Edited version of private ruling

Authorisation Number: 1011612545633

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Ruling

Subject: Lump sum payment from an overseas pension scheme

Question

Is a portion of a lump sum payment received from an overseas pension scheme, included in your assessable income as applicable fund earnings under section 305-70 of the Income Tax Assessment Act 1997?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 2010.

The scheme commences on:

1 July 2009.

Relevant facts and circumstances

You are over 60 years of age, and you were previously a resident of a foreign country.

You commenced your employment in your current vocation over 40 years ago. You subsequently became a member of a foreign pension scheme (the pension scheme) by virtue of your employment in the foreign country.

The pension scheme is a defined benefit (final salary) occupational pension scheme.

The pension scheme is a non contributory pension scheme for members in your current vocation.

Whilst you are in pensionable service you do not pay any contributions towards your pension, other than the state pension of the foreign country. You have not made any contributions to the pension scheme either before or after you became a resident of Australia.

Under the rules of the pension scheme, the pension age for members is 65 years of age, and you may retire with a pension at that age (or after that age up to age 70). Pension benefits do not become payable for members until age 55 at the earliest.

The rules of the pension scheme allow you to take up paid employment following your retirement and this paid employment will not affect your pension entitlement.

The pension paid on retirement depends on the period of pensionable service completed. Up until the middle of the 2007-08 income year benefits from pensionable service are calculated as a specified proportion of the full pension for each year of service. From the middle of the 2007-08 income year the period required for a full pension was increased

On retirement at, or after, age 65, the full pension is calculated as a specified proportion of your minimum remuneration. If a member dies leaving a surviving spouse, the spouse receives a pension equal to a specified proportion of the pension the member was receiving.

Pensions are increased each year after retirement. The pension earned in respect of pensionable service up to the middle of the 2007-08 income year is guaranteed to increase at the lower of the cost of living in the foreign country and a specified rate per annum. Increases to the part of the pension earned in respect of pensionable service from the middle of the 2007-08 income year are guaranteed at the lower of the cost of living in the foreign country and a reduced rate per annum.

Pensions are paid monthly in arrears and tax is deducted from the pension in the foreign country.

In addition, you become entitled to a retirement lump sum payment equal to three times the annual pension payable. Retirement lump sums cannot be paid before the actual date of retirement. The retirement lump sum payment is tax-free in the foreign country.

You left your employment in the foreign country, and your pensionable service ceased, in the late 1980's. You received a letter from the pension scheme in the first quarter of the 2010-11 income year, in which you were advised the length of your pensionable service you had accumulated in the pension scheme at the time of leaving your employment. Also in this letter, the pension scheme provided you with details of the values, at the time of leaving your employment, of the annual retirement pension and lump sum payable to you at age 65.

Your benefits were preserved in the pension scheme until you reached age 65, and you received no pension benefits before your 65^th birthday.

Several days after leaving your employment in the foreign country you arrived in Australia and became a resident of Australia for tax purposes (the residency date). In the abovementioned letter, you were advised that the value of your deferred benefits on the day before you became a resident of Australia could not be provided.

After the residency date you were employed in your current vocation by your sponsoring employer until your retirement in late August 2010. Your service with your sponsoring employer during this period was not counted as pensionable service within the pension scheme.

Since the residency date, no employer has made any contributions to the pension scheme on your behalf. Also since this date, no amounts been transferred into the pension scheme from any other foreign superannuation funds on your behalf.

In a letter sent to you in the second quarter of the 2009-10 income year you were advised by the pension scheme that when you turned age 65, you became entitled to preserved benefits covering the period of your pensionable service. Your benefits consisted of an annual pension, and a tax-free retirement lump sum equal to three times the deferred pension payable.

A couple of months later the lump sum payment was deposited directly into your bank account in the foreign country.

Assumption

The Commissioner considers that it is not unreasonable to make the assumption that the value of the retirement lump sum on the day before you became a resident of Australia is the same as the value of the retirement lump sum on the day when you left your employment in the foreign country.

Relevant legislative provisions

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

Income Tax Assessment Act 1997 Section 305-70,

Income Tax Assessment Act 1997 Subsection 305-70(2),

Income Tax Assessment Act 1997 Paragraph 305-70(2)(a),

Income Tax Assessment Act 1997 Subsection 305-70(3),

Income Tax Assessment Act 1997 Subsection 305-75(2),

Income Tax Assessment Act 1997 Subsection 305-75(3),

Income Tax Assessment Act 1997 Paragraph 305-75(3)(a),

Income Tax Assessment Act 1997 Paragraph 305-75(3)(b),

Income Tax Assessment Act 1997 Paragraph 305-75(3)(c),

Income Tax Assessment Act 1997 Paragraph 305-75(3)(d),

Income Tax Assessment Act 1997 Section 960-50,

Income Tax Assessment Act 1997 Subsection 960-50(1),

Income Tax Assessment Act 1997 Subsection 960-50(4),

Income Tax Assessment Act 1997 Subsection 960-50(6),

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

Income Tax Assessment Regulations 1997 Regulation 960-50.01.

