Edited version of private ruling

Authorisation Number: 1011647975747

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Ruling

Subject: Lump sum payment from foreign superannuation fund

Question

Is a portion of a lump sum payment received from a foreign superannuation fund included in your assessable income as applicable fund earnings under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Advice/Answers

Yes.

This ruling applies for the following period

Year ending 30 June 2010

The scheme commenced on

29 September 2009

Relevant facts

You were born overseas.

You were employed overseas.

On reaching 60 years of age you are eligible for a pension.

You are a member of a foreign superannuation fund.

You applied for a lump sum payment which you received from your foreign superannuation fund in the 2009-10 income year.

You became a resident of Australia in the 1999-2000 income year.

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 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 of decision

A portion of the lump sum benefit you received from a foreign superannuation fund is assessable as 'applicable fund earnings'. The amount of applicable fund earnings represents the increase or growth in the foreign superannuation fund during the period you are a resident of Australia.

The amount of applicable fund earnings is calculated by translating the lump sum benefit received from the foreign superannuation fund at the exchange rate applicable on the day of receipt into Australian dollars, and deducting from this amount the Australian dollar equivalent of the lump sum benefit on the day just before the residency date at the exchange rate applicable on that day.

The applicable fund earnings are assessable in Australia. The remainder of the lump sum benefit is not assessable income and is not exempt income.

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 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) 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.

In this case, you received a lump sum benefit from a foreign superannuation fund. It is evident that the foreign superannuation fund, which is established overseas, is not an Australian superannuation fund as defined in subsection 295-95(2) of the ITAA 1997. Based on the information provided, the Commissioner considers that the payment is made from 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 in the 1999-2000 income year (the residency date). The foreign superannuation fund paid you a lump sum benefit which was received by you in the 2009-10 income year. The date on which you received the lump sum benefit is more than six months after you became an Australian resident. Accordingly, a portion of the lump sum benefit 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).

The calculation of this portion effectively means that you will be assessed only on the income earned in the foreign superannuation fund while you were a resident of Australia. That is, you will only be assessed on the accretion in the foreign superannuation fund 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) 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 in 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 foreign superannuation fund 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.

1. When the amount of the lump sum benefit 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.

2. 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 benefit received from the foreign superannuation fund at the exchange rate applicable on the day of receipt to AUD (item 11 of the table in subsection 960-50(6)); and

§ deducting from this amount the AUD equivalent of the lump sum benefit vested in the foreign superannuation fund at the exchange rate applicable just before the residency date (item 11A of the table in subsection 960-50(6)).

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