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This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4.

Edited version of your private ruling

Authorisation Number: 1012333266787

Ruling

Subject: Lump sum payment from a foreign superannuation fund

Question

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

Answer

Yes.

This ruling applies for the following periods:

Year ending 30 June 2011

Year ending 30 June 2012

The scheme commences on:

1 July 2010

Relevant facts and circumstances

A few years ago, your client migrated to Australia and became a permanent resident of Australia for tax purposes.

Your client was a member of a number of pension funds in the overseas country.

During the 2010-11 and 2011-12 income years, and more than six months after becoming a resident of Australia, your client's benefits were transferred from the overseas funds to a complying superannuation fund in Australia.

You advised that the transfer from Fund 3 involved two separate payments due to an error during the initial transfer. A copy of the correspondence in relation to the error was provided.

After the transfers, your client no longer had an interest in the foreign pension funds.

Since your client migrated to Australia there have been no contributions or transfers into these pension funds.

Funds cannot be accessed from these pension funds in the UK other than at retirement.

Assumptions

Section 357-110 of Schedule 1 to the Taxation Administration Act 1953 (TAA) states:

If the Commissioner considers that the correctness of a private ruling or an oral ruling would depend on which assumptions were made about a future event or other matter, the Commissioner may:

Transfer Value of benefits on the day before Australian residency for Funds 1, 2, 4 and 5

Your client could not provide the total value of his benefits for Funds 1, 2, 4 and 5 as at the day before your client became an Australian resident. However, an amount for the closest business day was obtained.

The Commissioner considers it reasonable to assume that the values of your client's benefits in Funds 1, 2, 4 and 5 on the day before your client became an Australian resident are the values on the closest business day.

Transfer Value of benefits on the day before Australian residency for Fund 3

Your client could not provide the value of his benefits in Fund 3 as at the day before they became an Australian resident. The transfer value on the day of the first payment, however, was provided.

It is noted that the member benefits vested in Fund 3 are increased by the cost of living.

Using this rate of increase between the day before your client became an Australian resident and the payment date, and discounting the available transfer value by that increase, the value at the day before your client became an Australian resident has been determined.

The Commissioner considers it reasonable to assume that the transfer value as at the day before your client became a resident is the amount so determined.

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 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

Summary

An amount of 'applicable fund earnings' in respect of the lump sum payments received by your client and to be included in their assessable income in the 2010-11 income year have been calculated for Fund 1 and Fund 2.

The 'applicable fund earnings' in respect of the lump sum payments received by your client and to be included in their assessable income in the 2011-12 income year have been calculated for Fund 4 and Fund 5.

The 'applicable fund earnings' in respect of the lump sum payments paid from Fund 3 have been calculated as zero.

Consequently, no amounts of the lump sum payments from Fund 3 will be included in your client's assessable income.

Your client can elect to have all or part of the assessable 'applicable fund earnings' in 1, 2, 4 and 5 treated as assessable income of their complying Australian superannuation fund because immediately after the relevant payments were made, your client no longer had an interest in the foreign funds.

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.

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:

Under the definition of Australian superannuation fund in subsection 295-95(2) of the ITAA 1997 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.

Subsection 995-1(1) of the ITAA 1997 defines a superannuation fund as having the same meaning given by section 10 of the Superannuation Industry (Supervision) Act 1993 (SIS Act), which requires that the fund is a provident, benefit, superannuation or retirement fund.

Provident, benefit, superannuation or retirement fund

The issue of what constitutes a provident, benefit, superannuation or retirement fund was discussed by the Full Bench of the High Court in Mahony v. Federal Commissioner of Taxation (1967) 41 ALJR 232; (1967) 14 ATD 519 (Mahony).

In that case, Justice Kitto's judgement indicated that a fund does not satisfy any of the three provisions, that is, 'provident, benefit or superannuation fund', if there exist provisions for the payment of benefits 'for any other reason whatsoever'. In other words, though a fund may contain provisions for retirement purposes, it could not be accepted as a superannuation fund if it contained provisions that benefits could be paid in circumstances other than those relating to retirement.

In section 62 of the SIS Act, a regulated superannuation fund must be 'maintained solely' for the 'core purposes' of providing benefits to a member where the events occur:

Notwithstanding the SIS Act applies only to 'regulated superannuation funds' (as defined in section 19 of the SIS Act), and foreign superannuation funds do not qualify as regulated superannuation funds as they are established and operate outside Australia, the Commissioner views the SIS Act (and the SIS Regulations) as providing guidance as to what 'benefit' and 'specific future purpose' a superannuation fund should provide.

It is evident that the payers of the lump sum payments are established outside of Australia. Similarly, the central management and control is outside of Australia.

On the basis of the information provided, the Commissioner considers that the funds are foreign superannuation funds as defined in subsection 995-1(1) of the ITAA 1997.

Applicable fund earnings

Your client became a resident of Australia for tax purposes a few years ago and the payments were transferred from five pension funds in the overseas country during the 2010-11 and 2011-12 income years. As the payments were made 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:

(a) Work out the total of the following amounts:

In short, your client is assessed only on the income earned (the accretion) in respect of the overseas pension funds less any contributions your client made since he became a resident of Australia. Further, any amounts representative of earnings during the 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 (A$). The applicable fund earnings is the result of a calculation from two other amounts and subsection 960-50(4) states 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 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 received 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 Australian dollars at the exchange rate applicable at the time of receipt.

