the courts were to interpret domestic legislation or domestic instruments, and gaps, imprecision and ambiguities should be accepted as sometimes inevitable in such a text, and to some extent accommodated or 'smoothed over' in a way that addresses the context and meets the object and purpose of the DTA.

As per Article 1, the Australia- overseas country 2 DTA applies to persons who are residents of one or both of the Contracting States.

As per Article 2 of the Australia- overseas country 2 DTA, the taxes covered in Australia include income tax, fringe benefits tax and resource rent taxes imposed under the federal law of Australia.

As per Article 18 of the Australia- overseas country 2 DTA, any lump sums arising in overseas country 2 and paid to a resident of the other Contracting State under a retirement benefit scheme shall be taxable only in overseas country 2.

We are satisfied that the Taxpayer's foreign fund in overseas country 2 meets the requirement of being a retirement benefit scheme covered by the DTA.

Accordingly, any lump sums withdrawn by the Taxpayer from their foreign fund in overseas country 2 is excluded from taxation in Australia.