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Ruling

Subject: Lump sum from foreign superannuation fund

For the purposes of subparagraph 305-75(3)(a)(i) of the Income Tax Assessment Act 1997 (ITAA 1997), will the Commissioner accept an actuary's valuation of the amount vested in a fund for your client immediately prior to becoming a resident of Australia in respect of a lump sum payment from a foreign defined benefits superannuation fund?

Yes, for the purposes of subparagraph 305-75(3)(a)(i) of the ITAA 1997 the Commissioner can accept an actuary's valuation provided the assumptions the actuary uses in determining the amount produces a result that is broadly consistent with valuations of resident defined benefits funds and consistent with the intention expressed in the law.

This ruling applies for the following period:

2010-11 income year

The scheme commences on:

1 July 2010

Relevant facts and circumstances

Your client has been a resident of Australia since the 2001-02 income year.

Prior to the 2001-02 income year, your client was a resident of an overseas country where your client had lived and worked for an overseas employer (the employer).

Your client commenced employment with the employer several years ago and retired during the 2009-10 income year, and was under 65 years of age.

Your client was a member of an overseas superannuation fund, a defined benefit fund (the Fund), for the entire period of your client's employment with the employer.

Your client's pensionable service commenced several years ago and finished with effect from the 2009-10 income year at retirement.

Your client rendered services both overseas and in Australia during the period of your client's pensionable service.

Your client has obtained a valuation prepared by a firm of consulting actuaries, estimating the amount vested in the Fund for your client on a particular date in the 2001-02 income year that your client commenced Australian tax residency. The valuation was completed by a suitably qualified and experienced actuary and documented in a report which was provided in the application.

The actuary has calculated the lump sum benefit on retirement in Australian dollars based on a formula taking into account your client's final average salary, that is, the final 12 months salary prior to retirement and based on your client's number of years of pensionable service in the overseas country and in Australia.

Your client will receive your client's entitlements as a lump sum from the Fund more than six months after your client's Australian residency commenced (that is, more than six months after a particular date in the 2001-02 income year that your client commenced Australian tax residency). However, the entitlements have accrued since your client commenced overseas employment several years ago and therefore whilst a non resident of Australia.

Relevant legislative provisions

Section 305-70 of the Income Tax Assessment Act 1997

Subparagraph 305-75(3)(a)(i) of the Income Tax Assessment Act 1997

Subsection 305-75(2) of the Income Tax Assessment Act 1997

Subsection 305-75(3) of the Income Tax Assessment Act 1997

Section 305-75 of the Income Tax Assessment Act 1997

Reasons for decision

Summary

The Commissioner can accept a valuation, prepared by an actuary, of the amount vested in your client immediately prior to becoming a resident of Australia in respect of a lump sum payment from a foreign defined benefits superannuation fund, provided the assumptions the actuary uses in determining the amount produces a result that is broadly consistent with valuations of resident defined benefits funds and consistent with the intention expressed in the law.

Detailed reasoning

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 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.

The applicable fund earnings is calculated by converting the amount received from the foreign superannuation fund at the exchange rate applicable on the day of receipt into Australian dollars (AUD), and deducting from this amount the AUD equivalence of the amount vested in the foreign superannuation fund just before the taxpayer first became an Australian resident at the exchange rate applicable on that day.

Subparagraph 305-75(3)(a)(i) of the ITAA 1997 deals with the value of an amount in a superannuation fund that was vested in the taxpayer the day before he or she first became an Australian resident; being a date after the start of the period to which the lump sum relates (but before it is received).

In most situations a foreign superannuation fund can supply this amount. However, in cases where the foreign superannuation fund is a defined benefits fund, an actuary may be required to determine the amount vested in the taxpayer the day before he or she first became an Australian resident for the purposes of subparagraph 305 -75(3)(a)(i) of the ITAA 1997.

As noted above 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 ITAA 1997. Prior to 1 July 2007 section 27CAA of the Income Tax Assessment Act 1936 (ITAA 1936) applies to include in an Australian resident's assessable income certain amounts transferred from an eligible non-resident non-complying superannuation fund where the payment is made six months or more after the taxpayer became a resident of Australia.

Taxation Ruling TR2003/12 (withdrawn 22 February 2006) deals with the old legislative provisions under section 27CAA of the ITAA 1936 which were the precursors of the provisions in section 305-75 of the ITAA 1997.

The following paragraphs from TR2003/12 are relevant for present purposes:

In order to work out the investment earnings that accrue in an ENRNCSF [Eligible Non Resident Non Complying Superannuation Fund] during the period that a taxpayer is a resident of Australia, section 27CAA compares the amount properly payable (i.e. the member's vested benefit in the fund on the day of receipt), which in most cases is the amount actually received from the ENRNCSF, with the amount that would have been received if the payment had been made on the day before the taxpayer became a resident of Australia (i.e. the amount 'properly payable' being the member's vested benefit in the fund on the day before the 'relevant day' (defined in subsection 27CAA(2))).

In most cases, the difference between these two amounts is included in the taxpayer's assessable income under section 27CAA of the ITAA 1936. The difference, of course, is exclusive of additional contributions, if any, made by the taxpayer or the taxpayer's employer on or after the relevant day.

In most instances the ENRNCSF should be able to supply both amounts so the calculation will be straightforward. However, in cases where the ENRNCSF is a defined benefits fund, an actuary may be required to determine the amounts properly payable, or the investment earnings in the ENRNCSF, during the period the taxpayer is a resident of Australia. Some of the same considerations noted in paragraph 45 above could apply [paragraph 45 deals with the cost of valuation].

The assumptions an actuary uses in determining the amounts must produce a result that is broadly consistent with the outcome that would be obtained by applying the prescribed method and that it is consistent with the intention expressed in the law.

Although TR2003/12 was withdrawn due to legislative amendment, the valuation principles enunciated in that taxation ruling are still applicable to the current interpretation of Subparagraph 305-75(3)(a)(i) of the ITAA 1997.

Therefore for the purposes of subparagraph 305-75(3)(a)(i) of the ITAA 1997 the Commissioner can accept a valuation, prepared by an actuary, of the amount vested in your client immediately prior to becoming a resident of Australia in respect of a lump sum payment from a foreign defined benefits superannuation fund, provided the assumptions the actuary uses in determining the amount produces a result that is broadly consistent with valuations of resident defined benefits funds and consistent with the intention expressed in the law.

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