Private ruling: Assessability of a foreign pension lump sum payment
Date of advice: 31 March 2017
Published: May 2017
Ruling period: Year ending 30 June 2016
Date scheme commenced: 1 July 2015

Ruling: Q1: Is any part of the lump sum payment you received 'applicable fund earnings' and therefore assessable under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes. | Q2: Are you entitled to claim a foreign income tax offset (FITO) under section 770-10 of the ITAA 1997 for the pension charge paid in the Country X in relation to a lump sum payment? | A2: Yes.

Relevant facts and circumstances: You are a citizen of Australia and Country X. The fund is a defined benefit fund based in Country X. You have since departed Australia on international assignments where you were considered a non-resident for tax purposes. You arrived back in Australia in 20XX and are an Australian resident. You became eligible to withdraw the pension at a retirement age of 60. You made no personal contributions to the fund; all contributions were made by your employer. You received a lump sum amount from the fund and the fund commenced paying a reduced annual pension at the same time. The lump sum amount was subject to the pension charge. This amount was withheld from you and remitted on your behalf.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 section 6-10 | Income Tax Assessment Act 1997 section 305-60 | Income Tax Assessment Act 1997 section 305-65 | Income Tax Assessment Act 1997 section 305-70 | Income Tax Assessment Act 1997 section 305-75 | Income Tax Assessment Act 1997 section 770-10 | Income Tax Assessment Act 1997 section 770-15 | International Tax Agreements Act 1953

