Private ruling: Pension, annuity and lump sum payments from foreign country
Published: October 2011
Ruling period: Year ended 30 June 2010 | Year ended 30 June 2011 | Year ended 30 June 2012 | Year ended 30 June 2013 | Year ended 30 June 2014 | Year ended 30 June 2015
Date scheme commenced: 1 July 2010

Ruling: Question 1 and Answer | Is any part of the lump sum payments transferred from a foreign fund to an Australian superannuation fund assessable as applicable fund earnings under section 305-70 of the Income Tax Assessment 1997 (ITAA 1997)? | Yes | Question 2 and Answer | Are you assessable in Australia on your Country X annuities and Country X state pension? | Yes

Relevant facts and circumstances: You resided in an overseas country (Country X) prior to becoming an Australian resident and became a member of a foreign fund over twenty years ago. You had two policies, Policy A and Policy B. You became an Australian resident for tax purposes in the 1994-95 income year. No contributions have been made by you or anyone on your behalf since you became a resident of Australia. You received two lump sum payments from the foreign fund in the 2009-10 income year. You have advised that the foreign fund could not provide the total value of your benefits as at the day before you became an Australian resident. You have agreed with the transfer value of your benefit as at the day before you became an Australian resident. You receive regular payments from your Country X annuities and Country X state pension. You have been paying tax in Country X on your annuities and state pension. 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 you could not provide the total transfer value of your benefits for each policy in the foreign Fund as at the day before you became an Australian resident, the following assumptions will be made. You have provided the following information for Policy A: · the total transfer value of Amount A as at a specific date in the 1994-95 income year, and · the total transfer of benefits of Amount B during the 2009-10 income year. Based on these figures and the information provided, the Commissioner considers it is reasonable to assume that the annual compound rate of return for the period from a specific date in the 1994-95 income year to a specific date during the 2009-10 income year. Your entitlement under Policy A on a specific date during the 2009-10 income year was Amount B. By discounting back this transfer value by the assumed rate of return of a specific percentage, we have estimated that your accumulated entitlement in Policy A on a specific date in the 1994-95 income year (the day before you became a resident of Australia) to be Amount C. You have provided the following information for Policy B: · the current value of the lump sum payable at retirement age under the policy as at a specific date in the 1994-95 income year was Amount D (that is, the basic lump sum of an amount plus the total reversionary bonus of another amount), and · the value of the lump sum as at a specific date in the 2009-10 income year was Amount E. Based on these figures and the information provided, the Commissioner considers it is reasonable to assume that the annual compound rate of return for the period from a specific date in the 1994-95 income year to a specific date in the 2009-10 income year is a specific percentage. Your entitlement under Policy B as at on a specific date during the 2009-10 income year was Amount E. By discounting back this transfer value by the assumed rate of return of a specific percentage we have estimated that the current value of the lump sum payable at retirement age under Policy B on a specific date in the 1994-95 income year (the day before you became a resident of Australia) to be Amount F. In issuing this ruling, the Commissioner will make the following assumptions: · that the transfer value of your total benefits under Policy A is Amount C; and · the transfer value of Amount F of your total benefits under Policy B, on the day before you became an Australian resident. You have agreed to these assumptions in a telephone conversation on a specific date in the 2010-11 income year.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 6-5(2). | 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 Subsection 305-70(3). | 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 Subsection 305-80(1). | Income Tax Assessment Act 1997 Subsection 305-80(2). | Income Tax Assessment Act 1997 Subsection 305-80(3). | 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 995-1(1). | Superannuation Industry (Supervision) Act 1993 Section 10. | Superannuation Industry (Supervision) Act 1993 Section 19. | Superannuation Industry (Supervision) Act 1993 Section 62. | Income Tax Assessment Regulations 1997 Regulations 960-50.01. | International Tax Agreements Act 1953