Reasons for decision

Summary

A portion of the retirement lump sum paid by the foreign pension scheme is assessable as 'applicable fund earnings'. The applicable fund earnings represents the increase or growth in the pension scheme during the period you are a resident of Australia.

The applicable fund earnings is calculated by translating the lump sum payment received from the pension scheme at the exchange rate applicable on the day of receipt into Australian dollars, and deducting from this amount the Australian dollar equivalent of the retirement lump sum on the day just before the residency date at the exchange rate applicable on that day.

The applicable fund earnings are assessable in Australia notwithstanding that the retirement lump sum may be tax-free in the UK.

The remainder of the retirement lump sum is not assessable income and is not exempt income. As such, this amount is tax-free.

Detailed Reasoning

Lump sum payments transferred from foreign superannuation funds

From 1 July 2007 the applicable fund earnings in relation to a lump sum payment from a foreign superannuation fund that is received more than six months after a person has become an Australian resident will be assessable under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997). The remainder of the lump sum payment is not assessable income and is not exempt income.

The 'applicable fund earnings' is the amount worked out under either subsections 305-75(2) or 305-75(3) of the ITAA 1997. Subsection 305-75(2) applies where the person was an Australian resident at all times during the period to which the lump sum relates. Subsection 305-75(3) applies where the person becomes an Australian resident after the start of the period to which the lump sum relates.

Before determining whether an amount is assessable under section 305-70 of the ITAA 1997, it is necessary to ascertain whether the payment is being made from a foreign superannuation fund. If the entity making the payment is not a foreign superannuation fund then section 305-70 will not have any application.

Foreign superannuation fund

A foreign superannuation fund is defined in subsection 995-1(1) of the ITAA 1997 as follows:

· a superannuation fund is a foreign superannuation fund at a time if the fund is not an Australian superannuation fund at that time; and

· a superannuation fund is a foreign superannuation fund for an income year if the fund is not an Australian superannuation fund for the income year.

Subsection 295-95(2) of the ITAA 1997 defines Australian superannuation fund as follows:

A superannuation fund is an Australian superannuation fund at a time, and for the income year in which that time occurs, if:

· the fund was established in Australia, or any asset of the fund is situated in Australia at that time; and

· at that time, the central management and control of the fund is ordinarily in Australia; and

· at that time either the fund had no member covered by subsection (3) (an active member) or at least 50% of:

· the total market value of the funds assets attributable to superannuation interests held by active members; or

· the sum of the amounts that would be payable to or in respect of active members if they voluntarily ceased to be members;

· is attributable to superannuation interests held by active members who are Australian residents.

Thus, a superannuation fund that is established outside of Australia and has its central management and control outside of Australia would qualify as a 'foreign superannuation fund'. The fact that some of its members may be Australian residents would not necessarily alter this.

It is evident that the pension scheme established in the foreign country is not an Australian superannuation fund as defined in subsection 295-95(2) of the ITAA 1997. Based on the information provided, the Commissioner accepts that the pension scheme is a foreign superannuation fund, as defined in subsection 995-1(1).

Assessable Amount

You became a resident of Australia for tax purposes during the late 1980's. The retirement lump sum was made to you during the 2009-10 income year. The payment was made more than 6 months after you became an Australian resident). Accordingly, a portion of the lump sum payment will be assessable under section 305-70 of the ITAA 1997.

The amount included as assessable income is calculated under subsection 305-75(3) of the ITAA 1997 because you became an Australian resident after the start of the period to which the lump sum relates. Subsection 305-75(3) states:

If you become an Australian resident after the start of the period to which the lump sum relates (but before you received it) the amount of your applicable fund earnings is the amount (not less than zero) worked out as follows:

· work out the total of the following amounts:

· 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;

· 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;

· the part of the payment (if any) that is attributable to amounts transferred into the fund from any other foreign superannuation fund during the remainder of the period;

· 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);

· multiply the resulting amount by the proportion of the total days during the period when you were an Australian resident;

· add the total of all previously exempt fund earnings (if any) covered by subsections (5) and (6).

This calculation effectively means that you will be assessed only on the income earned in the pension scheme while you were a resident of Australia. That is, you will only be assessed on the accretion in the pension scheme less any contributions made since you became a resident of Australia.

Furthermore, any amounts representative of earnings during periods of non-residency and certain capital amounts previously transferred into the paying fund do not form part of the taxable amount when the overseas benefit is paid.

