Private ruling: Foreign death benefit
Published: June 2013
Ruling period: Year ended 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Is any part of the death benefit paid to you from an overseas pension plan on the death of your spouse included in your assessable income as applicable fund earnings under section 305-75 of the Income Tax Assessment Act 1997 ? | A1: Yes.

Relevant facts and circumstances: You are over 65 years of age. Your late spouse (the deceased) was also over 65 years of age at the time of death. The deceased worked for a government institution in an overseas country until you both immigrated to Australia. The deceased was, prior to his/her death, a member of an overseas pension plan (the fund). You stated that the deceased was in receipt of a pension payable from the Fund which commenced prior to year 2000. The deceased died during the 2012-13 income year. During the 2012-13 income year, you received a letter from the fund stating that you are now entitled to your spouse's pension payable under the pension plan which is based on a portion of your spouse's pension. You stated that you are taxed by the overseas government on the monthly pension payments. During the 2012-13 income year, you received also received a letter from the fund stating that under the provisions of the overseas pension plan, you as the designated beneficiary are entitled to a lump sum benefit in Australian Dollars. You stated that the overseas government has not deducted any tax from the lump sum which you received during the 2012-13 income year.

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 305-75(2). | Income Tax Assessment Act 1997 Subsection 305-75(3). | Income Tax Assessment Act 1997 Subsection 305-75(5). | Income Tax Assessment Act 1997 Subsection 305-75(6). | Income Tax Assessment Act 1997 Subsection 307-5(1) | Income Tax Assessment Act 1997 Section 307-65 | Income Tax Assessment Act 1997 Section 960-50. | Income Tax Assessment Act 1997 Subsection 960-50(1). | Income Tax Assessment Act 1997 Subsection 995-1(1).

Reasons for decision: Summary: A superannuation death benefit is tax-free in Australia only when it is paid by a complying Australian superannuation fund and to a dependant of the deceased. The lump sum death benefit was received as a result of the death of a fund member from a foreign superannuation fund (which is not a complying Australian superannuation fund), therefore, the entire amount is assessable as 'applicable fund earnings' in the 2012-13 income year. | Detailed Reasoning - Superannuation lump sum: A superannuation lump sum is described in section 307-65 of the Income Tax Assessment Act 1997 (ITAA 1997) as a superannuation benefit that is not a superannuation income stream. The table contained in subsection 307-5(1) identifies the different types of superannuation benefits. One such payment is a superannuation death benefit. A superannuation death benefit is described in Column 3 of item 1 of the table in subsection 307-5(1) of the ITAA 1997 as: · A payment to you from a superannuation fund, after another person's death, because the other person was a fund member. A death benefit payment made by a superannuation fund is tax-free in Australia only when it is paid: · by a complying Australian superannuation fund, and · to a dependant of the deceased. In your case, the overseas pension plan (the Fund) paying the death benefit is a foreign superannuation fund established in an overseas country. Foreign superannuation funds are not regulated in Australia, and so cannot be complying superannuation funds. Consequently, the payment is not tax-free in Australia, even though it is not subject to tax in the overseas country. Such a payment is, however, taxable in Australia under section 305-70 of the ITAA 1997. | Detailed Reasoning - Lump sum payment paid by a foreign superannuation fund: 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 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. | Detailed Reasoning - Foreign superannuation fund: A foreign superannuation fund is defined in subsection 995-1(1) of the ITAA 1997 as follows: (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. 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: (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 funds 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. 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. The Fund, which was established and administered in an overseas country, is not an Australian superannuation fund as defined in subsection 295-95(2) of the ITAA 1997. Based on the information available, the Commissioner considers that the Fund is a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997. | Detailed Reasoning - Assessable Amount: As noted above, the applicable fund earnings in relation to a lump sum payment from a foreign superannuation fund will be included in a person's assessable income where the payment is received more than six months after a person has become an Australian resident. You became a resident of Australia for tax purposes prior to year 2000 (the residency date). During the 2012-13 income year, your late husband passed away and you became entitled to a lump sum death benefit from the Fund. The Fund paid you a lump sum death benefit during the 2012-13 income year. The date on which you received the lump sum benefit is more than six months after you became an Australian resident. Accordingly, a portion of the lump sum benefit will be assessable under section 305-70 of the ITAA 1997. The amount included as assessable income is calculated under subsection 305-75(2) of the ITAA 1997 because you were an Australian resident at all times to which the lump sum relates. Subsection 305-75(2) of the ITAA 1997 states: If you were an Australian resident at all times during 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 part of the lump sum that is attributable to contributions made by or in respect of you on or after the day when you became a member of the fund (the start day ); (ii) the part of the lump sum (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 income tax); (c) add the total of all your previously exempt fund earnings (if any) covered by subsections (5) and (6). The calculation under this section means that you will be assessed only on the increase in value of your late spouse's entitlement 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. 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. | 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. As you received a lump sum amount which was already expressed in Australian dollars, therefore, no foreign currency conversion will apply to this payment. | Detailed Reasoning - Calculation of the assessable amount of the death benefit payment from overseas pension plan: In accordance with subsection 305-75 (2) of the ITAA 1997 the amounts determined at sub-paragraphs 305-75(2)(a)(i) and (ii) are added which result in nil. This total is then subtracted from the amount determined under paragraph 305-75(2)(b). To this figure we add the amounts determined under paragraph 305-75(2)(c). As the resulting amount is greater than zero, the entire lump sum payment representing a supplementary death benefit will assessable as 'applicable fund earnings' in your tax return for the 2012-13 income year.