Edited version of private ruling

Authorisation Number: 1011633629494

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fac sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: Foreign superannuation fund payment

Question

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

Answer

Yes.

This ruling applies for the following period:

1 July 2008 to 30 June 2009

The scheme commences on:

1 July 2008

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You were an overseas resident before becoming an Australian resident for tax purposes.

Whilst residing overseas you were working for an employer and were a member of the employer's pension scheme (the Scheme), an occupational pension scheme.

The normal retirement age in the Scheme is 60 years of age. You would have been entitled to a full pension when you reached this age several decades from now.

A transfer value statement issued by the Scheme prepared six months before the final payment date advised, among other things:

· the date you left the scheme;

· your member contributions;

· the date of calculation (which was several days before the statement date); and

· the total transfer value.

The statement also advised that if the transfer did not go ahead the alternative is full Scheme benefits at age 60. The full Scheme benefits comprise and pension and an associated lump sum payment. The value of these benefits as at both the date of leaving and at the calculation date was also provided.

You have stated no more contributions were made to the Scheme after you left the employer.

During the 2008-09 income year the  Scheme notified you that an amount had been transferred to your Australian complying superannuation fund account.

The following month your Australian complying superannuation fund notified you of the receipt of the transfer from the Scheme.

You tried to obtain the transfer value for your benefits with the Scheme on the day before you became an Australian resident, but the Scheme stated they were unable to provide this figure.

Assumption

You have made attempts to find out your accumulated entitlement in the Scheme on the day you became an Australian resident. However, the Scheme has stated that they are unable or unwilling to provide that information.

From the information you have provided, it is evident that the values of both the lump sum benefit and the per annum pension benefit are known as at:

· the date you left the Scheme; and

· the calculation date stated in the transfer value statement from the Scheme.

It is noted that the transfer value quoted in the transfer value statement is the actual transfer value paid six moths later. Therefore, it would not be unreasonable to assume that the values (as at the calculation date) of the lump sum benefit and the per annum pension benefit quoted in the transfer value statement also remain the same as at the payment date.

By comparing these values with the values quoted as at the date of leaving the Scheme an estimated annual compound rate of growth of has been calculated.

In view of the above and the information provided, the Commissioner considers it is reasonable to assume that the annual rate of return for the period from the date of becoming an Australian resident to the payment date is the same.

Therefore, based on the assumed rate of return, the transfer value of your entitlements in the Scheme on the day you became an Australian resident has been calculated.

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 305-75(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 305-80

Income Tax Assessment Act 1997 Subsection 305-80(1)

Income Tax Assessment Act 1997 Subsection 305-80(2)

Income Tax Assessment Act 1997 Subsection 305-80(3)

Income Tax Assessment Act 1997 Section 307-15

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

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Summary

A portion of the transfer value paid by the Scheme to your superannuation fund in Australia is assessable as 'applicable fund earnings'. The applicable fund earnings represent the increase or growth in the Scheme during the period you are a resident of Australia.

The applicable fund earnings is calculated by translating the transfer value paid by the Scheme at the exchange rate applicable on the day of receipt into Australian dollars (AUD), and deducting from this amount the AUD equivalent of the transfer value on the day just before the residency date at the exchange rate applicable on that day.

The amount calculated as the applicable fund earnings, in relation to the lump sum benefit transferred from the Scheme to your Australian superannuation fund has been determined.

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 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) of the ITAA 1997applies 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 subsection 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 subsection 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.

In the present case, the Scheme is a superannuation fund that is established overseas. Its central management and control would ordinarily be outside of Australia. Therefore the Scheme 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) of the ITAA 1997.

Assessable Amount

You became a resident of Australia for tax purposes on a particular day (the residency date) and the transfer value was paid to your Australian superannuation fund over four years later (that is, more than 6 months after you became an Australian resident). Accordingly, a portion of the lump sum payment will be assessable under section 305-70 of the ITAA 1997.

The amount included as assessable income 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) 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).

This calculation effectively means that you will be assessed only on the growth in the Scheme while you were a resident of Australia. That is, you will only be assessed on the increase in the Scheme less any contributions made since you became a resident of Australia.

Further, any amounts representative of earnings/growth 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 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:

(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 transfer value from the 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 the amount of the transfer value that was vested in 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 transfer value from the Scheme at the exchange rate applicable on the day of receipt to AUD (item 11 of the table to subsection 960-50(6)); and

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

Calculation of Assessable Amount

In this case, you became a resident of Australia on the residency date. A transfer value was paid from the Scheme to your Australian superannuation fund on the payment date. The Scheme advised you that the transfer value vested in you on the day before you became a resident of Australia could not be calculated. You have agreed to the Commissioner calculating this transfer value from a derived rate of return. This calculation resulted in a vested amount.

As noted in the facts, no contributions have been made to the Scheme after you became a resident of Australia.

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

· amount of the transfer value vested in you on the day before you became a resident of Australia;

· contributions made to the Scheme for or by you after becoming a resident of Australia: Nil;

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

This amount is translated into AUD at the exchange rate applicable on the day just before the residency date.

Paragraph 305-75(3)(b) of the ITAA 1997 requires that the amount calculated above be subtracted from the total amount of the transfer value made by the Scheme. However, before this can be done the transfer value is to be translated into AUD at the exchange rate applicable at the time the transfer value was paid into your Australian superannuation fund.

Based on the above, subtracting the AUD equivalent of the vested amount from the AUD equivalent of the transfer value produces a result.

Under paragraph 305-75(3)(c) of the ITAA 1997, this result is then multiplied by the proportion of the days you were an Australian resident to the total number of days from the residency date until the date the transfer value was paid. As the resident days and the total days are the same, 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). 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 your case, there are no previously exempt fund earnings.

Thus the applicable fund earnings in relation to the transfer value is determined.

Assessable amount and choice

In accordance with section 305-70 of the ITAA 1997 the applicable fund earnings is included in your assessable income.

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, may be able to choose under subsection 305-80(2) of the ITAA 1997 to have all or part of the applicable fund earnings 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 percent rather than being included in the taxpayer's assessable income and subject to tax at the taxpayer's marginal rate.

In order to make the choice under subsection 305-80(2) of the ITAA 1997 the following conditions must be satisfied:

· section 305-70 of the ITAA 1997 must apply to the superannuation lump sum being paid from the foreign superannuation fund because the payment is received more than six months after Australian residency commenced;

· you are treated as having received the lump sum under section 307-15 of the ITAA 1997 because you requested the foreign superannuation fund to make the payment to a complying superannuation fund rather than to you;

· all of the lump sum must be paid into a complying superannuation fund and no part is received by you;

· immediately after the lump sum was paid into the complying superannuation fund, you no longer have a superannuation interest in the foreign superannuation fund. A pension would be an interest in a superannuation fund.

Subsection 305-80(3) of the ITAA 1997 states that your choice must be in writing and must comply with the requirements (if any) specified in the regulations.

When the full amount of the payment is paid to your complying superannuation fund and no choice is made, the applicable fund earnings are included in your assessable income and will be subject to marginal rates of tax.

Similarly, any part of the applicable fund earnings that is not chosen to be included in the assessable income of the complying superannuation fund will be included in your assessable income.

The information you have provided does not show you made a choice to have the applicable fund earnings included in the assessable income of your superannuation fund. Accordingly, if you do not want the applicable fund earnings to be included in your assessable income for the 2008-09 income year, you should lodge a valid choice notice with your superannuation fund.

Alternatively, you should request an amendment to your 2008-2009 income tax return to include the applicable fund earnings at Item 20 label M.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).