Edited version of private ruling

Authorisation Number: 1011727147509

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Ruling

Subject: Lump sum payment from a foreign superannuation fund

Question 1

Will the growth in the overseas pension scheme be subject to tax in Australia if the benefits are retained in the overseas pension scheme where the taxpayer is a temporary resident?

Answer

No.

Question 2

Will the growth in the overseas pension scheme be subject to tax in Australia if the benefits are retained in the overseas pension scheme and the taxpayer becomes a permanent resident?

Answer

No.

Question 3

Is any part of the benefits proposed to be transferred from a overseas pension scheme to an Australian superannuation fund assessable as applicable fund earnings where the taxpayer is a temporary resident?

Answer

No.

Question 4

Is any part of the benefits proposed to be transferred from an overseas pension scheme to an Australian superannuation fund assessable as applicable fund earnings if the taxpayer becomes a permanent resident prior to the transfer?

Answer

(a) No. Provided the payment is made less than six months after your client becomes an Australian resident.

(b) Yes. Where the lump sum payment is received by your client more than six months after your client becomes an Australian resident.

This ruling applies for the following period:

Year ending 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

Your client migrated to Australia during the 2010-11 income year (the residency date) on a temporary visa and is a resident of Australia for income tax purposes.

Your client intends to apply for permanent residence late in the 2010-11 income year.

Your client ceased employment in an overseas country early in the 2010-11 income year.

Your client is a member of an overseas pension scheme (the overseas pension scheme) which is a defined benefit pension scheme in the overseas country.

Your client intends to transfer their benefit entitlement in the overseas pension scheme to Australia at a date in the future.

The total value of your client's benefit entitlement in the overseas pension scheme is more than $50,000.

You have provided the transfer value of your client's benefit entitlement in the overseas pension scheme on the day immediately before they became a resident of Australia.

No contribution has been made to the overseas pension scheme since your client became a resident of Australia.

Your client will no longer have an interest in the overseas pension scheme once the benefit entitlement is transferred to Australia.

Your client is under 55 years of age.

Relevant legislative provisions:

Income Tax Assessment Act 1997 Subsection 6-5.

Income Tax Assessment Act 1997 Subsection 6-5(2).

Income Tax Assessment Act 1997 Section 6-10.

Income Tax Assessment Act 1997 Subsection 6-10(4).

Income Tax Assessment Act 1997 Subsection 6-15(3).

Income Tax Assessment Act 1997 Section 10-5.

Income Tax Assessment Act 1997 Section 292-15.

Income Tax Assessment Act 1997 Subsection 292-20(2).

Income Tax Assessment Act 1997 Section292-25.

Income Tax Assessment Act 1997 Paragraph 292-25(2)(c).

Income Tax Assessment Act 1997 Section292-410.

Income Tax Assessment Act 1997 Section292-85.

Income Tax Assessment Act 1997 Subsection 295-85(2).

Income Tax Assessment Act 1997 Subsection 295-95(3).

Income Tax Assessment Act 1997 Subsection 295-95(4).

Income Tax Assessment Act 1997 Section 305-60.

Income Tax Assessment Act 1997 Section 305-65.

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 Section 305-75.

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

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

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 768-910.

Income Tax Assessment Act 1997 Subsection 768-910(1).

Income Tax Assessment Act 1997 Section 768-915.

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 (Transitional Provisions) Act 1997 Section 82-10F.

International Tax Agreements Act 1953 Schedule 1.

International Tax Agreements Act 1953 Schedule 1, Article 17.

International Tax Agreements Act 1953 Schedule 1, Article 23.

Small Superannuation Accounts Act 1995 Section 61.

Small Superannuation Accounts Act 1995 Section 61A.

Superannuation (Excess Concessional Contributions Tax) Act 2006 Section 4.

Superannuation (Excess Concessional Contributions Tax) Act 2006 Section 5.

Superannuation (Excess Non-concessional Contributions Tax) Act 2006 Section 4.

Superannuation (Excess Non-concessional Contributions Tax) Act 2006 Section 5.

Superannuation Guarantee (Administration) Act 1992 Section 65

Tax Laws Amendment (Foreign Source Income Deferral) Act (No. 1) 2010 Schedule 1.

Superannuation Industry (Supervision) Regulations 1994 Subregulation 7.04(3).

Reasons for decision

Summary

While your client remains a temporary resident of Australia any applicable fund earnings in relation to a lump sum payment or transfer from the overseas pension scheme are not included in your client's assessable income.

Similarly, if the lump sum payment or transfer from the overseas pension scheme is received or made after your client becomes a permanent resident of Australia but within six months of becoming an Australian resident, no amount of the payment or transfer are included in your client's assessable income.

However, if the lump sum payment or transfer from the overseas pension scheme is received or made after your client becomes a permanent resident of Australia and more than six months of becoming an Australian resident, any applicable fund earnings are included in your client's assessable income.