Foreign currency conversion

Subsection 960-50(1) of the ITAA 1997 states that an amount in a foreign currency is to be translated into AUD. The applicable fund earnings is the result of a calculation from two other amounts, and subsection 960-50(4) requires that when applying section 960-50 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.

· The table to subsection 960-50(6) of the ITAA 1997 sets out the translation rules. Only the following items are relevant to determining the issue in your case:

· item 11 which deals with a receipt or payment to which none of the other items apply; and

· item 11A which applies to amounts that are neither receipts nor payments and to which none of the other items apply.

Item 11 of the table in subsection 960-50(6) of the ITAA 1997 applies to a receipt or payment where none of the other items applies. The lump sum payment from the pension scheme is not included in any of the other items in the table so it will fall within item 11. Under this item, the payment is translated to AUD at the exchange rate applicable at the time of receipt.

For the purposes of this calculation it is accepted that the benefit was received at the time the retirement lump sum payment was credited to your bank account.

When the amount of the lump sum payment that was vested in you just before the residency date (subparagraph 305-75(3)(a)(i) of the ITAA 1997) is determined, there is no actual receipt or payment of an amount. All that occurs is a determination of the vested amount expressed in the foreign currency.

Regulation 960-50.01 of the Income Tax Assessment Regulations 1997 (ITAR 1997) modifies the table in subsection 960-50(6) of the ITAA 1997 to include item 11A that applies to amounts, other than receipts and payments, to which none of the other items apply. Under this item, the amount is translated into AUD at an exchange rate that is reasonable having regard to the circumstances.

Therefore, for the purposes of section 305-70 of the ITAA 1997, the 'applicable fund earnings' should be calculated by:

· translating the lump sum payment received from the pension scheme at the exchange rate applicable on the day of receipt to AUD (item 11 of the table to subsection 960-50(6)); and

· deducting from this amount the AUD equivalent of the payment vested in the pension scheme at the exchange rate applicable just before the residency date (item 11A of the table to subsection 960-50(6)).

Calculation of Assessable Amount

In a letter sent to you by the pension scheme during the first quarter of the 2010-11 income year, year, you were advised that, as at the time you left your employment in the foreign country, you were entitled to an annual retirement pension and a lump sum payable at age 65. As you became a resident of Australia a few days later, it is not unreasonable to assume that the value of the retirement lump sum on the day before the residency date is the same as the value of the retirement lump sum on the day when you left you left your employment in the foreign country.

You made no contributions to the pension scheme either before or after the residency date. Since the residency date, no contributions have been made to the pension scheme by an employer on your behalf. Also since this date, no transfers were made to the pension scheme from other foreign superannuation funds.

Therefore, the total of the amounts mentioned in paragraph 305-75(3)(a) of the ITAA 1997 is made up of:

· the amount of the retirement lump sum payment vested in you on the day before became a resident of Australia for tax purposes;

· contributions made to the pension scheme for or by you after you became an Australian resident; and;

· the amount transferred into the pension scheme from any other foreign superannuation fund.

The amount of the retirement lump sum payment that was vested in you at your residency date is translated into AUD at the exchange rate applicable on the day before the residency date.

The amount calculated above is subtracted from the total amount of the lump sum payment made by the pension scheme (paragraph 305-75(3)(b) of the ITAA 1997). The payment is translated into AUD at the exchange rate applicable at the time it was credited to your bank account. Thus the AUD equivalent of the vested amount is subtracted from the AUD equivalent of this payment.

Under paragraph 305-75(3)(c) of the ITAA 1997, this result is then multiplied by the proportion of the days you were an Australian resident to the total number of days from the residency date until the date the payment was made. As the resident days and the total days are the same, the proportion to be used in the calculation is 1.

Paragraph 305-75(3)(d) of the ITAA 1997 concerns previously exempt fund earnings calculated under subsections 305-75(5) and (6). Previously exempt fund earnings are the applicable fund earnings of any amounts transferred from one foreign superannuation fund to another foreign superannuation fund after you became a resident of Australia. In your case, there are no previously exempt fund earnings.

The amount determined above is the applicable fund earnings in relation to the lump sum payment.

In accordance with subsection 305-70(2) of the ITAA 1997 the applicable fund earnings is to be included in your assessable income for the 2009-10 income year. This amount is subject to tax at your marginal rate of tax.

The remainder of the lump sum payment is not assessable income and is not exempt income in accordance with subsection 305-70(3) of the ITAA 1997. As such, this amount is tax-free.

Although the retirement lump sum may be tax-free in the UK, you must include the applicable fund earnings in your assessable income for the 2009-10 income year in accordance with paragraph 305-70(2)(a) of the ITAA 1997.

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