Edited version of private advice

Authorisation Number: 1051973694179

Date of advice: 7 July 2022

Ruling

Subject: Lump sum transfer from a foreign superannuation fund

Question 1

Is any part of a lump sum payment to be transferred from an overseas fund applicable fund earnings under section 305-75 of the Income Tax Assessment Act 1997?

Answer

Yes.

Question 2

Is any part of the lump sum withdrawals from an overseas fund Account 2 assessable income under section 99B of the Income Tax Assessment Act 1936?

Answer

Yes.

Question 3

For an overseas fund, is the dividend which is reinvested in the Account 2 assessable income in the year that the annual distribution occurred?

Answer

No.

Question 4

For an overseas fund, is the dividend which is reinvested in the Account 2 assessable income in the year that lump sum withdrawals are made?

Answer

Yes.

This private ruling applies for the following periods:

Income year ended 30 June 20XX

Income year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

1.    In the 20XX-XX income year the Taxpayer became a member of an overseas fund (the Fund).

2.    In the 20XX-XX income year the Taxpayer arrived in Australia with a temporary visa as a temporary transfer with his company that has an office in Australia.

3.    In the 20XX-XX income year the Taxpayer became a resident of Australia for tax purposes.

4.    There are two accounts within the Fund. The Fund provides two types of individual accounts for members under age 55:

•         70% of contributions are allocated to Account 1, which funds retirement benefits; and

•         30% of contributions are allocated to Account 2, which can be accessed before retirement for education, buying a home, certain critical illnesses, and other approved expenses.

5.    Account 1 does not allow for access of benefits prior to retirement age.

6.    The Taxpayer provided the value of their benefits in the Fund as at the date of residency.

7.    The Taxpayer provided value of contributions made since they became an Australian resident.

8.    To date no lump sum payment has been made.

9.    Dividends paid on the Taxpayer's Account 2 are automatically reinvested/added to the Account 2 balance.

10.  It was not the case that the dividends were paid out to the Taxpayer first and the Taxpayer then directed them back into Account 2.

Assumptions

•         The Fund meets the definition of being a foreign superannuation fund for Account 1.

•         The Fund doesn't meet the definition of being a foreign superannuation fund for Account 2.

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 275-10

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

Income Tax Assessment Act 1997 section 305-55

Income Tax Assessment Act 1997 section 305-60

Income Tax Assessment Act 1997 section 305-70

Income Tax Assessment Act 1997 section 305-75

Income Tax Assessment Act 1997 section 305-80

Income Tax Assessment Act 1997 section960-50

Income Tax Assessment Act 1997 subsection960-50(1)

Income Tax Assessment Act 1997 subsection960-50(4)

International Tax Agreements Act 1953

Taxation Administration Act 1953 Section 357-110

ATO view documents

ATO Interpretation Decision ATO ID 2011/93 Income Tax: Application of section 99B of the Income Tax Assessment Act 1936 when accumulated foreign source income is paid to an Australian resident beneficiary who was a non-resident when the trustee derived the income

Reasons for Decision

Summary

1.    A portion of the lump sum payment to be transferred from Account 1 of the Fund should be included as assessable 'applicable fund earnings' in the Taxpayers tax return for the income year in which the transfer is made.

2.    Part of the lump sum withdrawals from Account 2 is assessable income under section 99B of the Income Tax Assessment Act 1936 (ITAA 1936).

3.    For Account 2, the dividend which is reinvested in the Account 2 is not assessable income in the year that the annual distribution occurred.

4.    For Account 2, the dividend which is reinvested in the Account 2 is assessable income in the year that lump sum withdrawals are made.

Detailed reasoning

Question 1

Lump sum payments received from certain foreign superannuation funds

5.    Subdivision 305-B of the Income Tax Assessment Act 1997 (ITAA 1997) deals with superannuation benefits paid from foreign superannuation funds.

