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Ruling

Subject: Lump sum payment from foreign superannuation fund

Is any part of a lump sum payment made from a foreign superannuation fund assessable under subsection 305-70(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes.

This ruling applies for the following period

2008-09 income year

The scheme commenced on

1 July 2008

Relevant facts

You were a member of Fund A (the original scheme fund), a superannuation fund established in an overseas country.

You became a resident of Australia for income tax purposes in the late 1960's.

You stated the value of the lump sum in the original fund, at the date you became a resident of Australia, in the foreign currency. You also converted and stated this figure in Australian dollars.

Your funds in the original pension fund were transferred to Fund B, a superannuation fund established in the overseas country, in the early 1970's.

The lump sum was paid from Fund B in the 2008-09 income year.

You stated the lump sum in the foreign currency. You also converted and stated this figure in Australian dollars.

Assumptions

You have contacted Fund A and due to difficulties in tracing their records they have been unable to provide the date and the value of the funds transferred from the original pension scheme to Fund B.

For the purposes of calculating applicable fund earnings, the transfer of funds from Fund A to Fund B will be ignored. Furthermore, the ultimate payment of the lump sum from Fund B will be taken as if the lump sum was paid by Fund A.

Therefore, for the purposes of this decision, your benefits will be considered to have remained in Fund A and paid out of Fund A.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 295-95.

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

Income Tax Assessment Act 1997 Section 305-60.

Income Tax Assessment Act 1997 Section 305-70.

Income Tax Assessment Act 1997 Subsection 305-70(2).

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 Paragraph 305-75(3)(a).

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

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

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

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

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 resident of Australia, reduced by the contributions you made to the foreign superannuation fund after you became an Australian resident, represents the applicable fund earnings. The applicable fund earnings are included in your assessable income.

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) applies where the person was an Australian resident at all times during the period to which the lump sum relates. Subsection 305-75(3) 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 subsection 305-70(2) 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 subsection 305-70(2) 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.

In the present case, Fund A (the original fund) is a superannuation fund that was established in the overseas country. Its central management and control would ordinarily be outside of Australia. Therefore the foreign 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).

Calculation of Assessable Amount

In this case, you became a resident of Australia for tax purposes in the late 1960's and the lump sum payment was made in the 2008-09 income year, more than six months after you became an Australian resident. Therefore, the exemption under section 305-60 of the ITAA 1997 will not apply.

Accordingly, a portion of your lump sum payment will be assessable under subsection 305-70(2) of the ITAA 1997.

This calculation effectively means that you will be assessed only on the income earned in the foreign fund while you were a resident of Australia. That is, you will only be assessed on the accretion in the original 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.

The amount included as assessable income, and taxed at marginal rates of tax, is worked out under subsection 305-75(3) of the ITAA 1997 because you became an Australian resident after the start of the period to which the lump sum relates.

Subsection 305-75(3) of the ITAA 1997 states:

If you become an Australian resident after the start of the period to which the lump sum relates (but before you received it) 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 amount in the fund that was vested in you just before the day (the start day) you first became an Australian resident during the period;

(ii) the part of the payment that is attributable to contributions to the fund made by or in respect of you during the remainder of the period;

(iii) the part of the payment (if any) that is attributable to amounts transferred into the fund from any other foreign superannuation fund during the remainder of 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 tax);

(c) multiply the resulting amount by the proportion of the total days during the period when you were an Australian resident;

(d) add the total of all 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 dollars (AUD).

For the purposes of section 305-70 of the ITAA 1997, the 'applicable fund earnings' should be calculated by:

(a) translating the amount received from the original fund at the exchange rate applicable on the day of receipt to AUD; and

(b) deducting from this amount the AUD equivalent of the amount vested in the original fund at the exchange rate applicable just before the day you first became an Australian resident.

In your case, you have provided the elements in AUD.

Calculation

The total of the amounts mentioned in paragraph 305-75(3)(a) of the ITAA 1997 is worked out as follows:

· The amount vested in the original fund just before you became an Australian resident which relates to lump sum portion.

· Contributions made to the original fund for or by you, after you became a resident of Australia.

· Amount transferred into the original fund from any other foreign superannuation fund.

Paragraph 305-75(3)(b) of the ITAA 1997 requires that the amount calculated above be subtracted from the total amount of the lump sum payment paid by the foreign fund.

Under paragraph 305-75(3)(c) of the ITAA 1997, the result above, is multiplied by the proportion of days you were a resident, to the total number of days from when you were a resident until the date the payment was made. In your case, the resident days and the total days are the same, and so the proportion to be used in the calculation is 1.

Paragraph 305-75(3)(d) of the ITAA 1997, concerns previously exempt fund earnings calculated under subsections 305-75(5) and (6). In your case, it is accepted that there are no previously exempt fund earnings.

Therefore, the applicable fund earnings assessable under subsection 305-70(2) of the ITAA 1997 is the amount to be included in your assessable income for the 2008-09 income year.

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