Edited version of private ruling

Authorisation Number: 1011497350225

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Ruling

Subject: Transfer of superannuation benefits from an overseas pension scheme

Question

Is a portion of a lump sum payment transferred from an overseas pension scheme to an Australian complying superannuation fund, assessable as applicable fund earnings under section 305-70 of the Income Tax Assessment Act 1997?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 2009.

The scheme commences on:

1 July 2008.

Relevant facts and circumstances

You are under 50 years of age, and you were previously a resident of a foreign country. Whilst residing in that country you were a member of a foreign pension scheme (the scheme).

You had a pension account in the scheme. You made no contributions to your pension account after income year Y.

You received a letter from the scheme in early September of the relevant year, in which you were advised of the values for your pension account as at the commencement of the relevant calendar year.

You became a resident of Australia for income tax purposes during income year Y.

In early March you commenced a superannuation account in your Australian complying superannuation fund (the fund).

In a yearly statement for your pension account issued by the scheme for the period ended mid July of income year X, you were advised of the transfer value of your benefit in the scheme at that time. You were also advised that no payments were made into your pension account during this period.

In early September of income year X a letter was sent by the scheme to the fund trustee. In this letter the scheme advised that you had chosen to transfer the value of your pension policy to the fund.

A cheque for the lump sum payment transferred by the scheme was enclosed with this letter. After your pension benefit was transferred to the fund your pension account in the scheme was closed.

The letter from the scheme was date stamped as being received by the fund trustee on the transfer date several days later. In addition, an internal document shows the transfer date as the effective receipt date of the cheque, which was cashiered on the next day.

A statement of account issued by the fund for income year X shows that a foreign fund amount for the transfer of your benefit from the scheme was credited to your superannuation account on the transfer date.

At the time the lump sum payment was received by the fund in Australia, you lodged a choice notice with the fund, showing the entire payment as being subject to tax in the hands of the fund.

You state that this amount was claimed in error on the choice notice as it is the full amount of the payment and not the taxable amount. You assert that the taxable amount is the growth component on the amount transferred. You are seeking a refund of tax overpaid by the fund in relation to the payment. You understand that such a refund must be paid back into your superannuation account.

You have contacted the fund trustee, however the fund trustee will not process the refund.

Assumption

The scheme did not provide you with the value of your accrued entitlement in your pension account on the date you became an Australian resident for income tax purposes. You received a letter from the scheme in which you were advised of the values for your account as at the commencement of the relevant calendar year.

The Commissioner is prepared to make an assumption about the rate of return in the scheme between the day you became a resident of Australia and the date the lump sum payment was received by the fund in Australia. The Commissioner will assume that this rate is the annual average rate of return in the scheme between the residency date and the payment date.

Based on this assumption, the transfer value of your pension benefit on the residency date can be estimated.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 295-95(2),

Income Tax Assessment Act 1997 Subsection 295-200(2),

Income Tax Assessment Act 1997 Subsection 295-200(3),

Income Tax Assessment Act 1997 Section 305-70,

Income Tax Assessment Act 1997 Subsection 305-70(2),

Income Tax Assessment Act 1997 Paragraph 305-70(2)(b),

Income Tax Assessment Act 1997 Subsection 305-70(3),

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 305-80,

Income Tax Assessment Act 1997 Subsection 305-80(2),

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),

Income Tax Assessment Act 1997 Subsection 995-1(1) 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 pension scheme (the scheme) to an Australian complying superannuation fund (the fund) is assessable as 'applicable fund earnings'.

The applicable fund earnings is calculated by translating the amount received from the scheme 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 scheme at the exchange rate applicable on the day before the day you first became a resident of Australia.

The difference between the AUD equivalent of the amount received from the scheme and the AUD equivalent of the amount that was vested in you when you first became an Australian resident, is included in the entire payment disclosed on the choice notice you have lodged with the fund.

The amount shown on the choice notice exceeds the applicable fund earnings in relation to the lump sum. Therefore, the choice notice must be amended to show the applicable fund earnings.

