Edited version of private ruling

Authorisation Number: 1011589233526

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Ruling

Subject: Transfer of superannuation benefits from an overseas pension scheme

Question

Is any portion of a lump sum payment, transferred from an overseas pension scheme to an Australian complying superannuation fund, to be included in your assessable income as applicable fund earnings under section 305-70 of the Income Tax Assessment Act 1997 (ITAA)?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2008.

The scheme commences on:

1 July 2007.

Relevant facts and circumstances:

You are under 50 years of age, and you were previously a resident of a foreign country.

Whilst residing in the foreign country you became a member of a foreign pension scheme (the pension scheme) over five years ago. The pension scheme is a defined benefit 'final salary' pension scheme and a contributory occupational pension scheme.

In over 2 years ago you became a resident of Australia for income tax purposes.

You are unable to provide the per annum value of your deferred pension benefit on the day immediately before you became an Australian resident, as the pension scheme declined to provide this information.

You are a member of an Australian complying superannuation fund (the fund).

A transfer statement was issued by the pension scheme. The transfer statement discloses your total pensionable service. The transfer statement further shows your estimated preserved benefits as at the last day of pensionable service. The transfer statement also shows the transfer value of your preserved benefits. The transfer value included no interest and was based on your total pensionable service.

Your preserved benefits in the pension scheme are increased in line the cost of living in the foreign country from the date you cease pensionable service..

A lump sum payment was transferred into your account with the fund more than six months after you became an Australian resident, in respect of your entitlements in the pension scheme.

You intend to elect that the fund pay the income tax for the payment on your behalf.

After the transfer of your pension benefits you no longer have an interest in the pension scheme.

Since the residency date, you have not made any personal contributions to the pension scheme.

In addition, no employer has made any contributions to the pension scheme for your benefit or on your behalf since you became an Australia resident. Also since this date, no amounts been transferred into the pension scheme from any other foreign superannuation funds.

Assumption

From the documents you have provided, your deferred entitlements in the pension scheme increased in accordance with the cost of living in the foreign country.

The rate at which the cost of living increased between the residency date and the payment date has been determined. In view of this cost of living increase, the value of lump sum payment on the residency date can be estimated.

The Commissioner will assume that this estimated amount is the transfer value of your benefit on the residency date. You advised us that you accepted this assumption.

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 305-70(3)

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 Section 305-80

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 Regulation 960-50.01

Reasons for decision

Summary

A portion of any lump sum payment transferred to an Australian fund from a foreign superannuation fund is assessable as 'applicable fund earnings'. The applicable fund earnings is calculated by translating the payment received from the foreign pension scheme at the exchange rate applicable on the day of receipt into Australian dollars, and deducting from this amount the Australian dollar equivalent of the payment on the day just before the residency date at the exchange rate applicable on that day.

Because no part of the payment is applicable fund earnings, the entire payment is not assessable income and is not exempt income.

Consequently, a choice to have your fund pay the income tax in respect of your foreign lump sum payment will have no effect.

Detailed reasoning

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 that is 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 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 subsections 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) 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 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.

It is evident that the pension scheme established in the foreign country is not an Australian superannuation fund as defined in subsection 295-95(2) of the ITAA 1997. Based on the information provided, the Commissioner accepts that the pension scheme is a foreign superannuation fund, as defined in subsection 995-1(1) of the ITAA 1997.

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 person's assessable income where the payment is received more than six months after a person has become an Australian resident.

You became a resident of Australia for tax purposes over two years ago.

The lump sum payment was made by the pension scheme to the fund more than six months after you became an Australian resident.

Accordingly, the applicable fund earnings in relation to the lump sum payment is assessable under section 305-70 of the ITAA 1997.

The applicable fund earnings is calculated 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).

The calculation effectively means that you will be assessed only on the income earned in the pension scheme while you were a resident of Australia. That is, you will only be assessed on the accretion in the pension scheme less any contributions made since you became a resident of Australia.

Furthermore, 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.

