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Ruling

Subject: Lump sum payment from a foreign superannuation fund

Question

Is a portion of the lump sum payment transferred from a foreign superannuation fund into an Australian superannuation fund included in your assessable income as applicable fund earnings under section 305-70 of the Income Tax Assessment Act 1997?

Answer

No.

This ruling applies for the following period

Year ending 30 June 2013

The scheme commenced on

1 July 2012

Relevant facts

In the 2011-12 income year, you applied for a private ruling in respect of the transfer of your superannuation benefits from a foreign superannuation fund to an Australian superannuation fund. The notice of decision was issued in the 2011-12 income year.

The facts below are extracted from the previous private ruling:

· You ceased employment in an overseas country during 2005-06 income year.

· You became a resident of Australia for tax purposes in the 2005-06 income year.

· An overseas pension (the Pension Fund) was making the payment.

The Pension Fund was an employer sponsored pension fund. Your holdings within the Fund comprised three elements:

· X Scheme component;

· Y Scheme component with additional voluntary contributions (AVCs); and

· Z Scheme component.

The Members' Handbook for the Pension Fund includes a calculation of the pension where a member leaves the Pension Fund. As part of the formula for the calculation of the pension, if a member leaves before the Normal Retirement Date (the member's 65^th birthday) the part of the pension which exceeds the Guaranteed Minimum Pension will be increased in the period between the date of leaving service and Normal Retirement date by a specific per annum compound.

The value of the total benefits held within the Fund as at a specific date during the 2011-12 income year was an amount and were transferred on the same day.

The full transfer value of the benefits was rolled into a complying superannuation fund in Australia.

You no longer hold any interests in the Pension Fund.

You have not made any contributions to the Pension Fund since a specific date during the 2005-06 income year.

You advised your previous employer has not made any contributions to your X Scheme or Y Scheme since a specific date during the 2005-06 income year.

You are under 65 years of age.

Your normal retirement date is several years away.

A letter from the Pension Fund to the Australian superannuation fund during the 2011-12 income year stated that an amount will be transferred to a superannuation account during the 2011-12 income year. An amount relates to the Z Scheme component Transfer Value and an amount relates to the X Scheme component Transfer Value. In addition, the letter states there were nil AVCs in the payment.

The Transfer Value of the Z Scheme component as at a specific date during the 2005-06 income year is calculated to be an amount.

A statement from the Pension Fund states that the transfer value of the X Scheme as at a specific date during the 2005-06 income is an amount.

You stated that the total value of your AVC fund was an amount as at a specific date during the 2005-06 income year.

A letter from Pension Fund to the Australian superannuation as at a specific date during the 2012-13 income year state:

We have noticed that when we had transferred the taxpayer's benefit from the Pension Fund in the 2011-12 income year we omitted to include the taxpayer's AVC funds.

We have since disinvested the taxpayer's AVC fund with the Pension Fund and I am pleased to inform you that a payment of a [specific amount] in respect of the final transfer value of the taxpayer's AVC fund will be paid into the superannuation account as indicated on the transfer out form shortly.

The value of these benefits expressed as a percentage of the members lifetime allowance is [a specific] %.

…

You stated that the benefit in the AVC fund was fully divested and transferred to the Australian superannuation fund in the 2012-13 income year.

In a recent letter, the Australian superannuation fund confirmed that the transfer amount was credited to your account in the 2012-13 income year.

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 960-50(1).

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

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

Reasons for decision

Summary of decision

The 'applicable fund earnings' in respect of the lump sum payment paid from the overseas Pension Fund is calculated as zero.

Consequently, no amount of the lump sum payment from the Pension fund will be included in your assessable income in the 2012-13 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 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.

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 funds 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 the present case, you were a member of the overseas Pension Fund (the Pension Fund). The Pension Fund's central management and control is clearly not in Australia, so the Pension Fund is not an Australian superannuation fund as defined in subsection 295-95(2) of the ITAA 1997.

Based on the information provided, the Commissioner of Taxation considers that the Pension Fund is a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997.

Applicable fund earnings

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 a person has become an Australian resident.

You became a resident of Australia for tax purposes on a specific date (the residency date) in the 2005-06 income year. In the 2012-13 income year, your balance in the Pension Fund was transferred into an Australian superannuation fund. The date on which you transfer the lump sum benefit is more than six months after you became an Australian resident. Accordingly, a portion of the lump sum benefit will be assessable under section 305-70 of the ITAA 1997.

The amount included as assessable income is calculated under subsection 305-75(3) of the ITAA 1997 because you became an Australian resident after the start of the period to which the lump sum relates. Subsection 305-75(3) 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).

The calculation of this portion effectively means that you will be assessed only on the income earned while you were a resident of Australia. That is, you will only be assessed on the accretion in your benefits less any contributions made since you became a resident of Australia.

Furthermore, any amounts representative of earnings during periods of non-residency and certain capital amounts previously transferred 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. Together with the application of subsection 960-50(4) this has the result that the payment you received is translated into Australian dollars at the exchange rate applicable at the time of receipt. Similarly, the amount vested in you on the day before you became an Australian resident is converted to Australian dollars at the exchange rate that applied on that day.

Calculation of applicable fund earnings

You do not have the transfer value of the AVC fund on a specific date (the day before you became a resident of Australia). However, we have applied the same method as in your previous private ruling to work out your transfer value on the day before you became a resident of Australia, that is, a rate of increase in the fund of a specific percentage in the calculation of the applicable fund earnings for the AVC fund on the day before you became a resident of Australia.

A letter from the Pension Fund to the Australian superannuation fund during the 2012-13 income year stated that the total transfer value was an amount. Accordingly, to work out the transfer value on the residency date we reduce the amount by the specific% rate per annum. Therefore, the transfer value on the residency date is £X.

No contributions were made after the residency date. No transfers made were from other foreign superannuation funds.

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

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

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

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

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

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 to you.

The lump sum benefit payment is translated into Australian dollars at the exchange rate which prevailed on the payment date.

Under paragraph 305-75(3)(c) of the ITAA 1997, this result is then multiplied by the proportion of the days you were an Australian resident to the total number of days from the residency date until the date the payment was made. As the resident days and the total days are the same, 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.

Based on the above the applicable fund earnings in relation to your lump sum benefit is less than A$0.

As your applicable fund earnings in relation to the lump sum benefit is less than zero, there will not be any applicable fund earnings under subsection 305-75(3) of the ITAA 1997.

Therefore, no part of the payment received from the foreign fund will be included in your assessable income for the 2012-13 income year.

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