Issue
When calculating the amount of 'applicable fund earnings' under subsection 305-75(3) of the Income Tax Assessment Act 1997 (ITAA 1997), is 'the period' in paragraph 305-75(3)(c) of the ITAA 1997 the same as 'the period to which the lump sum relates' elsewhere in subsection 305-75(3) and in subsection 305-75(2) of the ITAA 1997?
Decision
No. 'The period' in paragraph 305-75(3)(c) of the ITAA 1997 commences on the date, during the period to which the lump sum relates, on which the member first became an Australian resident. The period ceases when the foreign superannuation lump sum is paid.
Facts
The member joined the foreign superannuation fund on 1/01/1999 - they are not an Australian resident.
The member moved to Australia and becomes an Australian resident on 01/07/2007.
The value of the member's account with the foreign superannuation fund just before the day they first became an Australian resident is $5,500.
The member left the country and ceased to be an Australian resident on 1/01/2008.
The member then returned to Australia and became an Australia resident again on 01/07/2008.
The member was paid a lump sum of $6,500 from the foreign superannuation fund on 30/06/2009.
Since 01/07/2007, there have been no contributions made to the foreign superannuation fund, and no amounts have been transferred into the foreign superannuation fund from other funds.
Reasons for Decision
Section 305-70 of the ITAA 1997 generally provides that an Australian resident taxpayer who receives a lump sum from a foreign superannuation fund more than six months after becoming an Australian resident must include the 'applicable fund earnings' of the lump sum in their assessable income.
'Applicable fund earnings' for this purpose are worked out under section 305-75 of the ITAA 1997. In particular, subsection 305-75(3) of the ITAA 1997 is used to calculate applicable fund earnings where the taxpayer became an Australian resident after the start of the period to which the lump sum relates.
Paragraph 305-75(3)(c) of the ITAA 1997 requires the amount derived from the application of paragraphs 305-75(3)(a) and 305-75(3)(b) of the ITAA 1997 to be multiplied by the proportion of the total days during the period when the taxpayer was an Australian resident. This requires identification of the nature of 'the period'.
Two interpretations of 'the period' referred to in paragraph 305-75(3)(c) of the ITAA 1997 are possible. One is that it is the same as 'the period to which the lump sum relates', that is, the period during which the total lump sum accrued. The other is that it is the period, within 'the period to which the lump sum relates', commencing on the day on which the person first became an Australian resident and ceasing on the day the lump sum is paid.
As two interpretations of 'the period' are possible, these words need to be interpreted with reference to the intention of the whole provision.
Subsection 305-75(3) of the ITAA 1997 is a rewrite of former subsection 27CAA(1) of the Income Tax Assessment Act 1936 (ITAA 1936). Section 27CAA of the ITAA 1936 was amended in 2004 to include a proportion of days of Australian residency to accommodate persons who may have several periods of residency in Australia during the period to which the lump sum relates. It is clear from the Explanatory Memorandum to the Tax Laws Amendment (2004 Measures No 2) Bill 2004 that the intention of section 27CAA of the ITAA 1936 was to tax earnings that accrued only while the taxpayer was an Australian resident. Paragraphs 9.30 to 9.32 of the Explanatory Memorandum explain that the insertion of the proportion of days ensures that where a taxpayer moves in and out of Australian residency, the amount that would otherwise be assessable under section 27CAA of the ITAA 1936 is adjusted so that 'the assessable amount, is only what accrued during periods of residency since the individual first became resident'.
The formula in subsection 27CAA(1) of the ITAA 1936 included multiplying earnings by a proportion of Australian resident days within a period of 'total days'. The 'total days' were defined as the number of days from the 'relevant day' to the day on which the superannuation lump sum was paid. The 'relevant day' was defined as the later of the day on which the taxpayer became a member of the paying fund (the foreign superannuation fund) and the taxpayer's first day of Australian residency during the period to which the payment related.
The Explanatory Memorandum to the Tax Laws Amendment (Simplified Superannuation) Bill 2006, which introduced section 305-75 of the ITAA 1997, states that the existing tax treatment of superannuation benefits paid from non-complying superannuation plans would be maintained. Specifically, paragraph 2.86 states that 'superannuation lump sum benefits paid from "foreign superannuation funds" continue to be taxed on the earnings while the person was an Australian resident.'
To achieve this policy outcome, when applying the proportion in paragraph 305-75(3)(c) of the ITAA 1997, 'the period' must commence on the day within the period to which the lump sum relates on which the taxpayer first became a resident of Australia, and conclude when the lump sum is paid.
By using paragraph 305-75(3)(c) of the ITAA 1997 in the formula, the residency proportion of that period, the formula will adjust or maintain the earnings amount calculated at paragraphs 305-75(3)(a) and 305-75(3)(b) of the ITAA 1997 so that it will represent the proportion of earnings attributable to the taxpayer's period(s) of Australian residency.
In this case, 'the period to which the lump sum relates', for the purposes of subsection 305-75(3) of the ITAA 1997, is from 1/01/1999 to 30/06/2009. However, 'the period', for the purposes of paragraph 305-75(3)(c) of the ITAA 1997, is from 01/07/2007 to 30/06/2009. During 'the period' the superannuation lump sum increased by $1000. The Australian resident days for the taxpayer are from 01/07/2007 to 01/01/2008 and 01/07/2008 to 30/06/2009.
Therefore, the applicable fund earnings are: $1000 × 548/730 = $750.70
The taxpayer needs to include $750.70 as part of their assessable income.