It is quite common to see that many Australian residents migrated from overseas bringing lump sum amount from their overseas super fund into Australia and being asked by the ATO the nature of the money. Unless otherwise it is classified as non-assessable non-exempt income, the lump sum could be subject for the income tax in Australia. Hence, it is important to understand the rules of taxation on foreign super fund benefits.
There are three basic rules which apply to an individual receiving a lump sum from a foreign superannuation fund. They are covered in ITAA 1997 Subdiv 305-B and are as follows:
(1) A lump sum received by a person within six months of becoming an Australian resident is generally non-assessable non-exempt income as per s 305-60. The lump sum must also:
- relate only to a period when the person was not an Australian resident or starting after the person became an Australian resident and ending before the payment is received, and
- not exceed the amount in the fund that was vested in the person when they received the payment.
(2) If a superannuation lump sum from a foreign superannuation fund is received more than six months after the taxpayer’s Australian residency commences or foreign employment ends, the general rule is that the person receiving the benefit must include in their assessable income so much of the lump sum as equals the “applicable fund earnings” (s 305-70(2)).
(3) A person’s applicable fund earnings are, in general, the earnings that have accrued to the person in the foreign superannuation fund since the person became an Australian resident. The residual of the lump sum would remain non-assessable non-exempt income.
Private binding ruling (PBR)
In the PBR, the relevant facts and circumstances are as follows:
- The taxpayer held an interest in a Retirement Savings Plan in a foreign country.
- The taxpayer had been an Australian resident for a number of years, and in the tax year their employment was terminated.
- Being over 55 years of age, a lump sum payment was made to the taxpayer’s bank account in the relevant tax year.
- Details from the Retirement Savings Plan stated that lump sum withdrawals can be made upon leaving the company and in times of financial hardship including for tuition expenses and the purchase of a principal residence.
Foreign superannuation fund
In order for ITAA 1997 Subdiv 305-B to apply, the payment must be made from a foreign superannuation fund. Under ITAA 1997 s 995-1 a “foreign superannuation fund” is a superannuation fund which is not an Australian superannuation fund at a specific time or during an income year.
A foreign superannuation fund cannot be a regulated superannuation fund in accordance with superannuation law as they are not established and operated within Australia. Despite this, the Commissioner of Taxation has the view that a foreign entity would be considered a foreign superannuation fund where:
- it exclusively provides for a narrow range of benefits that are characterised by some specific purpose, or
- it is maintained solely for the purposes of providing benefits to a member on reaching a retirement age or on the member’s death.
In conclusion, the Commissioner is satisfied the foreign entity would be a foreign superannuation fund if it practically passes the sole purpose test (SIS Act s 62).
In the case of the taxpayer, the foreign Retirement Savings Plan also allowed for withdrawals prior to retirement:
- when the individual ceased employment with the company
- in times of financial hardship
- for the payment of tuition fees, and
- for the purchase of a principal residence.
Accordingly, the Retirement Savings Plan would not generally pass the sole purpose test and did not fall within the definition of a foreign superannuation fund. Hence, ITAA 1997 s 305-70(2) does not have any application.
In the ruling, the lump sum payment received by the taxpayer would be subject to the general tax rules relating to trust income. However, any tax which may have been payable in the foreign jurisdiction may have an applicable foreign income tax offset applied to it.
Client application
Any large payments or lump sum amounts coming from a foreign source needs to be scrutinised before determining the correct tax treatment. This may involve getting certified translations of documents as well as details surrounding the entity itself.