Reasons for decision: Detailed Reasoning - Lump sum payments from foreign fund: In accordance with subsection 305-75(3) of the Income Tax Assessment Act 1997 (ITAA 1997), the applicable fund earnings is calculated by translating the amount received from the overseas fund at the exchange rate applicable on the day of transfer into Australian dollars (AUD), and deducting from this amount the AUD equivalent of the amount vested in the overseas fund on the day just before you first became an Australian resident at the exchange rate applicable on that day. The applicable fund earnings of Amount Z is to be included in your income tax return for the 2009-10 income year and will be subject to your marginal rate of tax. | 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 transferred or 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 is 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 subsection 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 an 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 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. 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. Subsection 995-1(1) of the ITAA 1997 defines a superannuation fund as having the same meaning given by section 10 of the Superannuation Industry (Supervision) Act 1993 (SIS Act), that is: (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; In the present case it is evident that the fund established in Country X, the Foreign Pension Scheme (the foreign fund) is not an Australian superannuation fund as defined in subsection 295-95(2) of the ITAA 1997 but it is established to provide benefits to members on their retirement. Therefore, on the basis of the information provided, the Commissioner considers the foreign fund is a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997. | Detailed Reasoning - Calculation of Assessable Amount: In this case, you became a resident of Australia for tax purposes on a specific date in the 1994-95 income year and the lump sum payments were made in the 2009-10 income year. As this will be more than six months after you became an Australian resident section 305-70 of the ITAA 1997 applies to include the 'applicable fund earnings' in your assessable income. The 'applicable fund earnings' are worked out under section 305-75 of the ITAA 1997. As mentioned earlier, subsection 305-75(3) applies where the person becomes an Australian resident after the start of the period to which the lump sum relates. 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 amount included as assessable income, and taxed at marginal rates of tax, is 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; (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). In short, you are assessed only on the income earned (the accretion) in respect of the foreign fund less any contributions you made since you became a resident of Australia. Further, any amounts representative of earnings during periods of non-residency, and transfers 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. 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: (a) first, translate any amounts that are elements in the calculation of other amounts (except special accrual amounts); and (b) then, calculate the other amounts | Detailed Reasoning - Amounts to be used in calculation: In some circumstances, if the vested amount, which includes the entitlement to a lump sum and pension on the day before a taxpayer became a resident of Australia, cannot be obtained from the fund, it may be appropriate to engage the services of an actuary, especially where the amount is substantial and an incorrect estimate could result in more tax than is required being payable. Generally, it is our practice when ascertaining an amount to rely on documentation that reasonably allows us to arrive at an average rate of growth. The transfer value is then discounted by the average rate to determine the vested amount. If the amount is insignificant, the cost of engaging the services of an actuary may outweigh any benefit. However, assumptions can be made to estimate the annual compound rate of growth of the transfer value at the date of the Australian residency. In your case, you could not provide the vested amounts in the foreign fund, which includes both your entitlements to a lump sum and pension, on the day before you became a resident of Australia. Accordingly, we have made assumptions as to the values of the benefits available under the two policies on the day before you became a resident of Australia. As noted earlier under 'Assumptions', you have agreed to the estimated value of Amount C and Amount F as the amount of your benefits under Policy A and Policy B respectively, on the day before you became a resident of Australia. The estimated amounts of your benefits under Policy A and Policy B are to be converted into AUD. The exchange rate that applied on 24 February 1995 (which is the closest rate given to the day before you became an Australian resident), as published by the Reserve Bank of Australia, was rate y. Accordingly, the estimated amounts converted to AUD are: · Policy A: Amount C ÷ rate y = Amount G, and · Policy B: Amount F ÷ rate y = Amount H. In the case of Policy A, as the lump sum payable was a percentage of the total benefits under the policy, the estimated amount of the lump sum benefit will be Amount I. You have advised that no contributions were made to your policies in the foreign fund by yourself or an employer after the date you became an Australian resident. No amounts were transferred into the fund from other foreign superannuation funds during the period. Under Policy A, the amount you received in the 2009-10 income year is Amount J (that is, a percentage of Amount B). This amount, converted into AUD was Amount K. Under Policy B, the amount you received in the 2009-10 income year is Amount E. This amount, converted into AUD was Amount M. The period for the purposes of paragraph 305-75(3)(c) of the ITAA 1997 commences on the day on which the person first became an Australian resident and ceases on the day the lump sum is paid. In your case, that period would have been from the date you became an Australian resident to when the payments were made and you were a resident for the whole of that period. Therefore, the Australian resident days and the total days are the same, and so the proportion to be used in the calculation is 1. There are no previously exempt fund earnings in relation to each lump sum payment. Therefore, applying subsection 305-75(3) to your circumstances, the applicable fund earnings for Policy A is Amount N and for Policy B is Amount P: | Detailed Reasoning - Assessable amount of the payment from the foreign superannuation fund: The amount assessable in accordance with subsection 305-70(3) of the ITAA 1997 for Policy A and Policy B is Amount Z (Amount N plus Amount P). It should be noted that section 305-75 of the ITAA 1997 may apply even where the lump sum payment is paid into a bank account in Country X. | Detailed Reasoning - Assessability of income from overseas pension and annuities: Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of an Australian resident includes the ordinary income they derived directly or indirectly from all sources, whether in or out of Australia, during the income year. Pensions and annuities have the character of ordinary income. Pension and annuity income is assessable in the year of receipt even though it may relate to a past or future income period. In determining your liability to pay tax in Australia it is necessary to consider not only the domestic income tax laws but also any applicable double tax agreements. Section 4 of the International Tax Agreements Act 1953 (Agreements Act) incorporates that Act with the Income Tax Assessment Act 1936 (ITAA 1936) and the ITAA 1997 so that all three Acts are read as one. The Agreements Act overrides both the ITAA 1936 and ITAA 1997 where there are inconsistent provisions (except in some limited situations). Section 5 of the Agreements Act states that, subject to the provisions of the Agreements Act, any provision in an Agreement listed in section 5 has the force of law. The Country X tax treaty (which is the double tax agreement between Australia and Country X) is listed in section 5 of the Agreements Act. The Country X tax treaty is located on the Austlii website ( www.austlii.edu.au ) in the Australian Treaties Series database. The Country X tax treaty operates to avoid the double taxation of income received by residents of Australia and Country X. Article Y of the Country X tax treaty provides that pensions (including government pensions) and annuities paid to an Australian resident shall be taxable only in Australia. Therefore an Australian resident for tax purposes is assessable on their Country X pension and annuity income under subsection 6-5(2) of the ITAA 1997.

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