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Ruling

Subject: Transfer of benefits from a foreign pension scheme

Question 1

Is any part of the benefits transferred from Pension Fund 1, a pension scheme in an overseas country to an Australian superannuation fund applicable fund earnings under section 305-75 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

Is any part of the benefits transferred from Pension Fund 2, a pension scheme in an overseas country 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

2011-12 income year

The scheme commences on:

1 July 2010

Relevant facts and circumstances

Your client migrated to Australia during the 2009-10 income year as a permanent resident on a specific Class visa.

Your client held an interest in two pension schemes with two pension funds in an overseas country (Pension Fund 1 and Pension Fund 2).

You advised or agreed on the values of Pension Fund 1 and Pension Fund 2 on the date your client became a permanent resident of Australia.

There have been no contributions to Pension Fund 1 or Pension Fund 2 since your client migrated to Australia.

Your client cannot access their benefits in Pension Fund 1 or Pension Fund 2 other than at retirement in the foreign country.

Your client received a payment during the 2010-11 income year from Pension Fund 1.

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

Your client received a payment during the 2011-12 income year from Pension Fund 2.

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

Pension Fund 1 and Pension Fund 2 were then closed in the foreign 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 Subsection 305-70(1)

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 Subsection 305-75 (5)

Income Tax Assessment Act 1997 Subsection 305-75 (6)

Income Tax Assessment Act 1997 Subsection 306-70

Income Tax Assessment Act 1997 Subsection 960-50(1)

Income Tax Assessment Act 1997 Subsection 960-50(4)

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

Superannuation Industry (Supervision) Act 1993 Section 10

Superannuation Industry (Supervision) Act 1993 Section 19

Superannuation Industry (Supervision) Act 1993 Section 62

Reasons for decision

No part of the lump sum payments from Pension Fund 1 and Pension Fund 2 which were transferred to your client's Australian superannuation fund are assessable as the applicable fund earnings relating to the payments are nil.

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 benefits were transferred from Pension Fund 1 and Pension Fund 2. It is evident that both pension funds where established in an overseas country and are not Australian superannuation funds as defined in subsection 295-95(2) of the ITAA 1997.

Applicable fund earnings

Your client became a resident of Australia for tax purposes during the 2009-10 income year and received the lump sum payments in respect of her entitlements in Pension Fund 1 and Pension Fund 2 during the 2010-11 income year and 2011-12 income year respectively. In both cases, as the receipt of the lump sums occurred more than six months after your client became an Australian resident, section 305-70 applies to include the 'applicable fund earnings' in your client's assessable income.

The 'applicable fund earnings' are worked out under section 305-75. 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 Pension Fund 1 and Pension Fund 2 less any contributions your client made since he 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 of the ITAA, 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

Pension Fund 1

You advised us of the value of the benefits in Pension Fund 1 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 Pension Fund 1 since your client migrated to Australia.

During the 2010-11 income year, your client's benefit in Pension Fund 1 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.

Pension Fund 2

You agreed with us on the value of the benefits in Pension Fund 2 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 Pension Fund 2 since your client migrated to Australia.

During 2011-12 income year, your client's benefits in Pension Fund 2 was paid out to your client in the form of a lump sum which was directly deposited by the fund into a complying Australian superannuation fund. 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 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 sums.

Calculation of Assessable Amount

Pension Fund 1

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 Pension Fund 1 will be included as assessable 'applicable fund earnings' in your client's 2010-11 income year.

Pension Fund 2

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 Pension Fund 2 will be included as assessable 'applicable fund earnings' in your client's 2011-12 income year.

Conclusion:

No part of the lump sum payments from Pension Fund 1 and Pension Fund 2 which was transferred to your client's Australian superannuation fund is assessable as the applicable fund earnings relating to the payments is nil.

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