The remainder of the lump sum is not assessable income and is not exempt income. As such, this amount is tax-free.

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.

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 of the ITAA 1997 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 superannuation fund is a foreign superannuation fund at a time if the fund is not an Australian superannuation fund at that time; and

· 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:

· the fund was established in Australia, or any asset of the fund is situated in Australia at that time; and

· at that time, the central management and control of the fund is ordinarily in Australia; and

· at that time either the fund had no member covered by subsection (3) (an active member) or at least 50% of:

· the total market value of the funds assets attributable to superannuation interests held by active members; or

· 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.

It is evident that the scheme, a pension scheme established in the foreign country, is not an Australian superannuation fund as defined in subsection 295-95(2) of the ITAA 1997. Its central management and control would ordinarily be outside of Australia. Therefore, the scheme is a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997.

Assessable Amount

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 income tax purposes during income year Y. A lump sum payment was transferred from the scheme into your Australian superannuation fund during income year X. The lump sum payment was made to your Australian fund more than six months after you became an Australian resident.

Thus a portion of the payment will be assessable under section 305-70 of the ITAA 1997. The intent of the section is to include in assessable income that portion of a lump sum payment from a foreign fund that is taken to have accrued during the period the recipient is a resident of Australia. That is, the section requires measurement of the growth in the fund between two points in time - the time the taxpayer became a resident and the time the amount was transferred to Australia.

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) 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).

The calculation of this portion effectively means that you will be assessed only on the income earned in the scheme while you were a resident of Australia. That is, you will only be assessed on the accretion in the scheme 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 currency (AUD). The applicable fund earnings is the result of a calculation from 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. In this instance, only items 11 and 11A of the table in subsection 960-50(6) of the ITAA 1997 are relevant to the calculation of the applicable fund earnings.

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 scheme 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 pension benefit in the scheme was transferred as a lump sum to the fund, the benefit was received at the time the lump sum was paid. Under item 11 the 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 scheme 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, in this case, pounds sterling.

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 of your pension benefit is translated into AUD at the exchange rate which prevailed at the time you became an Australian resident.

Calculation of Applicable Fund Earnings

The scheme did not provide you with the value of your accrued entitlement in your pension account on the day immediately before the residency date. The values for your pension account as at the commencement of the relevant calendar year were advised in a letter you received from the scheme.

From the documents provided, the annual average rate of return in the scheme between the day you became a resident of Australia and the date the lump sum payment was received by the fund has been determined. The Commissioner considers it reasonable to assume that this rate is the annual average rate of return in the scheme between the residency date and the payment date.

Based on this assumption, the transfer value of your pension benefit on the residency date has been estimated. This is the amount that was vested in you on the day before the residency date.

You made no contributions to your pension account after income year Y. Accordingly, it is accepted that no contributions were made to the scheme for you or by you after you became an Australian resident, and that no transfers were received from other foreign superannuation funds prior to the transfer.

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

· the amount of the lump sum payment vested in you on the day before became a resident of Australia for tax purposes;

· contributions made to the scheme for or by you after you became an Australian resident; and

· the amount transferred into the scheme from any other foreign superannuation fund.

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

The amount calculated above is subtracted from the total amount of the lump sum payment made by the scheme (paragraph 305-75(3)(b) of the ITAA 1997). The lump sum payment is translated into AUD at the exchange rate applicable at the time it was received by the fund in Australia. Thus the AUD equivalent of the vested amount is subtracted from the AUD equivalent of this payment.

The result above is multiplied by the proportion of the days you were an Australian resident to the total number of days from when you became an Australian resident until the date the payment was made. In this case, the resident days and the total days are the same, and so the proportion 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 this case, there are no previously exempt fund earnings.

Assessable amount of the payment from the Scheme

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.

Subsection 305-70(2) of the ITAA 1997 provides that the assessable part of the lump sum payment is either the applicable fund earnings calculated under subsection 305-75(3), or if you have made a choice under section 305-80 of the ITAA 1997, the applicable fund earnings less the amount covered by the choice.