The applicable fund earnings represents the increase or growth in the overseas pension scheme during the period your client was a resident of Australia (temporary and permanent).

The applicable fund earnings is calculated by:

· translating the amount received from the overseas pension 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 amount vested in the overseas pension scheme on the day just before your client first became an Australian resident at the exchange rate applicable on that day.

If all the benefits your client has in the overseas pension scheme are transferred as a lump sum from the overseas pension scheme to an Australian complying superannuation fund, your client may choose for part or all of the amount of the applicable fund earnings to be included in the assessable income of the complying superannuation fund.

The foreign investment fund (FIF) provisions no longer apply from 1 July 2010. Accordingly, Australian residents with non-controlling shareholdings in foreign companies or with interests in foreign trusts no longer need to include income on an attribution basis.

Detailed reasoning

Residency

Subsections 6-5(2) and 6-10(4) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident taxpayer includes ordinary or statutory income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

However, the foreign source income exemption for temporary residents, contained in Subdivision 768-R of the ITAA 1997, provides an exemption for most foreign income derived by temporary residents of Australia.

A temporary resident is defined in subsection 995-1(1) of the ITAA 1997 as a person:

(a) who holds a temporary visa granted under the Migration Act 1958; and

(b) who is not an Australian resident within the meaning of the Social Security Act 1991; and

(c) whose spouse is not an Australian resident within the meaning of the Social Security Act 1991.

In particular, section 768-910 of the ITAA 1997 provides that ordinary income derived from a foreign source, excluding employment related income and capital gains on shares and rights acquired under employee share schemes, is non-assessable non-exempt income when derived by a temporary resident of Australia.

Similarly, section 768-910 of the ITAA 1997 provides that statutory income derived from a foreign source, excluding a net capital gain which is covered by section 768-915 and employment related statutory income, is non-assessable non-exempt income when derived by a temporary resident of Australia.

Assessability of the growth in the overseas pension scheme for the 2010-11 and subsequent income years

The FIF rules has been repealed by the Tax Laws Amendment (Foreign Source Income Deferral) Act (No 1) 2010 which received royal assent on 14 July 2010. This Act repeals the FIF rules and the deemed present entitlement rules in relation to the 2010-11 and later income years.

Therefore from 1 July 2010 Australian residents with non-controlling shareholdings in foreign companies or with interests in foreign trusts no longer need to include income on an attribution basis under the FIF rules.

In your case, if your client has an interest in foreign investment funds, regardless of whether your client retained the funds in overseas or transfers them to Australia, as a temporary resident or a permanent resident of Australia, FIF provisions are not applicable from 1 July 2010.

Tax implication on pension income from the overseas pension scheme as a temporary resident

A taxpayer's pension income from the overseas, being ordinary income from a foreign source, is exempt from income tax in Australia under section 768-910 of the ITAA 1997 when the taxpayer is a temporary resident of Australia when he or she derived it.

Tax implication on pension income from the overseas pension scheme as a permanent resident

Once your client attains a permanent residency in Australia, section 768-910 of the ITAA 1997 will no longer be applicable to your client's situation.

As noted above, subsections 6-5(2) and 6-10(4) of the ITAA 1997 provide that the assessable income of an Australian resident includes ordinary income and statutory income they derived directly or indirectly from all sources whether in or out of Australia.

In determining the liability to Australian tax of foreign sourced income received by a resident, we consider not only the income tax laws but also any applicable tax treaty contained in the International Agreements Act 1953 (the Agreements Act).

Australia has a tax treaty with the overseas country (the overseas country Convention) that operates to avoid the double taxation of income received by residents of Australia and the overseas country.

The overseas country Convention provides that pensions and annuities paid to a resident of Australia shall be taxable only in Australia.

In your case, if your client receives a pension from the overseas pension scheme as a permanent resident (in contrast to a temporary resident), being ordinary income, your client's overseas pension will be assessable under subsection 6-5(2) of the ITAA 1997.

Superannuation benefits from an overseas superannuation fund

Temporary resident

The following advice only applies where a lump sum payment from the overseas pension scheme is received by your client whilst she is a temporary resident of Australia.

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 taxpayer 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.

Section 10-5 of the ITAA 1997 lists the provisions in respect of statutory income. Relevantly included in this list is section 305-70.

As previously mentioned, subdivision 768-R of the ITAA 1997 provides tax relief for most foreign income derived by temporary residents of Australia.

In particular, subsection 768-910(1) of the ITAA 1997 provides that statutory income derived from a foreign source, excluding a net capital gain which is covered by section 768-915 and employment related statutory income, is non-assessable non-exempt income when derived by a temporary resident of Australia.

