Edited version of private ruling

Authorisation Number: 1011609020783

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Ruling

Subject: Transfer of superannuation benefits from an overseas pension scheme

Question

Is a 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?

Answer: Yes.

This ruling applies for the following period:

Year ended 30 June 2010.

The scheme commences on:

1 July 2009.

Relevant facts and circumstances

You are under 50 years of age, and you are a dual citizen of Australia and a foreign country.

You were employed by an employer in the foreign country during the 2007-08 income year. You arrived in the foreign country from Australia in mid July 2007, and your employment with the foreign employer commenced several days later.

After commencing your employment you subsequently became a member of a foreign pension scheme (the pension scheme). The pension scheme is an occupational pension scheme.

Your employment in the foreign country ceased in late May 2008, and you returned to Australia several days later. During the period you were in the foreign country, you were a resident of Australia for income tax purposes.

You received a letter from the pension scheme in late June 2008, in which you were advised both the transfer value of your benefits in the pension scheme, and the gross amount of contributions paid into the pension scheme.

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

A lump sum payment was transferred from the foreign pension scheme into your account with the fund in early July 2009. You have not paid any foreign tax on the lump sum payment.

You have not made any contributions to the pension scheme after you returned to Australia, and after the transfer of your pension benefits you no longer maintain an interest in the pension scheme.

In addition, after you returned to Australia no employer has made further contributions to the pension scheme for you, and no amounts have been transferred into the pension scheme from any other foreign superannuation funds.

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 Paragraph 305-70(2)(a),

Income Tax Assessment Act 1997 Subsection 305-70(3),

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

Income Tax Assessment Act 1997 Paragraph 305-75(2)(a),

Income Tax Assessment Act 1997 Paragraph 305-75(2)(b),

Income Tax Assessment Act 1997 Paragraph 305-75(2)(c),

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

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) and

Income Tax Assessment Regulations 1997 Regulation 960-50.01.

Reasons for decision

Summary

A portion of the lump sum payment transferred to your Australian fund (the fund) from the foreign pension scheme is assessable as 'applicable fund earnings'.

The applicable fund earnings represent the increase or growth in the pension scheme during the period from the date you joined the pension scheme until the date your benefits in the pension scheme were transferred to the fund in Australia.

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 amount which represents contributions made to the pension scheme, at the average exchange rate for the financial year in which the contributions were made.

Your applicable fund earnings are to be included in your assessable income.

Alternatively, as you no longer have an interest in the pension scheme, you are eligible to choose to have the fund include your applicable fund earnings in its assessable income, and pay the income tax for this amount on your behalf.

The remainder of the lump sum payment is not assessable income and is not exempt income. As such, this amount is tax-free.

Detailed reasoning

Lump sum payments transferred from foreign superannuation funds

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, or after the termination of a person's foreign employment, will be assessable under section 305-70 of the Income Tax Assessment Act 1997 (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) 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.

Lump sum payment received more than 6 months after termination of foreign employment

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, or after the termination of the person's foreign employment.

You stayed in the foreign country from mid July 2007 until early June 2008. Whilst you were in the foreign country you were employed by an employer in the foreign country. Throughout this period, you were a resident of Australia for income tax purposes.

Your benefits in the pension scheme were transferred to your Australian complying superannuation fund (the fund) in early July 2009. The payment was credited to your account with the fund at this time. The date of receipt of the lump sum payment by the fund is more than six months after the termination of your employment in the foreign country in late May 2008.

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(2) of the ITAA 1997, because you were an Australian resident at all times during the period to which the lump sum relates.

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:

(a) work out the total of the following amounts:

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

(ii) the part of the lump sum (if any) that is attributable to amounts transferred into the fund from any other foreign superannuation fund during 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) add the total of all your 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 during the period you were a member of the pension scheme, i.e. from the date you joined the pension scheme until the transfer of your pension benefits to the fund in Australia.

That is, you will only be assessed on the accretion in the pension scheme during this period.

Furthermore, 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) requires that when applying section 960-50 to amounts that are elements in the calculation of another amount you 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 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 lump sum payment from the pension scheme 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 to AUD at the exchange rate applicable at the time of receipt.

