Issue
Where an individual receives a superannuation lump sum from a foreign superannuation fund in circumstances where an annuity may be paid subsequently from that fund, is the amount of the 'applicable fund earnings' in relation to the lump sum calculated by taking a proportionate approach to calculate the amounts referred to in subsection 305-75(3) of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
No. A proportionate approach is not used to calculate the 'applicable fund earnings' under subsection 305-75(3) of the ITAA 1997.
Facts
The individual was a resident of a foreign country.
Whilst they were a foreign resident, the individual commenced a pension plan with a foreign superannuation fund, and made contributions to the plan.
The individual immigrated to Australia and became an Australian resident for tax purposes.
The individual has remained an Australian resident for tax purposes at all times since.
The individual continued to make contributions to the plan with the foreign superannuation fund while an Australian resident for tax purposes. No amount was transferred to the foreign superannuation fund from another foreign superannuation fund.
More than six months after becoming an Australian resident, the foreign superannuation fund paid a superannuation lump sum to the individual. The superannuation lump sum was only a part of the total amount to which the individual was entitled.
The individual expects, but is not required, to commence an annuity from the fund at some later time.
Reasons for Decision
Division 305 of the ITAA 1997 sets out the tax treatment of superannuation benefits received by individuals from non-complying superannuation plans. Subdivision 305-B of the ITAA 1997 deals specifically with superannuation lump sums from foreign superannuation funds.
Section 305-70 of the ITAA 1997 applies to superannuation lump sums received by an individual from a foreign superannuation fund more than six months after the individual either becomes an Australian resident or terminates their foreign employment.
In accordance with subsection 305-70(2) of the ITAA 1997, an individual who receives a superannuation lump sum from a foreign superannuation fund must include in their assessable income, so much of the lump sum as equals their 'applicable fund earnings'. The assessable portion is effectively subject to tax at the individual's marginal tax rate. In accordance with subsection 305-70(3) of the ITAA 1997, the remainder of the superannuation lump sum is not assessable income and is not exempt income.
The amount of an individual's 'applicable fund earnings' is worked out under section 305-75 of the ITAA 1997. In general terms, this amount is the earnings that have accrued to the individual in the foreign superannuation fund since the person became an Australian resident.
Where an individual becomes an Australian resident after the start of the period to which the lump sum relates (but before they receive it) the amount of their 'applicable fund earnings' is worked out using the method in subsection 305-75(3) of the ITAA 1997.
Subparagraph 305-75(3)(a)(i) and paragraph 305-75(3)(b) of the ITAA 1997 respectively require the following to be identified: • the amount in the fund that was vested in the individual just before the day (called the 'start day') the individual first became an Australian resident during the period to which the superannuation lump sum relates; and • the amount in the fund that was vested in the individual when the lump sum was paid.
Both of these provisions express an intention to take account of the total amount of an individual's benefits or interest in the foreign superannuation fund. That is certainly clear when also considered with subsection 305-75(4) of the ITAA 1997, which applies when a series of superannuation lump sums is to be paid from the fund.
Even though subsection 305-75(4) of the ITAA 1997 states how the section is applied if the relevant superannuation lump sum is not the first lump sum paid from a foreign superannuation fund, nothing explains if, or how, the provision applies if the amount vested in the individual can be taken in more than one form, such as a combination of superannuation lump sum and annuity.
It is the Commissioner's view that where an individual is paid a superannuation lump sum that represents only a part of the amount vested in them at the time of payment, there is no basis for applying a proportionate approach in working out the 'applicable fund earnings'.
Having regard to the facts, the method requires the following amounts to be determined: • the amount in the fund vested in the person just before the day they first became an Australian resident (the start day) (subparagraph 305-75(3)(a)(i) of the ITAA 1997) • the part of the payment attributable to contributions to the fund made by or in respect of the person from the start day (subparagraph 305-75(3)(a)(ii) of the ITAA 1997) • the amount in the fund vested in the person when the lump sum was paid (before any deduction for foreign income tax) (paragraph 305-75(3)(b) of the ITAA 1997).
Paragraph 305-75(3)(b) of the ITAA 1997 clearly requires the total amount that was vested in the individual when the lump sum was paid to be used in the calculation of the applicable fund earnings.
The sum of the amounts specified in subparagraphs 305-75(3)(a)(i) and 305-75(3)(a)(ii) of the ITAA 1997 are then subtracted from the amount referred to in paragraph 305-75(3)(b) of the ITAA 1997 as part of the calculation. This amount is multiplied by the proportion of the total number of days the person was an Australian resident during the period from the start day to the day the lump sum is paid (see ATO Interpretative Decision ATO ID 2009/124 Lump sums received from superannuation funds by Australian residents: relevant periods under subsection 305-75(3) of the ITAA 1997 ). In this case, that proportion will be 1. The result is the individual's 'applicable fund earnings'.
However, the amount included in assessable income cannot exceed the amount of the lump sum as a result of subsection 305-70(2) of the ITAA 1997. Subsection 305-70(2) of the ITAA 1997 states that only so much of the lump sum as equals the 'applicable fund earnings' is included in the assessable income. Therefore, the assessable income will be limited to the amount of the lump sum in any case where the lump sum is less than the applicable fund earnings. Note: The tax treatment of the superannuation lump sum described above will be the same regardless of how the individual is paid any further benefit from the foreign superannuation fund, that is, regardless of whether further benefits are taken as a superannuation lump sum or an annuity.
Amendment History
Date of Amendment Part Comment 16 June 2015 All Updated for clarity.
Date of Amendment | Part | Comment
16 June 2015 | All | Updated for clarity.