Private ruling: Lump sum payments from overseas retirement annuities
Published: September 2011
Ruling period: 1 July 2010 to 30 June 2011
Date scheme commenced: 1 July 2010

Ruling: Q1: Is any part of the lump sum payments from overseas retirement annuities included in assessable income as applicable fund earnings? | A1: Yes. | Q2: Are you entitled to a foreign income tax offset (FITO) on the assessable portion of your lump sum payments from your overseas retirement annuities? | A2: Yes.

Relevant facts and circumstances: You are over 60 years of age. You migrated to Australia from a foreign country and became a resident for tax purposes on a particular date (the residency date). While in the foreign country you commenced three annuities many years ago. All premiums paid on the policies were funded from your after tax personal income. At maturity, you would be entitled to take one third in cash tax free and the remaining two thirds would constitute an annuity payable monthly and taxed. Some years ago the rules of the foreign retirement annuity fund (FRAF) were amended such that if a person has formally emigrated from the foreign country and the policies have not yet matured, on maturity, the full value of the policy less tax, could be remitted overseas. You have provided details of the policies in the foreign currency. You have advised that the contributions made to the policies after your residency date were made on the first day of every month until the policies matured. The policies have matured and have been remitted to Australia into your superannuation fund. You have provided the dates they were paid into your overseas bank account, their values and tax deducted. You have provided documentation from the FRAF. Assumptions: Section 357-110 of Schedule 1 to the Taxation Administration Act 1953 (TAA) gives the Commissioner a power to make assumptions which he considers to be most appropriate. You were advised that, as we did not have the total transfer value of your benefits in the overseas Fund as at the day before you became an Australian resident, assumptions will be made. We have made the following assumptions. The value of your benefit for each policy on the date before you became an Australian resident is calculated as follows: Value of the policy on a particular date = A; Gross value of the lump sum on the date transferred to your overseas bank account (transfer date) = B; Contributions made to the scheme by you after your residency date = C. This amount is subtracted from both the above values, A and B. Therefore the calculated annual compound rate of growth of transfer value is calculated as a percentage. Based on this growth rate, the value of your benefit on the date before you became an Australian resident is calculated. In issuing this ruling, the Commissioner will make the assumption of the transfer values of the above calculated amounts of your total benefits on the day before you became an Australian resident.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 295-95(2). | 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 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 Subsection 305-75(5). | Income Tax Assessment Act 1997 Subsection 305-75(6). | Income Tax Assessment Act 1997 Section 307-5. | Income Tax Assessment Act 1997 Section 307-65. | Income Tax Assessment Act 1997 Subsection 295-95(2). | Income Tax Assessment Act 1997 Subsection 960-50. | Income Tax Assessment Act 1997 Subsection 995-1(1). | Superannuation Industry (Supervision) Act 1993 Section 10. | Superannuation Industry (Supervision) Act 1993 Section 62. | Income Tax Assessment Act 1997 Section 770-10. | Income Tax Assessment Act 1997 Subsection 770-10(1). | Income Tax Assessment Act 1997 Section 770-75. | Income Tax Assessment Act 1997 Subsection 770-75(1). | Income Tax Assessment Act 1997 Subsection 770-75(2).

Reasons for decision: Summary: A portion of the lump sum payments is assessable in Australia. You are assessable on your 'applicable fund earnings' in the foreign retirement annuity fund (FRAF), your fund overseas. | Detailed Reasoning - Lump sum payments from foreign superannuation funds: 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 applicable fund earnings are subject to tax at the person's marginal rate. 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 subsection 305-75(2) or (3) of the ITAA 1997. Subsection 305-75(2) of the ITAA 1997 applies where the person was an Australian resident at all times during the period to which the lump sum relates. Subsection 305-75(3) of the ITAA 1997 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 of the ITAA 1997 will not have any application. If the lump sum payment is received within six months of a person becoming an Australian resident it is not assessable income and is not exempt income under section 305-60 of the ITAA 1997. In your case, the payment was made from a fund overseas to your superannuation fund in Australia. 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. In this case it is evident that the Foreign Retirement Annuity Fund (FRAF) which is a retirement scheme established in the foreign country, is not an Australian superannuation fund as defined in subsection 295-95(2) of the ITAA 1997. | Detailed Reasoning - Foreign superannuation fund: The phrases 'Foreign superannuation fund' and 'Australian superannuation fund' are defined in subsection 995-1(1) of the ITAA 1997 as follows: foreign superannuation fund: (a) a superannuation fund is a foreign superannuation fund at a time if the fund is not an Australian superannuation fund at that time; and (b) 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. Australian superannuation fund has the meaning given by section 295-95. Subsection 295-95(2) of the ITAA 1997 states: A superannuation fund is an Australian superannuation fund at a time, and for the income year in which that time occurs, if: (a) the fund was established in Australia, or any asset of the fund is situated in Australia at that time; and (b) at that time, the central management and control of the fund is ordinarily in Australia; and (c) at that time either the fund had no member covered by subsection (3) (an active member ) or at least 50% of: (i) the total market value of the fund's assets attributable to superannuation interests held by active members; or (ii) 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. Accordingly, the definitions of a 'foreign superannuation