Edited version of private ruling

Authorisation Number: 1011508906324

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Ruling

Subject: Foreign Superannuation Lump Sum Payment

Question

Is any part of the lump sum payment you received from your overseas pension fund assessable under section 305-70 of the Income Tax Assessment Act 1997?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 2009

The scheme commences on:

1 July 2008

Relevant facts and circumstances

You were employed by the overseas employer.

You also became a member of the employer's pension fund (the Pension Fund).

You received a lump sum payment from the pension fund more than six months after you became a resident of Australia for tax purposes.

You are also in receipt of a monthly pension from the Pension Fund.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 295-95

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 subsection 305-70(2)

Income Tax Assessment Act 1997 section 305-75

Income Tax Assessment Act 1997 subsection 305-75(1)

Income Tax Assessment Act 1997 subsection 305-75(3)

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

Income Tax Assessment Act 1997 subsection 960-50(6)

Income Tax Assessment Act 1997 section 995-1

Income Tax Assessment Regulations 1997 regulation 960-50.01

Reasons for decision

Summary

A portion of the lump sum payment you received from the Pension Fund in the overseas country is assessable as 'applicable fund earnings'. The applicable fund earnings represents the increase or growth in the fund during the period you were a resident of Australia.

The applicable fund earnings is calculated by translating the amount received from the Pension Fund at the exchange rate applicable on the day of receipt into Australian dollars (AUD), and deducting from this amount the AUD equivalent of the amount vested in the Pension Fund on the day just before you first became an Australian resident at the exchange rate applicable on that day.

Detailed reasoning

From 1 July 2007, the applicable fund earnings in relation to a lump sum payment from a foreign superannuation fund that is received or transferred 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 applicable fund earnings are 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 apply to the payment received.

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.

In the present case, it is evident that the Pension Fund is not an Australian superannuation fund as defined in subsection 295-95(2) of the ITAA 1997. The fund is, however, considered to be a foreign superannuation fund.

Calculation of 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 becoming an Australian resident.

In your case, as you received the payment more than six months after becoming an Australian resident, the exemption under section 305-60 of the ITAA 1997 will not apply. Therefore, a portion of your lump sum payment will be assessable under section 305-70.

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

Further, 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.

The amount included as assessable income, is worked out under subsection 305-75(3) of the ITAA 1997 because you were not an Australian resident at all times during 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).

Foreign currency conversion

It should be noted that subsection 960-50(1) of the ITAA 1997 states that an amount in a foreign currency is to be translated into Australian dollars (AUD). The applicable fund earnings is the result of a calculation from two other amounts and subsection 960-50(4) states 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. Only the following items are relevant to determining the issue in your case:

· item 11 which deals with a receipt or payment to which none of the other items apply, and

· item 11A which applies to amounts that are neither receipts nor payments and to which none of the other items apply.

The payment you received is not included in any of the other items in the table so it will fall within item 11 of the table in subsection 960-50(6) of the ITAA 1997. Under this item, the payment is translated into AUD at the exchange rate applicable at the time of receipt.

When the amount in the Pension 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.

Regulation 960-50.01 of the Income Tax Assessment Regulations 1997 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 AUD 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 lump sum amount received from the Pension Fund at the exchange rate applicable on the day of receipt to AUD (item 11 of the table to subsection 960-50(6)); and

deducting from this amount the AUD equivalent of the lump sum amount vested in the Pension Fund at the exchange rate applicable just before the day you first became an Australian resident (item 11A of the table to subsection 960-50(6)).

Calculation

Paragraph 305-75(3)(b) of the ITAA 1997 requires that the vested net amount calculated below be subtracted from the transfer value on the day of payment.

This result is then multiplied by the proportion of days you were a resident to the total number of days from when you became a resident for Australian tax purposes until the date when the vested amount was paid.

You maintained your Australian residency status throughout the whole period from when you first became a resident to when the payment was received. Therefore the proportion of days as mentioned above is equal to 1.