When the amount in the foreign fund that was vested in your client just before they became a resident of Australia (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) 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, and for which none of the other items apply. Consequently the vested amount is translated into Australian dollars 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 amount received from the foreign 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 amount vested in the fund at the exchange rate applicable just before the day your client first became an Australian resident.

Amounts to be used in calculation

As noted in the assumptions, the values of the total benefits in the overseas pension funds on the day before your client became a resident of Australia have been estimated.

These amounts are converted into Australian currency at the exchange rate that applied on the day before your client became a resident of Australia.

Further, the amount vested in Fund 3 on the day the first lump sum was paid 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 five pension funds in the overseas country since your client migrated to Australia.

There have been no transfers into the five pension funds in the overseas country from other foreign pension schemes by your client since becoming a resident of Australia.

Your client's benefits were paid from the five overseas pension funds to your client in the form of lump sums which were transferred directly into a complying Australian superannuation fund. These amounts were vested for your client when the lump sums were paid. The amounts were converted into Australian dollars at the exchange rate that applied on the day they were transferred.

By using the exchange rates that applied on the day the benefits were transferred, the payments from each fund have been converted to Australian dollars.

'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. In your client's case, there are six relevant periods.

Your client was a resident for the whole of those periods. Therefore, the Australian resident days and the total days are the same, and so the proportion to be used in each calculation is 1.

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

Fund 1

Applying subsection 305-75(3) of the ITAA 1997 to your client's circumstances, the amounts to be used in calculating the applicable fund earnings for Fund 1 are as follows:

Calculation of the assessable amount of the payment from 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).

The result for Fund 1 will be included as assessable 'applicable fund earnings' in your client's tax return for the income year in which it was received.

Calculation of the assessable amount of the payment from the Funds 2, 4 and 5

Similarly, the amounts to be used in calculating the applicable fund earnings for Funds 2, 4 and 5 include the amounts advised above for both the lump sum received (paragraph 305-75(3)(b) of the ITAA 1997) and the value in each fund on the day before your client became a resident of Australia (subparagraph 305-75(3)(a)(i). Further, for all these funds the following values also apply:

The result for each fund will be included as assessable 'applicable fund earnings' in your client's tax return for the income year in which it was received.

Calculation of the assessable amount of the payment from Fund 3

As stated in the facts, two separate payments were made due to an error during the initial transfer from Fund 3 to your client's complying fund. The applicable fund earnings will be calculated separately for each transfer made.

Lump sum payment 1

The amounts to be used in calculating the applicable fund earnings for the payment include the amounts advised above (paragraph 305-75(3)(b) of the ITAA 1997) and the value in the fund on the day before your client became a resident of Australia (subparagraph 305-75(3)(a)(i)). Further, the following values apply:

The result for this payment is zero and no 'applicable fund earnings' would be included in your client's tax return for the income year in which it was received.

Lump sum payment 2

The amounts to be used in calculating the applicable fund earnings for the payment include the amounts advised above (paragraph 305-75(3)(b) of the ITAA 1997). The start day for this payment, however, is the day after lump sum payment 1 was made (subsection 305-75(4) of the ITAA 1997).

The value to be used for subparagraph 305-75(3)(a)(i) of the ITAA 1997 is calculated by subtracting Lump sum payment 1 from the transfer value immediately before Lump sum payment 1 was paid.

This amount is then converted into Australian currency at the exchange rate that applied on the 'start date'.

Applying the method prescribed in subsection 305-75(3) of the ITAA 1997 to your payment, the amounts to be used in calculating the applicable fund earnings are as follows:

The result for this payment is zero and no 'applicable fund earnings' will be included in your client's tax return for the income year in which it was received.

Election

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 the taxpayer's marginal rate.

Your client can elect to have all or part of the 'applicable fund earnings' from Fund 1, Fund 2, Fund 4 and Fund 5 treated as assessable income of their complying Australian superannuation fund because immediately after the relevant payments were made, your client no longer had an interest in the foreign funds (subsection 305-80(1) of the ITAA 1997).

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 (subsection 305-80(3) of the ITAA 1997).

An amount that is covered by an election under section 305-80 of the ITAA 1997 will not be treated as either a concessional contribution or a non-concessional contribution to the Australian superannuation fund. Consequently, this amount will not count towards your concessional or non-concessional contributions caps for the relevant income year.

Conclusion:

An amount of 'applicable fund earnings' in respect of the lump sum payments received by your client and to be included in their assessable income in the 2010-11 income year have been calculated for Fund 1 and Fund 2.

The 'applicable fund earnings' in respect of the lump sum payments received by your client and to be included in their assessable income in the 2011-12 income year have been calculated for Fund 4 and Fund 5.

The 'applicable fund earnings' in respect of the lump sum payments paid from Fund 3 have been calculated as zero.

Consequently, no amounts of the lump sum payments from Fund 3 will be included in your client's assessable income.

Your client can elect to have all or part of the assessable 'applicable fund earnings' in 1, 2, 4 and 5 treated as assessable income of their complying Australian superannuation fund because immediately after the relevant payments were made, your client no longer had an interest in the foreign funds.

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