fund' and Australian superannuation fund both incorporate the requirement of being a 'superannuation fund'. The effect of these definitions is that if the FRAF is not a 'superannuation fund', it will not be an Australian superannuation fund or a foreign superannuation fund. Nor can the amount paid to you be a 'superannuation lump sum' and Subdivision 305-B will not apply. Therefore, we are first required to determine if FRAF is a superannuation fund under the ITAA 1997. | Detailed Reasoning - Superannuation fund: 'Superannuation fund' is defined in subsection 995-1(1) of the ITAA 1997 as having the meaning given by section 10 of the Superannuation Industry (Supervision) Act 1993 (SISA). Subsection 10(1) of the SISA provides that: superannuation fund means: (a) a fund that: (i) is an indefinitely continuing fund; and (ii) is a provident, benefit, superannuation or retirement fund; or (b) a public sector superannuation scheme. | Detailed Reasoning - Provident, benefit, superannuation or retirement fund: Thus, to be a superannuation fund, a fund must satisfy one of four descriptors, namely that it is a 'provident, benefit, superannuation or retirement fund'. The SISA does not define these descriptors. Their meaning must be derived from ordinary usage. A provident, benefit, superannuation or retirement fund is commonly understood as a fund which provides its members with the secured right to be paid future benefits out of the moneys set aside. Referring to the phrase, 'a provident, benefit or superannuation fund established for the benefit of employees', Kitto J in Mahoney v. FC of T (1967) 41 ALJR 232; (1967) 14 ATD 519 (Mahoney) said: There was no definition in the Act of "a provident, benefit or superannuation fund", and the meaning of the several expressions must, therefore, be arrived at in the light of ordinary usage and with only one piece of assistance to be gathered from the immediate context. Since a fund, if its income was to be exempt under the provision, was separately required to be one established for the benefit of employees, each of the three descriptive words 'provident', 'benefit' and 'superannuation' must be taken to have connoted a purpose narrower than the purpose of conferring benefits in a completely general sense, upon employees…[J]ust as 'provident' and 'superannuation' both referred to the provision of a particular kind of benefit-in the one case a provision against contemplated contingencies, and in the other case a provision, to arise on an employee's retirement or death or other cessation of employment, of a subvention for him or his estate or persons towards whom he may have stood in some kind of relation commonly giving rise to a legal or moral responsibility-so 'benefit' must have meant a benefit, not in a general sense, but characterized by some specific future purpose. A funeral benefit is a familiar example. Kitto J's description in Mahoney , indicates that these funds have the following attributes: · 'Provident' refers to the making of provision against possible or expected future events. · 'Superannuation' refers to the making of provision for financial support for an employee, or for the employee's estate or dependants, to arise on the employee's retirement, death or other cessation of employment. · 'Benefit' refers to the making of provision for benefits of some specific future kind such as a funeral benefit, as distinct from benefits in a general sense. Sub paragraph 10(1)(a)(ii) of the SISA adds to this, 'Retirement' which, in line with Kitto J's description and dictionary definitions, would presumably refer to the making of provision for benefits to arise on the employee permanently ceasing regular work or withdrawing from the active workforce. The purpose of being a provident, benefit, superannuation or retirement fund must be the fund's exclusive purpose. The sole purpose test in section 62 of the SISA extends this exclusivity further by requiring that a regulated superannuation fund must be maintained for the sole purpose of providing superannuation and related benefits (core purposes), and for any ancillary purposes which the Regulator may approve. However section 62 only applies to regulated funds. The FRAF is not a regulated fund as it is a fund overseas. However, it is necessary to consider the purpose or purposes of the FRAF. | Detailed Reasoning - The purpose of the FRAF: On the basis of the information provided, the policies which form part of the assets of the FRAF are only payable on retirement, death or permanent incapacity. Therefore FRAF satisfies the established superannuation fund purposes corresponding to the requirements for a provident, benefit, superannuation or retirement fund similar to those under SISA. Therefore, the FRAF is a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997. | Detailed Reasoning - Assessable Amount: You became a resident of Australia for tax purposes and the lump sum payments were made in the 2010-11 income year, more than six months after you became an Australian resident. Therefore the exemption under section 305-60 of the ITAA 1997 will not apply. A portion of your lump sum payments will be assessable under subsection 305-70(3) of the ITAA 1997. This calculation effectively means that you will be assessed only on the income earned in the fund while you were a resident of Australia. That is, you will only be assessed on the accretion in the fund less any contributions made since you became a resident of Australia. Further, 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. The amounts included as assessable income, and taxed at marginal rates of tax, are worked out 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) of the ITAA 1997 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: (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 remainder of the period; (c) 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); (d) multiply the resulting amount by the proportion of the total days during the period when you were an Australian resident; (e) add the total of all previously exempt fund earnings (if any) covered by subsections (5) and (6). Subsection 305-75(5) defines previously exempt fund earnings as follows: You have an amount of previously exempt fund earnings in respect of the lump sum if: (a) part or all of the amount in the fund that was vested in you when the lump sum was paid (before any deduction for foreign tax) is attributable to the amount; and (b) the amount is attributable to a payment received from a foreign superannuation fund; and (c) the amount would have been included in your assessable income under subsection 305-70(2) by the application of this section, but for the payment having been received by another foreign superannuation fund. Subsection 305-75(6) states: The amount of your previously exempt fund earnings is the amount mentioned in paragraph (5)(c) (disregarding the addition of previously exempt fund earnings under subsection (2) or (3) of this section). | Detailed Reasoning - Foreign currency conversion: 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) states when applying section 960-50 to amounts that are elements in the calculation of another amount you need to: (c) first, translate any amounts that are elements in the calculation of other amounts (except special accrual amounts); and (d) then, calculate the other amounts Therefore, for the purposes of section 305-70 of the ITAA 1997, the 'applicable fund earnings' are calculated by translating the amount received from the FRAF at the exchange rate applicable on the day of receipt to Australian dollars and deducting from this amount the Australian dollars equivalent of the amount vested in the FRAF at the exchange rate on the day just before the day you became an Australian resident for tax purposes. | Detailed Reasoning - Calculation of Assessable Amount: In your case, the assessable amount is calculated as follows for each policy: · the total of the amounts in paragraph 305-75(3)(a) of the ITAA 1997 will equal the value of your benefit in the foreign fund on the day just before the residency date which has been calculated as the sum of the following. (i) amount of the lump sum vested in you on the day before the residency date; (ii) contributions made to the scheme for or by you after the residency date; and (iii) amount transferred into the foreign fund from any other foreign superannuation fund. · The amount vested in you when the lump sum was paid by the foreign fund (as per paragraph 305-75(3)(b) of the ITAA 1997) will equal the value of the benefit (in foreign currency) transferred to you; · The amounted vested in you just before you became a resident of Australia is subtracted from the total amount calculated above after both amounts are translated into AUD. · The result is multiplied by proportion of days you were a resident to the total number of days from when you were a resident until the date the payment was made (paragraph 305-75(3)(c) of the ITAA 1997); and · The total of the amounts in paragraph 305-75(3)(d) of the ITAA 1997 are added. As noted above, the lump sum payment is translated into AUD at the exchange rate applicable at the time the payment was received by you in your bank account in the foreign country. Also as noted above, the amount in the foreign fund that was vested in you when you first became an Australian resident, is translated into AUD at the exchange rate applicable on the day just before the day you became an Australian resident. Based on the above, subtracting the AUD equivalent of the vested amount from the AUD equivalent of the lump sum payment produces a negative result for two policies and a positive result for the third. Therefore there was some growth in one policy in the foreign fund while you were a resident of Australia. Accordingly, that portion of the lump sum payment is to be included in your income tax return for the 2010-11 income year. | Summary: The maximum foreign income tax offset available to you is the foreign tax which you have paid on the assessable amount calculated above. If the amount of foreign tax you have paid on the assessable amount of is less than $1,000, you can claim the total tax paid as a FITO. If the amount of tax paid is greater than $1,000 you can claim a FITO of either $1,000 or an amount calculated in accordance with subsection 770-75 of the ITAA 1997. | Detailed Reasoning - Foreign income tax offset: With effect from 1 July 2008, the foreign tax credit (FTC) system has been replaced by the foreign income tax offset (FITO) system contained in Division 770 of the ITAA 1997. Subsection 770-10(1) of the ITAA 1997 provides that a person is entitled to a FITO for foreign tax paid in respect of an amount that is included in the person's assessable income in a year of income. It is not necessary that the payment of foreign income tax actually occurs in the claim year. To determine the amount of FITO in any particular year, a person must first calculate the total foreign income tax paid on amounts included in their assessable income for the year. In your case you will need to include the growth amount in one policy in your assessable income. The tax offset has the effect of reducing the Australian tax that would otherwise be payable on the double-taxed amount. A FITO is a non-refundable tax offset. The FITO rules do not allow for the carry forward of excess foreign tax. This means that all available FITOs will need to be utilised in the year in which they arise. There will be no opportunity to carry them forward for use against future Australian tax on foreign income. Furthermore, there is a FITO limit. Where the total foreign income tax paid by a person is less than or equal to $1,000, the person is not required to calculate the FITO, i.e. the person's FITO will equal the foreign income tax paid on amounts included in the their assessable income. Where the total foreign income tax paid is more than $1,000, the person can choose to offset only $1,000 of foreign tax (and not formally calculate the FITO entitlement) or calculate the offset limit to determine the maximum FITO entitlement under section 770-75 of the ITAA 1997. | Detailed Reasoning - Your case: In your case you are assessable on your applicable fund earnings in the 2010-2011 income year. The maximum foreign income tax offset available to you is the foreign tax which you have paid on this assessable amount. If the amount of foreign tax you have paid on the amount of the growth is less than $1,000, you can claim the total tax paid as a FITO. If the amount of tax paid is greater than $1,000 you can claim a FITO of either $1,000 or an amount calculated in accordance with subsection 770-75 of the ITAA 1997. You will find further information on FITO on our website www.ato.gov.au under the heading Guide to foreign income tax offset rules 2010-11

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