Issue
Where, at the same time, an individual is paid a superannuation lump sum and commences an annuity from a foreign superannuation fund, is the amount of 'applicable fund earnings' in relation to the superannuation lump sum calculated by taking a proportionate approach to the amounts referred to in subsection 305-75(3) of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
Yes. The amount of 'applicable fund earnings' in relation to the superannuation lump sum is calculated by taking a proportionate approach to the amounts referred to in 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 represented only a third of the amount the individual was entitled to receive from the fund.
At the same time as paying the superannuation lump sum, the foreign superannuation fund commenced to pay an annuity to the individual using the remainder of the amount in the foreign superannuation fund.
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) of the ITAA 1997 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 commences an annuity from the foreign superannuation fund at the same time as the superannuation lump sum is paid from the fund, subsection 305-75(3) of the ITAA 1997 is applied having regard only to the individual's lump sum entitlement. That is, regard is had only to so much of each of the relevant vested amounts that was, at the relevant times, payable as a lump sum. The part of the vested amount that relates to the annuity must be disregarded.
For example, if the rules of the foreign superannuation fund require the individual to be paid an annuity from the fund but allow the individual to choose, as in this case, to receive a superannuation lump sum of one-third of the vested amount, subsection 305-75(3) of the ITAA 1997 is applied on a proportionate basis, that is, to only one-third of the individual's total vested interest in the fund.
This approach ensures that the individual is not assessed on earnings that have, in effect, accrued in relation to the annuity that will be paid from the foreign superannuation fund. It is also consistent with the previous approach taken in ATO Interpretative Decision ATO ID 2002/284 Superannuation, retirement and employment termination: Lump sum and pension from overseas superannuation fund. Amount to which section 27CAA of the ITAA 1936 applies (Withdrawn) in respect of former section 27CAA of the Income Tax Assessment Act 1936 (ITAA 1936), the predecessor to Subdivision 305-B of the ITAA 1997. Subdivision 305-B is intended to replicate the effect of section 27CAA of the ITAA 1936. Paragraph 2.86 of the Explanatory Memorandum to the Tax Laws Amendment (Simplified Superannuation) Bill 2006 stated: The existing tax treatment of superannuation benefits paid from non-complying superannuation plans will be maintained, however the terminology applying to these benefits will be simplified. In summary: ... • Superannuation lump sum benefits paid from 'foreign superannuation funds' continue to be taxed on the earnings while the person was an Australian resident.
The view in ATO ID 2002/284 was also consistent with the approach set out in Income Tax Ruling IT 2272 Income Tax: eligible termination payments and superannuation pensions - determination of undeducted contributions and undeducted purchase price which provides a basis for apportionment between a lump sum and annuity paid from a superannuation fund.
Having regard to the facts, the method in subsection 305-75(3) of the ITAA 1997 for calculating 'applicable fund earnings' 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) apportioned between the superannuation lump sum and the annuity: 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 with the contributions made to the foreign superannuation fund apportioned between the lump sum and the annuity: subparagraph 305-75(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) as apportioned between the lump sum and the annuity: paragraph 305-75(3)(b) of the ITAA 1997.
The sum of the amounts specified in subparagraph 305-75(3)(a)(i) of the ITAA 1997 and subparagraph 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. The resulting 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 foreign superannuation funds: relevant periods under subsection 305-75(3) of the ITAA 1997 ). In this case the proportion will be 1. The result is the individual's 'applicable fund earnings'. Note: While not relevant to the facts of this case, if an amount had been transferred to the foreign superannuation fund from another such fund, that transferred amount would also need to be apportioned between the superannuation lump sum and annuity when applying subparagraph 305-75(3)(a)(iii) of the ITAA 1997.
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.