6.    Section 305-55 of the ITAA 1997 restricts the application of that Subdivision to lump sums received from certain foreign superannuation funds, or schemes that pay benefits in the nature of superannuation upon retirement or death.

7.    Generally, where a lump sum paid from a foreign superannuation fund is received within six months after Australian residency and relates only to a period of non-residency; or to a period starting after the residency and ending before the receipt of payment, the lump sum is not assessable income and is not exempt income. That is, it is tax-free (sections 305-60 of the ITAA 1997).

8.    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.

9.    The Taxpayer became a resident of Australia for tax purposes sometimes in 2018. To this date, no lump sum payment had been made. As this payment will be eventually made more than six months after this Taxpayer became an Australian resident for tax purposes, section 305-70 of the ITAA 1997 will apply to the payment made from Account 1 so that an amount of applicable fund earnings (if any) is included in their assessable income for the relevant income year.

Applicable fund earnings

10.  The 'applicable fund earnings' amount is worked out under section 305-75 of the ITAA 1997. As the Taxpayer became an Australian resident after the start of the period to which the lump sum relates, the applicable fund earnings are worked out in accordance with subsection 305-75(3) of the ITAA 1997 which 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 earnings is 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 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).

11.  The effect of section 305-75 of the ITAA 1997 is that the Taxpayer is assessed only on the income they earned on their benefits in Account 1 of the Fund after they became an Australian resident for tax purposes. Earnings made during periods of non-residency, contributions, and transfers into the paying fund do not form part of the taxable amount when the benefit is paid.

Foreign currency conversion

12.  Subsection 960-50(1) of the ITAA 1997 states that an amount in a foreign currency is to be translated into Australian dollars. The applicable fund earnings is the result of a calculation from two other amounts and subsection 960-50(4) of the ITAA 1997 states that when applying section 960-50 of the ITAA 1997 to amounts that are elements in the calculation of another amount you need to:

•         first, translate any amounts that are elements in the calculation of other amounts (except special accrual amounts); and

•         then, calculate the other amounts.

13.  For the purposes of section 305-70 of the ITAA 1997, the 'applicable fund earnings' amount in respect of the lump sum received from Account 1 of the Fund should be calculated by deducting the Australian dollar equivalent of the amount vested in the Taxpayer just before the Residency Date from the amount vested in the Taxpayer on the day of receipt. Both amounts should be translated using the exchange rate applicable on the day of receipt.

Calculation of the applicable fund earnings amount

14.  The Taxpayer has yet to transfer their benefits from Account 1 of the Fund. Until that transfer takes place, we are unable to advise the Taxpayer of the actual figure to be included as assessable 'applicable fund earnings' in the Taxpayer's tax return for the income year in which the transfer is made. However, we have used the transfer value of the Taxpayer's benefits as at particular date to show the Taxpayer how the applicable fund earnings are calculated. We also informed the Taxpayer that should the relevant amounts change (i.e. the lump sum actually received and/or exchange rate that applies on the date when the lump sum is received) then the applicable fund earnings will need to be recalculated.

15.  The determined 'applicable fund earnings' amount from Account 1 of the Fund would then be included in the Taxpayer's assessable income for the relevant income year.

Questions 2

16.  Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of an Australian resident taxpayer includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

17.  In determining liability to tax on foreign sourced income, it is necessary to consider not only the income tax laws but also any applicable double tax agreement.

18.  In this instance, the relevant agreement (the Agreement) operates to avoid the double taxation of income received by Australian and the overseas resident.

19.  An Article of the Agreement deals with pensions and annuities which are usually paid as an income stream. In this case, the Taxpayer will receive a lump sum payment from Account 2 which is not considered to be a pension or annuity.

20.  The Agreement does not contain any Articles that specifically relate to the receipt of funds from a foreign retirement or investment fund, so the Article concerning 'Other income' will apply.