Therefore applicable fund earnings in relation to lump sum payments from foreign superannuation funds in overseas, being statutory income from a foreign source, are non-assessable non-exempt income under subsection 768-910(1) of the ITAA 1997 if a person is a temporary resident of Australia when the person derived the income.

Subsection 6-15(3) of the ITAA 1997 provides that if an amount is non-assessable non-exempt income, it is not assessable income. Therefore, applicable fund earnings in relation to a lump sum payment from a foreign superannuation fund in overseas for a temporary resident is not assessable income.

Permanent resident - Lump sum payment received less than six months after becoming an Australian resident

The following advice only applies where a lump sum payment from the overseas pension scheme is received by your client whilst she is a permanent resident of Australia.

If the lump sum payment is received within six months from the date your client become a resident of Australia (that is, when your client arrived in Australia and held a temporary visa), section 305-60 of the ITAA 1997 applies:

A superannuation lump sum you receive from a foreign superannuation fund is not assessable income and is not exempt income if:

(a) you receive it within 6 months after you become an Australian resident; and

(b) it relates only to a period:

(i) when you were not an Australian resident; or

(ii) starting after you became an Australian resident and ending before you receive the payment; and

(c) it does not exceed the amount in the fund that was vested in you when you received the payment.

Accordingly, if the lump sum payment made by the overseas pension scheme is received within six months of your client becoming an Australian resident, the amount will not be included in your client assessable income in Australia.

It should be noted that the six month period referred to in section 305-60 of the ITAA 1997 will also include the period your client had held a temporary visa. This is because your client is still a resident of Australia for income tax purposes whilst holding the temporary visa.

Permanent resident - Lump sum payment received more than six months after becoming an Australian resident

The following advice only applies where a lump sum payment from the overseas pension scheme is received by your client whilst she is a permanent resident of Australia.

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 subsection 305-70(2) of the ITAA 1997. The remainder of the lump sum payment is not assessable income and is not exempt income (subsection 305-70(3)).

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.

As your client became an Australian resident on the residency date, subsection 305-75(3) of the ITAA 1997 would apply to determine the amount of the applicable fund earnings (if any) in relation to the lump sum payment.

This calculation effectively means that your client will be assessed only on the income earned in the overseas pension scheme while your client was a resident of Australia. That is, your client will only be assessed on the accretion in the overseas pension scheme less any contributions made since your client became a resident of Australia.

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).

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 currency. The applicable fund earnings is the result of a calculation from two other amounts and subsection 960-50(4) states when applying section 960-50 to amounts that are elements in the calculation of another amount your client needs 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 7 which relates to an amount of statutory income

· 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 7 of the table in subsection 960-50(6) of the ITAA 1997 provides that:

an amount of statutory income that is received at or before the time when the requirement first arose to include the amount in a taxpayer's assessable income is to be translated to Australian currency at the exchange rate applying at the time of receipt; or

in any other case, the amount of statutory income is to be translated at the rate applying at the time when the requirement first arose to include the amount in a taxpayer's assessable income.

As noted earlier, section 10-5 of the ITAA 1997 lists the provisions in respect of statutory income. Relevantly included in this list is section 305-70.

However, item 7 deals with the translation of an amount of statutory income. The statutory income under consideration is represented by the difference between the lump sum on the day of payment and the amount vested on residency. Each of these two amounts is a separate element in the calculation of another amount (statutory income) and requires translation prior to calculating that other amount as stated above.

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 your client finally receives 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 of the lump sum payment that was vested in your client 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 overseas pension 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 payment vested in the overseas pension scheme at the exchange rate applicable just before the residency date (item 11A of the table to subsection 960-50(6)).

Election

As 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 elect under subsection 305-80(2) of the ITAA 1997 to have all or part of the payment treated as assessable income of the Australian superannuation fund.

As a result, the amount specified in the election 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 his or her marginal rate.

To qualify, the taxpayer must, immediately after the relevant payment is made, no longer have an interest in the paying fund under subsection 305-80(1) of the ITAA 1997 (a pension would be an interest in a superannuation fund). Under subsection 305-80(3), the election 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 noted in the facts of this case, you advised that your client will have no further interest in the overseas pension scheme when the benefits were transferred to the Australian superannuation fund. Therefore your client can make an election under subsection 305-80 of the ITAA 1997 to have all or part of the assessable income treated as assessable income of the Australian superannuation fund.

Further issues for you to consider:

Concessional contributions

From 1 July 2007, concessional contributions made to superannuation funds are subject to an annual cap. For the 2010-11 income year, the annual cap is $25,000.

The concessional contributions cap will be indexed to upward movements of average weekly ordinary time earnings (AWOTE) in $5,000 increments (subsection 292-20(2) of the ITAA 1997).

Concessional contributions include employer contributions and personal contributions claimed as a tax deduction by a self-employed person.

