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Ruling

Subject: Lump sum payment from foreign superannuation fund

Question

Is any part of the lump sum payment received from a foreign pension scheme to an Australian superannuation fund assessable as applicable fund earnings?

Answer

No.

This ruling applies for the following periods:

2009-10 income year.

The scheme commences on:

1 July 2009.

Relevant facts and circumstances

You were a member of the Fund, a foreign superannuation fund.

You state that in mid 2008, you became a resident of Australia for tax purposes.

No contributions were made to the Fund after you became a resident for tax purposes.

The Reserve Bank of Australia daily exchange rate which prevailed on the day before the residency date was AUD$1 = FX.

In early 2010 you transferred a lump sum from the Fund of X to a complying Australian superannuation fund. This sum was converted to $XX.

You no longer have an interest in the Fund.

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 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

The applicable fund earnings in relation to the lump sum is Nil. Therefore, no part of the payment received from the Fund is to be included in your assessable income for the 2009-10 income year.

Detailed reasoning

Lump sum payments transferred from a foreign superannuation fund

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 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 subsection 305-75(2) or (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 was not an Australian resident at all times during 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 apply to the payment received.

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 fund's 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, the lump sum benefit was paid from the Fund. It is evident that the Fund, which is established in a 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 considers that the Fund is a foreign superannuation fund as defined in subsection 995-1(1).

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 becoming an Australian resident.

You became a resident of Australia for tax purposes in mid 2008 and the lump sum benefit was transferred to Australia more than six months after you became an Australian resident. Consequently, the exemption under section 305-60 of the ITAA 1997 will not apply. Therefore, a portion of the lump sum payment will be assessable under subsection 305-75(3).

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

Further, any amounts representative of earnings during periods of non-residency, and transfers into the paying fund do not form part of the taxable amount when the overseas benefit is paid.

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).

Subsection 305-75(5) of the ITAA 1997 defines previously exempt fund earnings as follows:

You have an amount of previously exempt fund earnings in respect of the lump sum if:

(a) part or all of the amount in the fund that was vested in you when the lump sum was paid (before any deduction for foreign tax) is attributable to the amount; and

(b) the amount is attributable to a payment received from a foreign superannuation fund; and

(c) the amount would have been included in your assessable income under subsection 305-70(2) by the application of this section, but for the payment having been received by another foreign superannuation fund.

Subsection 305-75(6) states:

The amount of your previously exempt fund earnings is the amount mentioned in paragraph (5)(c) (disregarding the addition of previously exempt fund earnings under subsection (2) or (3) of this section).

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). For the purposes of section 305-70 of the ITAA, the 'applicable fund earnings' should be calculated by:

· translating the lump sum payment received from the Fund at the exchange rate applicable on the day of receipt to Australian Dollars (item 11 of the table to subsection 960-50(6)); and

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

You have provided the Australian Dollar equivalent for the lump sum payment of $XX received from the Fund in early 2010 into your bank account. The Commissioner is prepared to accept this figure as an appropriate translation into Australian Dollars.

Calculation of Assessable Amount

Based on the information you have provided, the Commissioner is prepared to make the assumption that the value of your lump sum in the Plan on the date before you became a resident of Australia was Y.

No contributions were made to the fund after the residency date, and no transfers were made to the fund from other foreign superannuation funds.

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

· the amount of the lump sum benefit vested in you just before the residency date = Y;

· contributions made to the fund for or by you after the residency date = NIL;

· the amount transferred into the fund from any other foreign superannuation fund = NIL.

The lump sum benefit vested in you in mid 2008 is translated into Australian Dollars at the exchange rate applicable on the day just before the residency date.

The daily exchange rate which prevailed that date was AUD$1 = FX.

Accordingly, the vested lump sum benefit of Y converted to Australian Dollars is:

Y ÷ FX = $YY (cents ignored).

Paragraph 305-75(3)(b) of the ITAA 1997 requires that the amount calculated above be subtracted from the total amount of the lump sum benefit made by the fund.

You have provided the AUD equivalent for the lump sum payment received by the Fund, $XX, being the amount received from the Plan into your bank account.

Accordingly, the lump sum benefit is $XX (cents ignored).

Based on the above, subtracting the Australian dollars equivalent of the lump sum benefit vested in you as at the date of residency from the Australian dollars equivalent of the lump sum benefit you received in early 2010:

$XX - $YY = -$Z

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

However, because the result of the calculation in subsection 305-75(3) of the ITAA 1997 is less than zero, your applicable fund earnings will be Nil.

Therefore, no part of the payment received from the Fund is to be included in your assessable income for the 2009-10 income year.

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