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Ruling

Subject: Transfer of benefits from foreign pension scheme

Question

Is any part of the benefits transferred from a pension scheme in an overseas country (Foreign Pension Scheme) to an Australian superannuation fund applicable fund earnings under section 305-75 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer:

No.

This ruling applies for the following periods:

2010-11 income year

The scheme commences on:

1 July 2010

Relevant facts and circumstances

Your client migrated to Australia during the 2008-09 income year as a permanent resident on a specific Class visa.

Your client held an interest in a pension scheme in an overseas country (Foreign Pension Scheme).

You advised the value of the Foreign Pension Scheme on the date your client became a permanent resident of Australia.

Your client received a payment during the 2010-11 income year from the Foreign Pension Scheme.

Your client transferred this payment in full to a Complying Australian Superannuation Fund.

The Foreign Pension Scheme was then closed in the overseas country.

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 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 Subparagraph 305-75(3)(a)(i)

Income Tax Assessment Act 1997 Subparagraph 305-75(3)(a)(ii)

Income Tax Assessment Act 1997 Subparagraph 305-75(3)(a)(iii)

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 Subsection 960-50(1)

Income Tax Assessment Act 1997 Subsection 960-50(6)

Income Tax Assessment Act 1997 Subsection 995-1(1)

Reasons for decision

The 'applicable fund earnings' in respect of the payment of benefits from the Foreign Pension Scheme is zero.

Consequently, no amount of the payment from the Foreign Pension Scheme will be included in your client's assessable income in the 2010-11 income year.

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 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 subject to tax at the person's marginal rate. 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 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 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 a foreign pension scheme. It is evident that the foreign pension scheme, which is established in an overseas 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 foreign pension scheme is a foreign superannuation fund as defined in subsection 995-1(1).

Applicable fund earnings

Your client became a resident of Australia for tax purposes in the 2008-09 income year and received the lump sum payment in respect of her entitlements in the foreign pension scheme in the 2010-2011 income year. As this was more than six months after your client became an Australian resident, section 305-70 of the ITAA 1997 applies to include the 'applicable fund earnings' in your client's assessable income.

The 'applicable fund earnings' are worked out under section 305-75 of the ITAA 1997. As mentioned earlier, subsection 305-75(3) applies where the person becomes an Australian resident after the start of the period to which the lump sum relates.

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, 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 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).

In short, your client is assessed only on the income earned (the accretion) in respect of the foreign pension scheme less any contributions your client made since she became a resident of Australia. 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.

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

· translating the lump sum payment received from the overseas superannuation 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 overseas superannuation fund at the exchange rate applicable on the day immediately before the residency date (item 11A of the table to subsection 960-50(6)).

Amounts to be used in calculation

You advised us of the value of the benefit in the Foreign Pension Scheme on the day before your client became a resident of Australia. This is converted into Australian dollars at the exchange rate that applied on that day.

From the facts provided no contributions have been made to the Foreign Pension Scheme since before your client migrated to Australia.

During the 2010-11 income year, your client's benefit in the Foreign Pension Scheme was transferred as a lump sum directly into a complying Australian superannuation fund. Therefore this is the amount vested in your client when the lump sum payment of benefits was made. This is converted into Australian dollars at the exchange rate that applied on that day.

'The period' for the purposes of paragraph 305-75(3)(c) of the ITAA 1997 commences on the day on which the person first became an Australian resident and ceases on the day the lump sum of benefits is paid. Your client was a resident for the whole of both those periods. Therefore, the Australian resident days and the total days are the same, and so the proportion to be used in the calculation is 1.

There are no previously exempt fund earnings in relation to the lump sum amount transferred.

Calculation of Assessable Amount

In accordance with subsection 305-75 (3) of the ITAA 1997 the amounts determined at sub-paragraphs 305-75(3)(a)(i), (ii) and (iii) are added.

This total is then subtracted from the amount determined under paragraph 305-75(3)(b).

This figure is multiplied by the proportion of the total days determined under paragraph 305-75(3)(c):

To this figure we add the amounts determined under paragraph 305-75(3)(d).

Because the amount, in Australian dollars, vested in your client before they became a resident of Australia is greater than the actual amount of the lump sum payment of benefits received, in Australian dollars, the result of this calculation is negative.

As the amount is less than zero, no amount of the lump sum payment from the Foreign Pension Scheme will be included as assessable 'applicable fund earnings' in your client's 2010-11 income year.

Conclusion:

No part of the lump sum payment from the Foreign Pension Scheme which was transferred to your client's Australian superannuation fund is assessable as the applicable fund earnings relating to the payment are nil.

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