A person will be taxed on concessional contributions over the cap at a rate of 31.5% (section 292-15 of the ITAA 1997 and sections 4 and 5 of the Superannuation (Excess Concessional Contributions Tax) Act 2006).

If a person has more than one fund, all concessional contributions made to all their funds are added together and count towards the cap.

Amounts in excess of the concessional contributions cap are also counted towards the non-concessional contributions cap.

Section 292-25 of the ITAA 1997 determines what amounts are concessional contributions for a financial year. Under paragraph 292-25(2)(c) the following amounts are excluded from being concessional contributions:

(i) so much of an amount that is transferred to a superannuation fund from a foreign superannuation fund and is included in the assessable income of the fund as a result of a choice made under section 305-80;

(ii) an amount that is a roll-over superannuation benefit to the extent that it contains an untaxed element that is not an excess untaxed roll-over amount;

(iii) a contribution made to a constitutionally protected fund (CPF).

As noted earlier, the amount of the applicable fund earnings in relation to the transfer of benefits from a foreign superannuation fund to an Australian superannuation fund that is covered by a choice made under section 305-80 of the ITAA 1997 is treated as assessable income of the Australian superannuation fund. The amount covered by the choice will not be treated as a concessional contribution to the Australian superannuation fund. Consequently, this amount will not count towards the concessional contributions cap for the relevant year.

Non-concessional contributions

From 1 July 2007, non-concessional contributions made to a complying superannuation fund will be subject to an annual cap (subsection 292-85(2) of the ITAA 1997). For the 2010-11 income year onwards the annual cap is always six times the concessional contributions cap. Therefore, for the 2010-11 income year the annual cap is $150,000.

Non-concessional contributions include:

· personal contributions for which an income tax deduction is not claimed;

· contributions a person's spouse makes to the person's superannuation fund account (spouse contributions); and

· transfers from foreign superannuation funds (excluding amounts included in the fund's assessable income).

As noted above, the amount of the applicable fund earnings in relation to the transfer of benefits from a foreign superannuation fund to an Australian superannuation fund that is covered by a choice made under subsection 305-80(2) of the ITAA 1997 is treated as assessable income of the Australian superannuation fund. Therefore, this amount will not be treated as a non-concessional contribution to the Australian superannuation fund and will not count towards the taxpayer's non-concessional contributions cap for the relevant year.

The remainder of the superannuation benefit transferred from the foreign superannuation fund will be treated as a non-concessional contribution to the Australian superannuation fund and will count towards the taxpayer's non-concessional contributions cap for the relevant year. This will include the amount, if any, of the applicable fund earnings not covered by the choice made under subsection 305-80(2) of the ITAA 1997.

A person will be taxed on non-concessional contributions over the cap at the rate of 46.5% (section 292-80 of the ITAA 1997 and sections 4 and 5 of the Superannuation (Excess Non-concessional Contributions Tax) Act 2006). The person will be required to ask their superannuation fund to release an amount that is equal to the tax liability (section 292-410 of the ITAA 1997).

As a concession, to accommodate larger contributions, persons under age 65 in an income year are able to bring forward future entitlements to two years worth of non-concessional contributions. This means a person under age 65 will be able to contribute non-concessional contributions totalling $450,000 over three income years without exceeding their non-concessional contributions cap (subsections 292-85(3) and (4) of the ITAA 1997).

The bring forward will be triggered automatically when contributions in excess of the annual non-concessional contributions cap are made in an income year by a person who is under age 65 at any time in the year where a bring forward has not already commenced (subsection 292-85(3) of the ITAA 1997).

Where a bring forward has been triggered, the two future years' entitlements are not indexed.

Fund-capped contributions

Under subregulation 7.04(3) of the Superannuation Industry (Supervision) Regulations 1994 (SISR):

… the regulated superannuation fund must not accept any fund-capped contributions in a financial year in respect of a member that exceed:

(a) if the member is 64 or less on 1 July of the financial year - three times the amount of the non-concessional contributions cap; or

(b) if the member is 65 but less than 75 on 1 July of the financial year - the non-concessional contributions cap.

Fund-capped contributions are member contributions other than:

· contributions to which a valid and acknowledged notice under section 290-170 of the ITAA 1997 relates;

· contributions arising from a structured settlement or an order for personal injury;

· contributions relating to some capital gains tax (CGT) small business concessions to the extent that it does not exceed the CGT cap amount ($1,000,000 indexed annually) when it is made;

· a payment made by the Commissioner of Taxation under section 65 of the Superannuation Guarantee (Administration) Act 1992;

· a payment made by the Commissioner of Taxation under section 61 or 61A of the Small Superannuation Accounts Act 1995;

· a Government co-contribution made under the Superannuation (Government Co-contribution for Low Income Earners) Act 2003;

· a contribution that is a directed termination payment within the meaning of section 82-10F of the Income Tax (Transitional Provisions) Act 1997.

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