Edited version of private ruling

Authorisation Number: 1011574547993

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Ruling

Subject: Foreign lump sum payment

Question

Is any portion of a lump sum payment made from a foreign fund assessable to the taxpayer under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following period

For the year ended 30 June 2009

The scheme commenced on

1 July 2008

Relevant facts

Your client became a member of a foreign fund (the foreign fund) a number of years ago.

Prior to becoming an Australian resident, your client made contributions to the foreign fund over a couple of years which represented a percentage of your client's income.

Later, your client became an Australian resident for tax purposes and no other contributions were made to the foreign fund after this time.

A representative from the social insurance office of the overseas country advised that it is not possible for them to calculate the transfer value as at the day before your client became an Australian resident. Furthermore, the social insurance office advised that since the agreement on Social Security between the overseas country and Australia entered into force in the 2007-08 income year, it was not possible to ask for the benefit before that time.

However, they did advise the elements of the pension calculation and the benefits determined for your client.

In the third quarter of the 2008-09 income year, a lump sum payment was made by the overseas social insurance office to your client from the foreign fund.

Your client is over 65 years of age.

Assumptions

Value of vested amount in the foreign fund on the day before the date of residency

The foreign fund could not provide the value of your client's lump sum benefit as at the day before your client became an Australian resident. However, they did provide a transfer value of your client's benefits at a specified date.

Therefore, in order to determine the lump sum amount as at the day before your client became an Australian resident, you have been advised that the following assumptions are being made in issuing the notice of private ruling for your client:

· total value of contributions as at a specified date.

· transfer value as at the date the payment was made.

Based on the above information we have estimated the annual compound rate of growth of transfer value. By using this rate, we have estimated your client's total vested amount in the foreign fund on the day before your client became an Australian resident.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 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 305-75(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 305-75(5).

Income Tax Assessment Act 1997 Subsection 305-75(6).

Income Tax Assessment Act 1997 Section 960-50.

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).

Income Tax Assessment Regulations 1997 Regulations 960-50.01.

Reasons for decision

Summary

A portion of the lump sum payment made by the foreign fund is assessable as 'applicable fund earnings'. The applicable fund earnings represents the increase or growth in the foreign fund during the period your client was a resident of Australia.

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

The applicable fund earnings is the assessable amount to be specified in your client's income tax return for the 2008-09 income year and will be subject to your client's marginal rate of tax.

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 transferred or received 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 is 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 305-75(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 an 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 fund's 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 it is evident that the fund established in the overseas country (the foreign 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).

Calculation of assessable amount

In this case, your client became a resident of Australia for tax purposes a number of years ago and the lump sum payment will be made at a future date (that is, more than six months after your client became an Australian resident).

Accordingly, a portion of your client's lump sum payment will be assessable under subsection 305-75(3) of the ITAA 1997.

This calculation effectively means that your client will be assessed only on the income earned in the fund while your client was a resident of Australia. That is, your client will only be 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 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 your client 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).

In some circumstances, if the vested amount, which includes the entitlement to a lump sum and pension on the day before a taxpayer became a resident of Australia, cannot be obtained from the fund, it may be appropriate to engage the services of an actuary, especially where the amount is substantial and an incorrect estimate could result in more tax than is required being payable.

If the amount is insignificant, the cost of engaging the services of an actuary may outweigh any benefit. However, assumptions can be made to estimate the annual compound rate of growth of the transfer value at the date of the Australian residency.

In this case, the foreign fund could not provide your client's vested amount, which includes both your client's entitlement to a lump sum and pension, on the day before your client became a resident of Australia. Furthermore, the overseas social insurance office advised that since the agreement on Social Security between the overseas country and Australia entered into force in the 2007-2008 income year, it was not possible to ask for the benefit before that time.

Therefore, in order to determine the vested amount at the day before your client's residency it is proposed to use information shown in the documentation provided by the foreign fund as follows:

· total value of contributions as at ceasing employment in the overseas country in the early 1960's.

· transfer value as at the date the payment was made.

Based on the above information we have estimated the annual compound rate of growth of transfer value. By using this rate, we have estimated your client's total vested amount in the foreign fund on the day before your client became an Australian resident.

Therefore, the total of the amounts mentioned in paragraph 305-75(3)(a) of the ITAA 1997 comprise of:

· the amount of the lump sum vested in your client on the day before your client became an Australian resident

· contributions made to the foreign fund for or by your client prior to your client being entitled to the lump sum, and

· amount transferred into the foreign fund from any other foreign superannuation fund.

Foreign currency conversion

Subsection 960-50(1) of the ITAA 1997 states that an amount in a foreign currency is to be translated into AUD. 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 the taxpayer will 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 client's case:

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

· item 11A which applies to amounts that are neither receipts nor payments and to which none of the other items apply.

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 the taxpayer finally received 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 AUD at the exchange rate applicable at the time of receipt.

When the amount in the foreign fund that was vested in the taxpayer just before the taxpayer become a resident of Australia (subparagraph 305-75(3)(a)(i) of the ITAA 1997) is determined, there is no actual receipt or payment of an amount. All that occurs is a determination of the vested amount expressed in the foreign currency.

Regulation 960-50.01 of the Income Tax Assessment Regulations 1997 (ITAR) modifies the table in subsection 960-50(6) of the ITAA 1997 to include item 11A that applies to amounts, other than receipts and payments, and for which none of the other items apply. Consequently the vested amount is translated into AUD at an exchange rate that is reasonable having regard to the circumstances.

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 foreign fund at the exchange rate applicable on the day of receipt to AUD (item 11 of the table to subsection 960-50(6) of the ITAA 1997) and deducting from this amount the AUD equivalent of the amount vested in the fund at the exchange rate applicable just before the day your client first became an Australian resident (item 11A of the table to subsection 960-50(6)).

Calculation of assessable amount of the payment from a foreign superannuation fund

As noted above, the lump sum payment made to your client is translated into AUD at the exchange rate applicable at the time the payment was received by your client.

As noted earlier, the value for the purposes of paragraph 305-75(3)(a) of the ITAA 1997 is to be translated into AUD at the exchange rate applicable on the day just before the day your client became an Australian resident.

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 made to your client by the foreign fund. However, before this can be done the total amount of the lump sum payment made is to be translated into AUD at the exchange rate applicable at the time the payment was made to your client.

Under paragraph 305-75(3)(c) of the ITAA 1997, the result above is multiplied by proportion of days your client was a resident to the total number of days from when your client was a resident until the date the payment was made. In your client's 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 requires that the total of all previously exempt fund earnings covered by subsections 305-75(5) and 305-75(6) of the ITAA 1997 be added to the result. In your client's case there are no previously exempt fund earnings.

In accordance with section 305-70 of the ITAA 1997 the applicable fund earnings is the portion of the payment to be included in your client's assessable income for the 2008-09 income year.

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