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Authorisation Number: 1011564246761

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Ruling

Subject: Lump sum payment from foreign superannuation fund

Question

Is any part of a lump sum payment paid to your client from a foreign superannuation fund in the 2009-10 income year assessable to your client under section 305-70(2) of the Income Tax Assessment Act 1997?

Answer: Yes.

This ruling applies for the following period:

2009-10 income year

The scheme commences on:

1 July 2009

Relevant facts and circumstances

Your client became an Australian resident several years ago.

During the 2001-02 income year, an amendment act, an Act of the overseas country's parliament, came into effect which required all funds to determine if the value of their assets exceeds their liabilities and contingency reserves ( i.e. a surplus) as at the first statutory valuation date after a date during the 2001-02 income year (the Surplus Apportionment Date)). If a fund has a surplus at a specific date, the Surplus Apportionment Date, the fund is required to divide the surplus among the fund's stakeholders, in a way set out in the amendment act.

An e-mail from the Trustee of the overseas fund to your client's agent during the 2010-11 income year advised that a surplus distribution scheme considering former members of pension funds in the overseas country was promulgated in an Amendment Act. It stated that the relevant parts of this Amendment pertaining to the surplus distribution to former members are twofold:

The Amendment introduced a minimum (withdrawal) benefit for members of a fund who exited a fund several years ago.

That if a fund is in surplus at the next statutory valuation the fund needs to consider former members (all exits 1980 or later) who did not get the minimum benefit when they exited.

The Fund had a surplus in 2002 and the trustees decided to allocate 100% to former members.

The e-mail from the Trustee of the Fund to your client's agent during the 2010-11 income year advised that your client was paid a surplus benefit from the Fund during the 2009-10 income year. The surplus benefit comprised a lump sum and an amount of interest.

The surplus benefit was made to your client during the 2009-10 income year by the Fund comprising a lump sum payment and interest was paid to your client in Australian dollars.

Your client is over 60 years of age.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 6AB(1).

Income Tax Assessment Act 1936 Subsection 160AF(1).

Income Tax Assessment Act 1997 Subsection 6-5(2)

Income Tax Assessment Act 1997 Subsection 6-10(4)

Income Tax Assessment Act 1997 Subsection 295-95(2).

Income Tax Assessment Act 1997 Subsection 305-70.

Income Tax Assessment Act 1997 Section 305-75

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

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

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

Reasons for decision

Summary

The lump sum payment paid to your client from an overseas superannuation fund in the 2009-10 income year is assessable to your client under section 305-70(2) of the Income Tax Assessment Act 1997.

Detailed reasoning

Assessable income of an Australian resident

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) states that:

If you are an Australian resident, your assessable income includes the ordinary income you derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

Subsection 6-10(4) of the ITAA 1997 states:

If you are an Australian resident, your assessable income includes your statutory income from all sources, whether in or out of Australia.

Statutory income are amounts included in your assessable income as a result of specific provisions of the ITAA 1997 or the Income Tax Assessment Act 1936 (ITAA 1936). An example of statutory income is section 305-70 of the ITAA 1997.

Further, subsection 6AB(1) of the ITAA 1936 prescribes:

A reference in this Act to foreign income is a reference to income (including superannuation lump sums and employment termination payments) derived from sources in a foreign country or foreign countries, and includes a reference to an amount included in assessable income under section 102AAZD, 456, 457, 459A or 529 of this Act, or section 305-70 of the Income Tax Assessment Act 1997.

As your client is an Australian resident and received a lump sum payment from a foreign fund, in this case an amount of surplus benefit, it is relevant to determine whether section 305-70 of the ITAA 1997 applies to your client.

Lump sum payments transferred from foreign superannuation funds

From 1 July 2007 the applicable fund earnings in relation to a lump sum payment from a foreign superannuation fund will be assessable under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997), if it is received more than six months after a person has become an Australian resident. 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 was not an Australian resident at all times during 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 superannuation fund is a foreign superannuation fund at a time if the fund is not an Australian superannuation fund at that time; and

· 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:

· the fund was established in Australia, or any asset of the fund is situated in Australia at that time; and

· at that time, the central management and control of the fund is ordinarily in Australia; and

· at that time either the fund had no member covered by subsection (3) (an active member) or at least 50% of:

· the total market value of the funds assets attributable to superannuation interests held by active members; or

· 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.

In the present case, it is evident that the superannuation fund established overseas, the overseas superannuation fund (the Fund), is not an Australian superannuation fund as defined in subsection 295-95(2) of the ITAA 1997. Therefore, the Fund is a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997.

Calculation of Assessable Amount

As noted above, the applicable fund earnings in relation to a lump sum payment from a foreign superannuation fund will be included in a persons assessable income where the payment is received more than six months after becoming an Australian resident.

In your client's case, your client became a resident of Australia for tax purposes several years ago and the lump sum payment was made during the 2009-10 income year, more than six months after your client became an Australian resident. Therefore, a portion of your client's lump sum payment will be assessable under subsection 305-75(2) of the ITAA 1997.

It should be noted from the facts and information provided in relation to your case that there is nothing to indicate that the lump sum payment is a refund of contributions. Further, the Commissioner considers the lump sum payment:

· represents Fund earnings which were not allocated to your client previously; and

· appears to relate to the determination period in 2002 when an amendment act (Amendment Act) came into affect.

It certainly can not be said that your client had any entitlement to this payment before the Amendment Act was enacted during the 2001-02 income year.

Accordingly, as your client was an Australian resident at all times during the period to which the payment relates the amount of the lump sum payment to be included as assessable income is calculated 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:

· work out the total of the following amounts:

· the part of the lump sum payment that is attributable to the contributions made by or in respect of you on or after the day when you became a member of the fund (the start day);

· the part of the lump sum payment (if any) that is attributable to the amounts transferred into the fund from any other *foreign superannuation fund during the period;

· 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 tax);

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

This calculation effectively means that your client is only assessed on the accretion in the Fund less any contributions made since your client 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 the overseas benefit was paid.

In this case, after applying the above formula, the assessable amount is calculated as follows:

· the part of the lump sum payment that is attributable to the contributions made by or in respect of your client on or after the day your client became a member of the fund Nil;

· the part of the lump sum payment (if any) that is attributable to the amounts transferred into the fund from any other foreign superannuation fund during the period Nil;

· the total amount of the of the above amounts subtracted from the total lump sum payment received is an amount, which is the total of a lump sum of an amount and an amount of interest (i.e. the total lump sum payment less Nil)

· the total of all your client's previously exempt fund earnings covered by sections (5) and (6) not applicable.

In view of the above, the full amount of the lump sum payment represents applicable fund earnings on which your client will be assessed.

As indicated from the facts provided, the conversion of the foreign currency lump payment of the total lump sum payment to Australian currency is an amount. Therefore, this amount is to be included in your client's tax return for the 2009-10 income year.

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