Edited version of private ruling

Authorisation Number: 1011555612802

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Ruling

Subject: Lump sum payment from an overseas superannuation fund

Questions

1. Is any part of the lump sum payment from an overseas superannuation fund included in your assessable income as applicable fund earnings?

Answer: Yes.

2. Can a choice under section 305-80 of the Income Tax Assessment Act 1997 be made if the lump sum payment is made to you and then contributed to a complying Australian superannuation fund?

Answer: No.

This ruling applies for the following period

Year ending 30 June 2010

Year ending 30 June 2011

The scheme commenced on

1 July 2009

Relevant facts

You were employed overseas.

You subsequently migrated to Australia and became a resident of Australia for tax purposes. You have continuously been a permanent resident of Australia since arrival.

You ceased employment with your overseas employer after moving to Australia.

You are a member a foreign superannuation fund (the Fund).

The Fund is an accumulation fund and your benefits in the Fund are not accessible prior to retirement.

You joined the Fund on the date you ceased employment with your overseas employer.

You wish to bring the Australian Dollar equivalent of your benefits in the Fund to Australia to help your retirement.

The lump sum payment from the Fund was made more than six months after you became an Australian resident.

Your overseas employer has advised that they will only pay your benefits in the Fund directly to you and not directly to your Australian superannuation fund.

You state that you will have your benefits in the Fund paid directly to you. You will then immediately deposit the full amount received into a complying Australian superannuation fund.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 6-10(2).

Income Tax Assessment Act 1997 Section 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 305-80.

Income Tax Assessment Act 1997 Subsection 305-80(1).

Income Tax Assessment Act 1997 Section 307-15.

Income Tax Assessment Act 1997 Subsection 960-50(1).

Income Tax Assessment Act 1997 Subsection 960-50(4).

Income Tax Assessment Act 1997 Subsection 960-50(6).

Income Tax Assessment Act 1997 Subsection 995-1(1).

Reasons for decision

Summary

The difference between the amount of the lump sum received from your foreign superannuation fund and the value of the lump sum at the date you became a member of the fund represents the applicable fund earnings. The applicable fund earnings is included in your assessable income.

As you will receive the payment directly and your foreign superannuation fund will not transfer your entitlements directly to a complying Australian superannuation fund you may not elect to have all or part of the payment treated as assessable income of the Australian superannuation fund.

Detailed Reasoning

Lump sum payments from foreign superannuation funds:

From 1 July 2007, the applicable fund earnings in relation to a lump sum payment from a foreign superannuation fund that is received or transferred 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 are 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 (3) of the ITAA 1997. Subsection 305-75(2) of the ITAA 1997 applies where the person was an Australian resident at all times during the period to which the lump sum relates. Subsection 305-75(3) of the ITAA 1997 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 of the ITAA 1997 will not have any application.

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 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 funds 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.

Based on the information provided, your foreign superannuation fund (the Fund) is not an Australian superannuation fund as defined in subsection 295-95(2) of the ITAA 1997 and falls within the definition of foreign superannuation fund in subsection 995-1(1) of the ITAA 1997.

Calculation of Assessable Amount

In this case the lump sum payment from the Fund was made more than six months after you became an Australian resident. Therefore, the exemption under section 305-60 of the ITAA 1997 will not apply.

A portion of your lump sum payment will be assessable under section 305-70 of the ITAA 1997.

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 an overseas benefit is paid.

As you became an Australian resident before the start of the period to which the lump sum relates, the amount included as assessable income, and taxed at marginal rates of tax, is worked out under subsection 305-75(2) of the ITAA 1997.

Subsection 305-75(2) of the ITAA 1997 states:

If you were an Australian resident at all times during the period to which the lump sum relates, 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 part of the lump sum that is attributable to contributions made by or in respect of you on or after the day when you became a member of the fund (the start day);

ii. the part of the lump sum (if any) that is attributable to amounts transferred into the fund from any other foreign superannuation fund during 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 income tax);

c) add the total of all your previously exempt fund earnings (if any) covered by subsections (5) and (6).

Foreign currency conversion:

It should be noted that subsection 960-50(1) of the ITAA 1997 states that an amount in a foreign currency is to be translated into Australian currency. The applicable fund earnings is the result of a calculation from two other amounts and subsection 960-50(4) of the ITAA 1997 states when applying section 960-50 of the ITAA 1997 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

The table to subsection 960-50(6) of the ITAA 1997 sets out the translation rules. Only the following items are relevant to determining the issue in your case:

· item 7 which relates to an amount of statutory income

· item 11 which deals with a receipt or payment to which none of the other items apply, and

Item 7 of the table in subsection 960-50(6) of the ITAA 1997 provides that:

an amount of statutory income that is received at or before the time when the requirement first arose to include the amount in a taxpayer's assessable income is to be translated to Australian currency at the exchange rate applying at the time of receipt; or

in any other case, the amount of statutory income is to be translated at the rate applying at the time when the requirement first arose to include the amount in a taxpayer's assessable income.

