Edited version of private ruling

Authorisation Number: 1011510008811

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Ruling

Subject: Lump sum payment from an overseas pension scheme

Question

Is a portion of a lump sum payment received from an overseas pension scheme, included in your assessable income 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 over 60 years of age. You lived in a foreign country and were employed by a foreign employer until you ceased employment a number of years ago.

When you commenced employment you joined a foreign pension scheme. The pension scheme is a final salary related occupational pension scheme.

The pension scheme is a non contributory pension scheme for members, and you make no direct contributions towards your basic benefits under the pension scheme. You have not made any contributions to the pension scheme either before or after arriving in Australia.

No contributions have been made to the pension scheme by an employer on your behalf.

Under the rules of the pension scheme you are entitled to pension benefits provided that you have at least two years' service. Your benefits are based on your final salary and your service.

When you reach your 60^th birthday, you become entitled to a lump sum payment. The payment is a one off lump sum equal to three times your annual pension from the pension scheme.

The payment is made in addition to your annual pension and is normally tax-free in the foreign country.

A few years later, the pension scheme advised that on leaving the employer you became entitled to a preserved pension and a preserved lump sum payment.

These benefits were preserved until you reached age 60, and you did not access and receive any benefits from the pension scheme prior to your 60^th birthday.

You arrived in Australia and became a resident of Australia for tax purposes some time ago.

A number of years after you became an Australian resident, the pension scheme provided you with details of the values of your preserved pension and preserved lump sum payment benefits.

In the relevant quarter of the 200X-0Y income year a letter was sent to you by the pension scheme. In this letter you were advised that when you turned age 60, you were awarded an annual pension and a lump sum payment.

A number of weeks later the lump sum payment was credited to your bank account in Australia.

Assumption

You are unable to provide the values of your preserved pension and your preserved lump sum payment entitlements on the day immediately before the residency date.

From the documents you have provided an annual average rate of return in the Pension Scheme has been determined. The Commissioner will assume that this is the annual average rate of return in the pension scheme in the pension scheme between the residency date and the date the lump sum payment was received. The Commissioner is prepared to make this assumption based on the figures you have provided. Based on this assumption, the value of lump sum payment on the residency date can be estimated.

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(2),

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

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 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 you received from the foreign pension scheme is assessable as 'applicable fund earnings'. The applicable fund earnings represents the increase or growth in the pension scheme during the period you are a resident of Australia.

The applicable fund earnings is calculated by translating the lump sum payment received from the pension scheme at the exchange rate applicable on the day of receipt into Australian dollars, and deducting from this amount the Australian dollar equivalent of the lump sum payment on the day just before the residency date at the exchange rate applicable on that day.

The applicable fund earnings are assessable in Australia notwithstanding that the lump sum payment is normally tax-free in the foreign country.

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 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.

It is evident that the pension scheme established in the foreign country is not an Australian superannuation fund as defined in subsection 295-95(2) of the ITAA 1997. Therefore, the pension scheme is a foreign superannuation fund as defined in subsection 995-1(1).

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 tax purposes many years ago. The lump sum payment was made to you during the 200X-0Y income year. The payment was made more than six months after you became an Australian resident. Accordingly, a portion of the payment 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 in the pension scheme while you were a resident of Australia. That is, you will only be assessed on the accretion in the pension 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 dollars (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. 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.

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 lump sum payment from the pension scheme 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 to AUD at the exchange rate applicable at the time of receipt.

It is accepted that the benefit was received at the time the lump sum payment was credited to your Australian bank account.

When the amount of the lump sum that was vested in you just before the residency date (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 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, to which none of the other items apply. Under this item, the 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 payment received from the pension scheme 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 vested in the pension scheme at the exchange rate applicable just before the residency date (item 11A of the table to subsection 960-50(6)).

Calculation of Assessable Amount

The lump sum payment is a one off lump sum equal to three times the annual pension awarded under the pension scheme. The payment is made in addition to your annual pension.

You could not provide the values of your preserved pension and your preserved lump sum payment entitlements on the day immediately before the residency date.

From the documents provided, the annual average rate of return in the pension scheme has been determined. The Commissioner considers it reasonable to assume that this rate is the annual average rate of return in the pension scheme between the residency date and the payment date.

Based on this assumption, the value of the lump sum payment on the residency date has been calculated. This amount is the estimated amount of the lump sum payment that was vested in you on the day before the residency date.

You made no contributions to the pension scheme either before or after the residency date. Further, no contributions have been made to the pension scheme by an employer on your behalf. No transfers were made to the pension scheme from other foreign superannuation funds.

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 pension scheme for or by you after you became an Australian resident; and

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

The amount of the lump sum payment that was vested in you at your residency date is translated into AUD at the exchange rate applicable on the day before the residency date.

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

Under paragraph 305-75(3)(c) of the ITAA 1997, 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 lump sum payment from the pension scheme

The amount determined above is assessable in accordance with subsection 305-70(2) of the ITAA 1997. Although the lump sum payment is normally tax-free in the foreign country, the applicable fund earnings are assessable in Australia in accordance with paragraph 305-70(2)(a) of the ITAA 1997. Further, this assessable income is taxed at your marginal rate of tax.

The remainder of the lump sum payment 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.