When your benefit in the pension scheme was transferred as a lump sum to the fund, the benefit was received at the time the lump sum was paid. Under item 11 the payment is translated into AUD at the exchange rate applicable at the time of receipt.

The day on which you became a member of the pension scheme is the start day for the purposes of subparagraph 305-75(2)(a)(i) of the ITAA 1997.

When the amount of the lump sum payment that is attributable to contributions made to the pension scheme for you in the period from the start day to the termination date of your foreign employment (subparagraph 305-75(2)(a)(i)) is determined, there is no actual receipt or payment of an amount. All that occurs is a determination of this 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 amount which represents contributions made to the pension scheme for you at the average exchange rate for the financial year in which the contributions were made (item 11A of the table to subsection 960-50(6)).

Calculation of Applicable Fund Earnings

You received a letter from the pension scheme in late June 2008, in which you were advised the gross amount of contributions paid into the pension scheme during the period of your employment with the foreign employer. The contributions were made to the pension scheme for you during the period in the 2007-08 financial year from the start day until the termination of your employment in the foreign country.

You have not made any contributions to the pension scheme after you returned to Australia from the foreign country. Further, no contributions have been made to the pension scheme by an employer since this time. No transfers were made to the pension scheme from other foreign superannuation funds either before or after this time.

Therefore, the total of the amounts mentioned in paragraph 305-75(2)(a) of the ITAA 1997 comprises:

· the amount of the lump sum payment which represents contributions made to the pension scheme for you after the start day; and

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

As the dates on which the contributions were paid into the pension scheme were not provided, the daily exchange rates which prevailed on each of these dates are not known. Therefore the amount attributable to the contributions is translated into AUD at the average exchange rate for the financial year in which the contributions were made.

Paragraph 305-75(2)(b) of the ITAA 1997 requires that the amount calculated above be subtracted from the total amount of the lump sum payment made by the pension scheme. The payment is translated into AUD at the exchange rate applicable at the time it was received by the fund in Australia. Therefore the AUD equivalent of the amount attributable to the contributions is subtracted from the AUD equivalent of this payment.

Paragraph 305-75(2)(c) 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 returned to Australia. In this instance, there are no previously exempt fund earnings.

Assessable amount of the lump sum payment from the foreign pension scheme

The amount determined above is assessable in accordance with subsection 305-70(2) of the ITAA 1997. Subsection 305-70(2) also provides that the assessable amount is either the applicable fund earnings under subsection 305-75(2), or if you have made a choice under section 305-80 of the ITAA 1997, the applicable fund earnings less the amount covered by the choice.

Choice

From 1 July 2007, a taxpayer transferring their overseas superannuation directly to an Australian complying superannuation fund more than six months after becoming a resident or after the termination of their foreign employment, may be able to choose under section 305-80 of the ITAA 1997 to have all or part of the lump sum payment treated as assessable income of the Australian superannuation fund.

As a result, the amount specified in the choice notice will be included as assessable income of the superannuation fund and subject to tax at 15% rather than being included in the taxpayer's assessable income and subject to tax at the taxpayer's marginal rate.

To qualify for making a choice under section 305-80 of the ITAA 1997, you must, immediately after the relevant payment is made, no longer have an interest in the paying fund. Your choice must be in writing, specify the amount to be covered by the election and comply with any requirements specified in the Income Tax Regulations.

As you no longer have an interest in the pension scheme after the transfer of your benefits, you are eligible to choose to have the fund include your applicable fund earnings in its assessable income, rather than pay tax on this amount yourself.

Amount to be included in your assessable income

However, if you do not make a choice under section 305-80 of the ITAA 1997 in respect of the payment, you must include the applicable fund earnings in your assessable income for the 2009-10 income year in accordance with paragraph 305-70(2)(a) of the ITAA 1997. Further, this assessable income is taxed at your marginal rate of tax. The remainder of the lump sum payment is not assessable income and is not exempt income in accordance with subsection 305-70(3) of the ITAA 1997. As such, this part of the lump sum payment is tax-free in your hands.

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