21.  Paragraphs (1) and (3) of Article provides that income of a resident of one of the countries which is not dealt with in the foregoing Articles of the Agreement will be taxable only in the country of residency. However, if such income is derived by a resident of one of the countries from sources in the other country, such income may also be taxed in the country in which it has its source.

22.  Therefore, the Agreement allows both Australia and the overseas country to tax any withdrawals made from the Fund.

23.  Subsection 6-10(4) of the ITAA 1997 states that the assessable income of an Australian resident includes statutory income from all sources, whether in or out of Australia.

24.  Section 10-5 of the ITAA 1997 lists certain statutory amounts that form part of assessable income. Included in this list is income derived pursuant to section 99B of the ITAA 1936.

25.  The Account 2 does not meet the definition of a 'foreign superannuation fund' under subsection 995-1(1) of the ITAA 1997. Therefore, it is a foreign trust estate for which section 99B would apply to tax distributions made to, or for the benefit of, resident beneficiaries.

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

27.  However, subsection 99B(2) of the ITAA 1936 modifies the rule in subsection 99B(1) and has the effect that the amount to be included in assessable income is not to include any amount that represents the corpus of the trust, but not an amount that is attributable to income of the trust which would have been included in the assessable income of a resident taxpayer if it had been derived by that taxpayer.

28.  Consequently, the assessable amount is the total amount received less any amounts deposited to the fund (the corpus) by the taxpayer, or on their behalf. The rule is that the taxpayer is taxed only on the earnings of the investment on withdrawal, not on the corpus returned to them. Any earnings in the funds are only assessable in Australia on withdrawal from the funds.

29.  In your case, as the Taxpayer is a resident of Australia for taxation purposes, the Taxpayer will need to include in their assessable income all amounts paid to the Taxpayer, or applied for the Taxpayer's benefit, from Account 2, subject to the exclusion contained in subsection 99B(2) of the ITAA 1936.

Questions 3 and 4

30.  Dividends paid on the Taxpayer's Account 2 are automatically reinvested/added to the Taxpayer's Account 2 and form part of the corpus of the Account 2.

31.  ATO Interpretation Decision ATO ID 2011/93 Income Tax: Application of section 99B of the Income Tax Assessment Act 1936 when accumulated foreign source income is paid to an Australian resident beneficiary who was a non-resident when the trustee derived the income provides the Commissioner's view of the operation of section 99B of the ITAA 1936 in respect of the receipt of an amount that comprised solely of foreign interest income.

32.  The Commissioner's view is that the entire amount of the payment is included in the beneficiary's assessable income under subsection 99B(1) of the ITAA 1936, because:

•         The conditions in subsection 99B(1) of the ITAA 1936 are satisfied as the taxpayer has received an amount of trust property during an income year in which the taxpayer was a resident.

•         Trust property paid to the resident beneficiary is attributable to foreign source interest derived by the trust. As interest income would have been assessable had it been derived by a resident taxpayer, and as the interest income has not been included in the assessable income of the beneficiary under section 97 of the ITAA 1936 or been assessed to either the trustee of the trust or the trustee of another trust under Division 6 of Part III of the ITAA 1936, none of the exclusions in subsection 99B(2) of the ITAA 1936 applies to reduce the amount included in the assessable income of the beneficiary.

•         It is clear from the language of section 99B of the ITAA 1936, and by inference from subsection 102AAM(5) of the ITAA 1936, that there is no apportionment of the amount included in assessable income by reference to the residency status of the beneficiary as at the time the income was derived by the trust. Rather, the only explicit condition concerning residency is that the beneficiary be a resident at some time during the year of income in which the trust property is paid to them or applied for their benefit.

33.  In this case, the dividends paid on the Taxpayer's Account 2 were automatically reinvested/added to the Taxpayer's Account 2. The dividends which are reinvested are not assessable income in the year they were paid; they are assessable under section 99B of the ITAA 1936 when the Taxpayer makes a withdrawal from the Account 2.