Edited version of private advice

Authorisation Number: 1051908936882

Date of advice: 12 October 2021

Ruling

Subject: Lump sum payment from a foreign fund and foreign income tax offset

Question 1

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

Answer

Yes.

Question 2

If the answer to question 1 is yes, is a Foreign income tax offset (FITO) available for any income tax withheld from these payments by the Country A authorities?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You held an interest in an Overseas Pension Scheme (the Fund), a pension scheme in Country A. Membership with the Fund commenced in 19XX as a member of the defined contribution scheme.

In late 20XX you used your benefits in the Fund to purchase an annuity.

In mid-20XX you became a resident of Australia for income tax purposes.

In a letter dated in late 20XX, the Fund's administrator Limited advised that they had identified discrepancies in relation to your benefits, and that as a result, you were entitled to further benefits payable to you from the Fund.

The amount of the additional benefit that was vested in you on the day before you became a resident is not known.

In mid to late 20XX you received an uncrystallised funds pension lump sum amount from the Fund in Country A. [An uncrystallised funds pension lump sum refers to pension savings that had you not yet accessed in any way].

An amount in tax was withheld from the lump sum payment by the Country A authorities as a final withholding tax, and accordingly you are not required to declare the lump sum payment in an income tax return in Country A.

Assumptions

The Fund is a foreign superannuation fund.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 305-70

Income Tax Assessment Act 1997 section 305-75

Income Tax Assessment Act 1997 subsection305-75(3)

Income Tax Assessment Act 1997 Division 770

International Tax Agreements Act 1953

Reasons for decision

Question 1

Summary

A portion of the lump sum payment you received from the foreign superannuation fund must be included as 'applicable fund earnings' in your income tax return for the 20XX-XX income year.

Detailed reasoning

If you receive a lump sum from a foreign superannuation fund more than six months after becoming an Australian resident, your assessable income includes any growth (applicable fund earnings) earned on the foreign superannuation interest while you were an Australian resident.

In this case, the Fund is a foreign superannuation fund. You became an Australian resident after the start of the period to which the lump sum relates. You remained an Australian resident at all times until the lump sum was paid. Therefore, the applicable fund earnings is calculated in accordance with subsection 305-75(3) of the ITAA 1997.

The effect of section 305-75 of the ITAA 1997 is that you are only assessed on the income you earned on your benefits in the Fund while you were an Australian resident. Earnings during periods of non-residency, contributions and transfers into the Fund are not taxable when the overseas benefit is paid.

The applicable fund earnings amount is subject to tax at the person's marginal tax rate. The remainder of the lump sum is not assessable income and not exempt income.

The foreign currency translation rules for lump sum transfers from foreign superannuation funds are explained in ATO Interpretative Decision ATO ID 2015/7: Income tax/Superannuation Foreign currency translation rules in working out 'applicable fund earnings' under section 305-75 of the ITAA 1997. We use the exchange rate that applied when the taxpayer received the lump sum, to work out the Australian dollar equivalent for the amount in the foreign superannuation fund that was vested in the taxpayer on a certain date.

Using the appropriate exchange rate as at mid to late 20XX (the time you received the lump sum amount), the 'applicable fund earnings' amount has been calculated in accordance with subsection 305-75(3) of the ITAA 1997.

Accordingly, this amount is to be included as assessable 'applicable fund earnings' in your income tax return for the 20XX-XX income year.

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 Country A (the Country A Convention) operates to avoid the double taxation of Australian and Country A residents.

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

Accordingly, the lump sum payment from the Scheme is taxable in Australia under Article Z of the Country A Convention and is assessable in Australia under section 305-70 of the ITAA 1997 as applicable fund earnings.

The amount of applicable fund earnings is shown at label M of question 20 in the Supplementary section of the tax return. You should also complete label E of question 20 with the total amount of your assessable foreign source income.

Question 2

Foreign Income Tax Offset (FITO)

If you have paid foreign tax in another country, you may be entitled to an Australian foreign income tax offset under section 770-10 of the ITAA 1997, which provides relief from double taxation.

These rules apply for income years that start on or after 1 July 2008. Different rules apply for income periods up to 30 June 2008.

To qualify for a foreign income tax offset (FITO) you must meet all of the following criteria:

•                     You must have paid the foreign tax on the foreign income,

•                     The foreign tax must be a tax which you were personally liable for, and

•                     The income or gain that the foreign tax was paid must be included in your assessable income for Australian income tax purposes.

The foreign income tax offset is a non-refundable tax offset. The foreign income tax offset is applied to your income tax liability including the Medicare levy and the Medicare levy surcharge where applicable. Any excess is not refunded to you.

Whether you are eligible for a foreign tax credit is dependent on the relevant double tax agreement between Australia and Country A.

As noted above, under Article 20 of the Country A Convention the lump sum payment from Country A is taxable in Australia and in addition may also be taxed in Country A under article 20. However, Article 22 of the Country A convention provides for relief from double taxation.

Accordingly, you will be entitled to a foreign income tax offset in respect of the foreign tax paid in Country A as long as you paid income tax to the Country A tax authorities, and the tax paid is related to a taxing event in Australia.

As noted above, in your case the lump sum amount is assessable in Australia under section 305-70 of the ITAA 1997 as applicable fund earnings.

As such the FITO to be claimed needs to be proportioned on the basis that you can only claim the FITO on the foreign tax paid on the amount assessable here (i.e. you can't claim the whole amount as a FITO unless this is the same amount assessable in Country A for example).

The FITO can be claimed at label O of item 20 in the Supplementary section of the tax return.