Foreign currency conversion

Subsection 960-50(1) of the ITAA 1997 states that an amount in a foreign currency is to be translated into Australian dollars (AUD). The 'applicable fund earnings' is the result of a calculation from two other amounts, and subsection 960-50(4) of the ITAA 1997 requires that when applying section 960-50 of the ITAA 1997 to amounts that are elements in the calculation of another amount you need to:

· first, translate any amounts that are elements in the calculation of other amounts (except special accrual amounts); and

· 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 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 (item 11) applies to a receipt or payment where none of the other items applies. The lump sum payment from the pension scheme is not included in any of the other items in the table. Therefore the payment will fall within item 11. Under this item, the payment is translated to AUD at the exchange rate applicable at the time of receipt.

When the amount of the lump sum payment that was vested for you just before the residency date (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 1997) 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, to which none of the other items apply.

Under this item, the 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 lump sum payment received from the pension scheme at the exchange rate applicable on the day of receipt by the fund to AUD (item 11 of the table to subsection 960-50(6)); and

· deducting from this amount the AUD equivalent of the payment vested in the pension scheme at the exchange rate applicable just before the residency date (item 11A of the table to subsection 960-50(6)).

Calculation of Applicable Fund Earnings

The pension scheme has not provided you with the per annum value of your deferred pension benefit on the day immediately before the residency date. A transfer statement was issued by the pension scheme, which shows the transfer value of your preserved benefits.

From the documents provided, it is clear that your deferred entitlements in the pension scheme increased in accordance with the cost of living in the foreign country. The rate at which the cost of living increased between the residency date and the payment date has been determined. In view of this increase, the value of lump sum payment on the residency date can be estimated.

The Commissioner considers it reasonable to assume that this estimated amount is the transfer value of your benefit on the residency date. Hence the Commissioner will assume that this amount is the value of the lump sum payment that was vested in you on the day before the residency date.

You made no contributions to the pension scheme after the residency date. Further, no contributions have been made to the pension scheme by an employer on your behalf. No transfers were made to the pension scheme from other foreign superannuation funds.

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

· the amount of the lump sum payment vested in you on the day before became a resident of Australia for tax purposes;

· contributions made to the pension scheme for or by you after you became an Australian resident; and

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

The amount of the lump sum payment that was vested in you at the residency date is translated into AUD at the exchange rate applicable on the day before the residency date.

The amount calculated above is subtracted from the total amount of the lump sum payment made by the pension scheme (paragraph 305-75(3)(b) of the ITAA 1997). The payment is translated into AUD at the exchange rate applicable at the time it was received by the fund in Australia. Hence the AUD equivalent of the vested amount is subtracted from the AUD equivalent of this payment.

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

Paragraph 305-75(3)(d) of the ITAA 1997 concerns previously exempt fund earnings calculated under subsections 305-75(5) and (6). Previously exempt fund earnings are the applicable fund earnings of any amounts transferred from one foreign superannuation fund to another foreign superannuation fund after you became a resident of Australia. In this case, there are no previously exempt fund earnings.

The difference between the AUD equivalent of the lump sum payment and the AUD equivalent of the vested amount is the applicable fund earnings worked out under subsection 305-75(3) of the ITAA 1997.

For the transfer of the payment from the pension scheme, the amount worked out in relation to the payment received is less than zero.

Further, subsection 305-75(3) states that the applicable fund earnings is the amount worked out under this provision which is not less than zero.

Hence no part of the lump sum payment is applicable fund earnings under subsection 305-75(3) of the ITAA 1997.

Consequently, the entire payment from the pension scheme is not assessable income and is not exempt income, in accordance with subsection 305-70(3) of the ITAA 1997.

Choice

It is noted that you intend to choose to have the fund include your applicable fund earnings in its assessable income, rather than pay tax on it yourself. However as discussed above, there is no applicable fund earnings in relation to the lump sum payment. Accordingly none of this lump sum payment needs to be included in assessable income under subsection 305-70(2) of the ITAA 1997.

Consequently, a choice you make under section 305-80 of the ITAA 1997 in respect of the payment will have no effect.

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