Reasons for decision: Summary: The lump sum amount equal to your 'applicable fund earnings' under section 305-70 of the ITAA 1997 will form part of your assessable income in the year ended 30 June 2016. Your applicable fund earnings should be calculated on a proportionate approach under section 305-75 ITAA 1997 and ATO Interpretative Decision ATO ID 2012/49 Superannuation lump sum paid from a foreign superannuation fund to an Australian resident as the same time as an annuity commenced: applying section 305-75 of the ITAA 1997 . This amount will then be taxed at your marginal tax rate. | Detailed Reasoning - Detailed reasoning: Sections 6-5 and 6-10 of the ITAA 1997, provide that the assessable income of an Australian resident includes ordinary and statutory income they derived directly or indirectly from all sources, whether in or out of Australia during the income year. In determining liability to Australian tax of foreign sourced income received by a resident, it is necessary to consider not only the income tax laws but also any applicable tax treaty. The Country X Convention operates to avoid the double taxation of income received by Australian and Country X residents. Article 17(1) of the Country X Convention provides that pensions including government pensions and annuities paid to a resident of Australia shall be taxable only in Australia. Section 305-70 of the ITAA 1997 applies to taxpayers who receive a superannuation lump sum payment from a foreign superannuation fund more than six months after the taxpayer becomes an Australian resident provided that section 305-60 or 305-65 of the ITAA 1997 does not apply. The amount equal to your 'applicable fund earnings' will form part of your assessable income in the year in which you received it. In your case the lump sum will be assessable in the year ended 30 June 2016. This amount will then be taxed at your marginal tax rate. The remainder of the lump sum payment is not assessable income and is not exempt income. Your applicable fund earnings should be calculated on a proportionate approach under section 305-70 of the ITAA 1997 and ATO ID 2012/49. As you became an Australian resident after the start period of the lump sum but before you received it, then the applicable fund earnings should be calculated as stated in subsection 305-75(3) of the ITAA 1997. You were paid a superannuation lump sum and also commenced receiving annuities from the fund at the same time. ATO ID 2012/49 advises that a proportionate approach should be taken where part of the vested amount that relates to the annuity must be disregarded. Therefore the 'applicable fund earnings' should be calculated as follows: (a) Calculate the total of the following amounts: I. The amount in the fund vested in you just before the day (the start day) you first became an Australian resident as apportioned between the superannuation lump sum and the annuity; II. The part of the payment attributable to contributions to the fund made by or in respect of you from the start day with the contributions made to the foreign superannuation fund apportioned between the lump sum and the annuity; III. The part of the payment that is attributable to amounts transferred into the fund from any other foreign superannuation fund during the remainder of the period; (b) Subtract that total amount in the fund vested in you when the lump sum was paid (before any deduction for foreign income tax) as apportioned between the lump sum and the annuity. (c) Multiply the resulting amount by the proportion of the total days during the period when you were an Australian resident between the start day to the day that the lump sum was paid, excluding the days you were a non-resident for tax purposes. (d) Add the total of all previously exempt fund earnings (if any) covered by subsections (5) and (6). The total of this calculation will be your applicable fund earnings which will be taxed at your marginal tax rate in the year ended 30 June 2016. | Summary: The pension charge meets the definition of 'foreign income tax' under section 770-15 of the ITAA 1997 and therefore you are entitled to FITO. | Detailed Reasoning - Detailed reasoning: Under section 770-10 of the ITAA 1997, a taxpayer is entitled to a tax offset for an income year for foreign income tax paid. The amount of foreign income tax counts towards the tax offset for the year if you paid it in respect of an amount that is all or part of an amount included in your assessable income for the year. To be entitled to FITO: ● You must have actually paid, or be deemed to have paid, an amount of foreign income tax. ● The income or gain on which you paid foreign income tax must be included in your assessable income for Australian income tax purposes. Foreign income tax is defined under subsection 770-15(1) of the ITAA 1997. To be entitled to the foreign income tax offset, the foreign income tax must be imposed under a law other than an Australian law and be; a tax on income, tax on profit or gains, or any other tax (subject to an agreement having the force of law under the International Tax Agreement Act 1953 ). The pension charge imposed by Country X is specifically defined under Country X's legislation as a charge to income tax. Therefore it can be concluded that the pension charge is 'tax on income' imposed under the Country X legislation and meets the foreign income tax definition under subsection 770-15(1) of the ITAA 1997. You may claim the FITO if your foreign pension or annuity is taxed both in Australia and in the country that paid it. Pensions and annuities are usually taxable only in the country of residence of the recipient. If your payment has also been taxed in a country with which Australia has a tax treaty, you may be entitled to a refund of that tax from that country. Country X's legislation states that an individual who is liable to pay the pension charge, will be subject to the charge in Country X regardless of their residency status. Article 22 (1) (a) of the Country X Convention states that Country X tax paid under the laws of Country X and in accordance with the Convention, whether directly or by deduction, in respect of income or gains derived by a person who is a resident of Australia from sources in Country X should be allowed as a credit against Australian tax payable in respect of that income. The pension charge is a foreign income tax which has been paid by you and the income on which you paid this charge will be included in your assessable income. Therefore you are entitled to claim the foreign income tax offset under section 770-10 of the ITAA 1997. To claim the FITO of more than $1,000, you will first need to work out your foreign income tax offset limit. This amount is based on a comparison between your tax liability and the tax liability you would have if certain foreign-taxed and foreign-sourced income and related deductions were disregarded. Your FITO limit is calculated as per subsection 770-75(2) of the ITAA 1997. Your offset limit is the greater of: (a) $1,000; and (b) This amount: (i) The amount of income tax payable by you for the income year, less (ii) The amount of income tax that would be payable by you for the income year if the assumptions in subsection (4) were made. The assumptions to make in subsection 770-75(4) of the ITAA 1997 advise to, assume that: (a) Your assessable income did not include: (i) So much of any amount included in your assessable income as represents an amount in respect of which you paid foreign income tax that counts towards the tax offset for the year; and (ii) Any other amounts of ordinary income or statutory income from a source other than an Australian source; and (b) You were not entitled to any deductions that: (i) Are debt deductions that are attributable to an overseas permanent establishment of yours; or (ii) Are deductions (other than debt deductions) that are reasonably related to amounts covered by paragraph (a) for that year. Note: You must also assume you were not entitled to any deductions for certain converted foreign losses. The amount of FITO equals the sum of eligible foreign income tax paid, subject to the offset limit. The eligible foreign income tax paid would be calculated as follows: ((Applicable Fund Earnings Attributable to Lump Sum Payment and Australian Residency Period per section 305-70 of the ITAA 1997)/(Gross Lump Sum Payment withdrawn)) x pension charge paid by the Taxpayer. To claim FITO, you need to keep adequate records of your foreign income and tax paid.