Edited version of private advice

Authorisation Number: 1051968250509

Date of advice: 31 March 2022

Ruling

Subject: Lump sum payment from a foreign superannuation fund

Question

Where the Taxpayer withdraw the total benefits from their 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.

This ruling applies for the following period:

Year ended 30 June 20XX

Relevant facts and circumstances

The Taxpayer is an Australian resident.

The Taxpayer currently holds benefits in a United Kingdom (UK) pension scheme (UK Fund).

In 20XX, and prior to becoming a resident, the Taxpayer commenced a Flexi-access drawdown (FAD) pension in the UK Fund by withdrawing an amount as a pension commencement lump sum (PCLS).

Further amounts were subsequently withdrawn from the UK Fund.

The Taxpayer intends to withdraw his total benefits from the UK Fund and transfer the money to Australia.

Relevant legislative provisions

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.

The Taxpayer is currently considering transferring their total FAD pension benefits in UK Fund to Australia. Under Australian law, the UK Fund payment would be akin to a full commutation of a pension entitlement.

For this reason, the total withdrawal and payment of benefits from the UK Fund 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.