Statutory income is defined in subsection 6-10(2) of the ITAA 1997 as 'amounts that are not ordinary income, but are included in your assessable income by provisions about assessable income'.

However, item 7 deals with the translation of an amount of statutory income. The statutory income under consideration is represented by the difference between the lump sum on the day of payment and the amount vested on residency. Each of these two amounts is a separate element in the calculation of another amount (statutory income) and requires translation prior to calculating that other amount as stated above.

Item 11 of the table in subsection 960-50(6) of the ITAA 1997 applies to a receipt or payment where none of the other items applies. The payment you finally receive is not included in any of the other items in the table so it will fall within item 11. Under this item, the payment is translated into Australian Dollars at the exchange rate applicable at the time of receipt.

Therefore, for the purposes of section 305-70 of the ITAA 1997, the 'applicable fund earnings' should be calculated by translating the amount received from the Fund at the exchange rate applicable on the day of receipt to Australian Dollars (item 11 of the table to subsection 960-50(6)) and deducting from this amount the Australian Dollars equivalent of the amount vested in the Fund at the exchange rate applicable just after the day you became a member of the Fund.

Election

From 1 July 2007, a taxpayer transferring their overseas superannuation to an Australian complying superannuation fund more than six months after becoming a resident, may be able to elect under section 305-80 of the ITAA 1997 to have all or part of the payment treated as assessable income of the Australian superannuation fund. This section states:

1. This section applies if:

a. section 305-70 applies to a superannuation lump sum that is paid from a foreign superannuation fund; and

b. you are taken to receive the lump sum under section 307-15; and

c. all of the lump sum is paid into a complying superannuation fund; and

d. immediately after the lump sum is paid into the complying superannuation fund, you no longer have a superannuation interest in the foreign superannuation fund.

2. You may choose for all or part of your applicable fund earnings worked out under section 305-75 (but not exceeding the amount of the lump sum) to be included in the assessable income of the complying superannuation plan.

3. Your choice:

a. must be in writing; and

b. must comply with the requirements (if any) specified in the regulations.

In this case, the payment from the Fund is not being made directly to a complying superannuation fund, but instead to you. You propose to then pay the lump sum into a complying Australian superannuation fund.

To be eligible to make an election under section 305-80 of the ITAA 1997, all the conditions in subsection 305-80(1) of the ITAA 1997 must be satisfied.

The condition in paragraph 305-80(1)(b) of the ITAA 1997 refers to lump sums that you are taken to receive. Section 307-15 of the ITAA 1997 states:

Payments for your benefit or at your direction or request

1. This section applies for the purposes of:

a. determining whether a payment is a superannuation benefit; and

b. determining whether a superannuation benefit is made to you, or received by you.

2. A payment is treated as being made to you, or received by you, if it is made:

a. for your benefit; or

b. to another person or to an entity at your direction or request.

Note: Paragraph (b) would cover, for example, a direction by you that a payment be rolled over from your original superannuation fund into another superannuation fund.

The question therefore arises as to whether the payment to you directly would satisfy section 307-15 of the ITAA 1997.

It can be seen that section 307-15 of the ITAA 1997 is a deeming provision. It operates to treat payments a person has not directly received as if they had received the payment. Such a section is of no effect where a person actually receives the payment directly.

The note to this section, quoted above, clarifies this by specifically stating that the section applies to payments rolled over, ie made directly, from one superannuation fund to another.

From the above, it is considered that for a person to be able to make an election under section 305-80 of the ITAA 1997 that payment must be paid directly from a foreign superannuation fund into a complying superannuation fund. The payment must be deemed to have been received by the taxpayer in accordance with section 307-15 of the ITAA 1997, and not actually received by that person.

In this case, you will receive the payment directly, as the Fund will not transfer your entitlements directly to your Australian complying superannuation fund. As such, section 307-15 of the ITAA 1997 will not apply to you and you will not satisfy the condition in paragraph 305-80(1)(b) of the ITAA 1997.

The Commissioner does not have a discretion under this legislation to disregard any or all of these conditions.

Consequently, the payment made directly from a foreign superannuation fund to you would not satisfy the requirements of section 305-80 of the ITAA 1997.

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