Choice

From 1 July 2007, 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 choose under section 305-80 of the ITAA 1997 to have all or part of the lump sum payment treated as assessable income of the Australian superannuation fund.

Section 305-80 of the ITAA 1997 states:

This section applies if:

· section 305-70 applies to a superannuation lump sum that is paid from a foreign superannuation fund; and

· you are taken to receive the lump sum under section 307-15; and

· all of the lump sum is paid into a complying superannuation fund; and

· immediately after the lump sum is paid into the complying superannuation fund, you no longer have a superannuation interest in the foreign superannuation fund.

You may choose for all or part of your applicable fund earnings worked out under section 305-75 (but not exceeding the amount of the lump sum) to be included in the assessable income of the complying superannuation plan.

Your choice:

· must be in writing; and

· must comply with the requirements (if any) specified in the regulations.

Applicable fund earnings assessable in an Australian complying superannuation fund are taxed at a rate of 15%, while applicable fund earnings assessable to a taxpayer personally are taxed at the taxpayer's normal rates of tax.

Your pension account in the scheme was closed after the lump sum payment was credited to your superannuation account in your Australian complying superannuation fund on the transfer date.

You no longer retain any entitlements in the scheme after your pension benefit was transferred.

As you no longer have an interest in the scheme, you are eligible to make a choice in respect of the lump sum payment. As noted above, subsection 305-80(2) of the ITAA 1997 provides that you may choose for all or part of the applicable fund earnings to be included in the assessable income of the fund.

The amount you specify in making the choice under subsection 305-80(2) is included in the assessable income of the fund under subsection 295-200(2) of the ITAA 1997.

Choice Notice lodged with the Fund

In the choice notice you lodged with the fund, you showed the full amount of the payment as being subject to tax in the hands of the fund.

As such, you made a choice under subsection 305-80(2) of the ITAA 1997 that the entire payment is to be treated as assessable income of the fund. This amount includes all of the applicable fund earnings in relation to the payment.

As all of the applicable fund earnings are covered by the choice notice, none of this amount is included in your assessable income in accordance with paragraph 305-70(2)(b) of the ITAA 1997.

In addition, the amount shown on the choice notice is included in the assessable income of the fund in accordance with subsection 295-200(2) of the ITAA 1997. This means that the tax paid on the amount specified in the choice notice represents a tax liability paid by the superannuation fund and not a tax liability paid by you. Consequently the fund, rather than you, will pay tax at the fund's tax rate (generally 15%) arising on the payment, rather than at your marginal rate of tax.

As the lump sum was transferred to the fund during income year X, the amount specified in the choice notice is included in the assessable income of the fund for this income year under subsection 295-200(3) of the ITAA 1997. Further, the amount covered by the choice notice will not be treated as either a concessional contribution or a non-concessional contribution made by you to the fund.

As a result, this amount will not count towards either your concessional contributions cap or your non-concessional contributions cap for income year X.

You state that the entire lump sum payment was incorrectly shown on the choice notice. Therefore, you are seeking a refund of tax overpaid by the fund in relation to the payment. At this point it should be noted that the tax paid by the fund on the portion of its assessable income relating to the payment cannot be refunded to you directly. In this light, you understand that if such a refund is allowable in this instance, the refund must be paid back into your superannuation account.

As noted previously, you may choose for all or part of the applicable fund earnings worked out under section 305-70 of the ITAA 1997 (but not exceeding the amount of the lump sum) to be included in the assessable income of the fund in accordance with subsection 305-80(2) of the ITAA 1997. The amount shown on the choice notice does not exceed the amount of the lump sum payment received by the fund. However, this amount exceeds the applicable fund earnings of calculated in relation to the lump sum payment under subsection 305-75(3) of the ITAA 1997.

Accordingly, the fund trustee should notified that the choice notice must be amended to show the applicable fund earnings The remainder of the lump sum is not assessable income and is not exempt income in accordance with subsection 305-70(3) of the ITAA 1997. As such, this amount is tax-free.