Edited version of private ruling

Authorisation Number: 1011478329477

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Ruling

Subject: Transfer of a superannuation benefit from a foreign superannuation fund

Question

What is the correct way to calculate applicable fund earnings under section 305-70 of the Income Tax Assessment Act 1997?

Answer

The applicable fund earnings is calculated by translating the amount received from the foreign superannuation fund into Australian currency at the exchange rate applicable on the day of receipt, and deducting from this amount the Australian currency equivalent of the amount vested in the foreign fund at the exchange rate applicable on the day just before the day you first became a resident of Australia.

This ruling applies for the following period:

Year ended 30 June 2010.

The scheme commences on:

1 July 2006.

Relevant facts and circumstances

You were previously a resident of a foreign country. Whilst residing in that country you were a member of a foreign superannuation fund (the foreign fund).

A number of years ago you ceased residing in that country and you became a resident of Australia for income tax purposes.

You advised the value of your benefit in the foreign fund at the date you became an Australian resident.

An amount was transferred from the foreign fund into your superannuation fund in Australia during the income year.

You advised the value of your benefit in your foreign fund as at the date this amount was transferred to your Australian superannuation fund.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 6-10(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 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) and

Income Tax Assessment Regulations 1997 Regulation 960-50.01.

Reasons for decision

Summary

A portion of the lump sum payment made by a foreign superannuation fund (the foreign fund), to your superannuation fund in Australia, is assessable as 'applicable fund earnings'. The applicable fund earnings is calculated by translating the amount received from the foreign fund at the exchange rate applicable on the day of receipt into Australian currency (AUD), and deducting from this amount the AUD equivalent of the amount vested in the foreign fund at the exchange rate applicable on the day just before the day you first became a resident of Australia.

Detailed reasoning

Lump sum payments transferred from foreign superannuation funds

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 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.

Assessable Amount

An amount was transferred from the foreign fund into your Australian superannuation fund during the income year.

You became a resident of Australia for income tax purposes several years ago and your benefit in the foreign fund was transferred a number of years later. The lump sum payment was made to your Australian fund more than six months after you became an Australian resident.

Your applicable fund earnings 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) 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:

· work out the total of the following amounts:

· 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;

· 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;

· 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;

· 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);

· multiply the resulting amount by the proportion of the total days during the period when you were an Australian resident;

· add the total of all previously exempt fund earnings (if any) covered by subsections (5) and (6).

For the purposes of paragraph 305-75(3)(a) of the ITAA 1997, the issue of bank charges does not arise. This amount is simply the value of your interest in the foreign superannuation fund.

Similarly, paragraph 305-75(3)(b) of the ITAA 1997 deals with the actual amount of the lump sum payment received from the foreign fund. This means that Australian bank charges do not reduce the amount transferred from the foreign fund.

Therefore any bank charges incurred in Australia as a result of transferring your pension benefit to your Australian fund do not reduce the amount that is assessable under subsection 305-75(3) of the ITAA 1997.

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 currency (AUD). The applicable fund earnings is the result of a calculation of two other amounts, and subsection 960-50(4) requires that when applying section 960-50 to amounts that are elements in the calculation of another amount you need to:

· first, translate any amounts that are elements in the calculation of other amounts (except special accrual amounts); and

· then, calculate the other amounts.

The table to subsection 960-50(6) of the ITAA 1997 sets out the translation rules.

Item 7 of the table in subsection 960-50(6) of the ITAA 1997 relates to an amount of statutory income and provides that:

an amount of statutory income that is received at or before the time when the requirement first arose to include the amount in a taxpayer's assessable income is to be translated to Australian currency at the exchange rate applying at the time of receipt; or

in any other case, the amount of statutory income is to be translated at the rate applying at the time when the requirement first arose to include the amount in a taxpayer's assessable income.

Statutory income is defined in subsection 6-10(2) of the ITAA 1997 as 'amounts that are not ordinary income, but are included in your assessable income by provisions about assessable income'. 'Applicable fund earnings' are statutory income.

Item 7 deals with the translation of an amount of statutory income. In this instance, the statutory income under consideration is represented by the difference between the lump sum on the day of payment and the amount vested on residency.

Each of these two amounts is a separate element in the calculation of another amount (statutory income) and requires translation prior to calculating that other amount as stated above. As neither of these amounts can be said to be statutory income, but each amount requires translation prior to calculating the statutory income, item 7 is not relevant to calculating the amount that is assessable as applicable fund earnings.

Instead, only items 11 and 11A of the table in subsection 960-50(6) of the ITAA 1997 are relevant to the calculation of your applicable fund earnings in this instance.

Item 11 applies to a receipt or payment where none of the other items of the table in subsection 960-50(6) of the ITAA 1997 applies. The lump sum payment from the foreign fund is not included in any of the other items in the table so it will fall within item 11.

Item 11 requires any receipt from a foreign superannuation fund to be translated to AUD at the exchange rate applicable at the time of receipt.

When your benefit in the foreign fund was transferred as a lump sum to your Australian fund, the benefit was received at the time the lump sum was paid. Under item 11 the lump sum payment is translated into AUD at the exchange rate applicable at the time of receipt.

Regulation 960-50.01 of the Income Tax Assessment Regulations 1997 (ITAR 1997) modifies the table in subsection 960-50(6) of the ITAA 1997 to include item 11A.

Item 11A applies to amounts, other than receipts and payments, to which none of the other items in the table other items apply. Under this item, the amount is translated into AUD at an exchange rate that is reasonable having regard to the circumstances.

When the amount in the foreign fund that was vested in you just before you 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.

As the vested amount is not a receipt or payment, and it is not an amount that would fall for consideration under any other item, item 11A will apply and so the vested amount is translated into AUD at the exchange rate which prevailed at the time you became an Australian resident.

Calculation of Assessable Amount

In order to calculate the applicable fund earnings in your case, you will need to obtain the values of each component mentioned in subsection 305-75(3) of the ITAA 1997.

Taking into account the information you provided:

· the total of the amounts in paragraph 305-75(3)(a) of the ITAA 1997 will equal the value of your benefit in the foreign fund at the date you became an Australian resident;

· the amount vested in you when the lump sum was paid by the foreign fund (as per paragraph 305-75(3)(b) of the ITAA 1997) will equal the value of the benefit transferred to your Australian fund at the time the lump sum was paid;

· the proportion specified in paragraph 305-75(3)(c) of the ITAA 1997 will equal 1 (because you did not become a member of the foreign fund after you became a resident of Australia, thus the resident days and the total days are the same); and

· the total of the amounts in paragraph 305-75(3)(d) of the ITAA 1997 will equal NIL.

The lump sum payment made during the income year is translated into AUD at the exchange rate applicable at the time the payment was received by your Australian fund.

The amount in the foreign fund that was vested in you when you first became an Australian resident, is translated into AUD at the exchange rate applicable on the day just before the day you became an Australian resident.

The difference between the AUD equivalent of the lump sum payment and the AUD equivalent of the vested amount is the applicable fund earnings worked out under subsection 305-75(3) of the ITAA 1997.