Edited version of private ruling

Authorisation Number: 1011520467922

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Ruling

Subject: Foreign superannuation fund payment

Issue 1:

1. Will any portion of the proposed transfer of benefits from an overseas pension scheme to an Australian complying superannuation fund be assessable under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes.

2. Are there any adjustments to be made due to the exchange rate difference between the exchange rate at the time of payment and the exchange rate when the taxpayer became a resident of Australia?

Yes.

This ruling applies for the following period:

1 July 2009 to 30 June 2010

The scheme commenced on:

1 July 2009

Issue 2:

Is the taxpayer entitled to any concessional tax treatment or foreign tax credits due to the Tax treaty between the overseas country and Australia?

No.

This ruling applies for the following period:

1 July 2009 to 30 June 2010

The scheme commenced on:

1 July 2009

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

Your client is under 65 years of age.

Your client became an Australian resident for tax purposes.

Your client was a member of the overseas pension scheme (the Scheme) that is an employer sponsored pension fund.

No personal or employer contributions were made to the Scheme since your client became an Australian resident.

A transfer value statement from the Scheme with a calculation date 20 months prior to the final payment, displays the available transfer value at that date.

The Scheme notified your client that the final transfer value of his account have been paid to your client's member account with the Australian complying superannuation fund (the Fund).

The Fund notified your client of the receipt of the transfer from the Scheme. The Fund stated the amount of the payment in foreign currency and Australian dollars.

Your client's financial planner tried to obtain the transfer value for your client's benefits with the Scheme on the day before he became an Australian resident, but the Scheme stated in a letter they were unable to provide this figure.

Assumption

The documentation provided has shown that you made reasonable attempts to find out your client's accumulated entitlement in the Scheme on the day your client became an Australian resident and that the fund could not provide that information.

You were able to provide two retirement statements prepared twenty months apart that stated the transfer values on those dates.

An estimated annual compound rate of growth is calculated from these figures.

In view of the above and the information provided, the Commissioner considers it is reasonable to assume that the annual rate of return from the date when your client became an Australian resident for tax purposes until the date of the final payment is the same annual rate.

Therefore, based on the assumed rate of return the Transfer Value on the day before your client became an Australian resident can be calculated.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 6-10(2).

Income Tax Assessment Act 1997 Section 295-95.

Income Tax Assessment Act 1997 Section 295-200.

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)(d).

Income Tax Assessment Act 1997 Subsection 305-75(5).

Income Tax Assessment Act 1997 Subsection 305-75(6).

Income Tax Assessment Act 1997 Section 305-80.

Income Tax Assessment Act 1997 Subsection 305-80(1).

Income Tax Assessment Act 1997 Paragraph 305-80(1)(b).

Income Tax Assessment Act 1997 Section 307-15.

Income Tax Assessment Act 1997 section 770-10

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).

International Tax Agreements Act 1953

Income Tax Assessment Regulations 1997 Regulation 960-50.01.

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Issue 1

Summary

The amount calculated as the applicable fund earnings, in relation to the lump sum benefit transferred from overseas pension scheme (the Scheme) to your client's Australian complying superannuation fund (the Fund), is to be included your client's assessable income for the 2009-10 income year.

Detailed reasoning

In order to determine whether an amount is assessable under subsection 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 subsection 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, the Scheme is a superannuation fund that is established in an overseas country. Its central management and control would ordinarily be outside of Australia. Therefore the Scheme is not an Australian superannuation fund as defined in subsection 295-95(2) of the ITAA 1997 and falls within the definition of foreign superannuation fund in subsection 995-1(1) of the ITAA 1997.

Lump sum payments made from a foreign superannuation fund

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 subsection 305-70(2) of the ITAA 1997. The applicable fund earnings is 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.

Section 305-60 of the ITAA 1997 will apply to treat the whole payment as not assessable income and not exempt income where:

· the lump sum payment is received within six months of a person becoming an Australian resident; and

· the payment only relates to a period:

o when you were an Australian resident; or

o starting after you became an Australian resident and ending before you received the payment; and

· it does not exceed the amount in the fund that was vested in you when you received the payment.

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) of the ITAA 1997 applies where the person was an Australian resident at all times during the period to which the lump sum relates. Subsection 305-75(3) of the ITAA 1997 applies where the person becomes an Australian resident after the start of the period to which the lump sum relates.

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 this case, your client became a resident of Australia for tax purposes and the lump sum payment was made over 20 years later (that is, more than six months after your client became an Australian resident). Therefore, the exemption under section 305-60 of the ITAA 1997 will not apply.

Consequently, a portion of your lump sum payment will be assessable under subsection 305-75(3) of the ITAA 1997.

This calculation effectively means that your client will be assessed only on the growth in the fund while your client was a resident of Australia. That is, your client will only be assessed on the increase in the fund less any contributions made since your client became a resident of Australia.

Further, any amounts representative of earnings/growth 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.

The amount included as assessable income, the applicable fund earnings, is worked out under subsection 305-75(3) of the ITAA 1997 because your client became an Australian resident after the start of the period to which the lump sum relates (that is, the date your client joined the Scheme).

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:

(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).

Subsection 305-75(5) defines previously exempt fund earnings as follows:

You have an amount of previously exempt fund earnings in respect of the lump sum if:

· part or all of the amount in the fund that was vested in you when the lump sum was paid (before any deduction for foreign tax) is attributable to the amount; and

· the amount is attributable to a payment received from a foreign superannuation fund; and

· the amount would have been included in your assessable income under subsection 305-70(2) by the application of this section, but for the payment having been received by another foreign superannuation fund.

Subsection 305-75(6) states:

The amount of your previously exempt fund earnings is the amount mentioned in paragraph (5)(c) (disregarding the addition of previously exempt fund earnings under subsection (2) or (3) of this section).

In this case, your client became a resident of Australia and was paid a lump sum payment from the Scheme. The Scheme advised your client that the value of the lump sum payment vested in your client on the day before he became a resident of Australia could not be calculated. You have agreed to the Commissioner calculating this Transfer Value from a derived rate of return. This calculation resulted in a vested amount.

As noted in the facts, no contributions have been made to the Scheme after your client became a resident of Australia.

In view of the preceding, the assessable amount is calculated as follows.

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

· amount of the lump sum payment vested in your client on the day before he became a resident of Australia

· contributions made to the Scheme for or by your client after he became a resident of Australia

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

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 payment to be made by the Scheme on the final payment date.

However, 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 currency (AUD).

Foreign currency conversion

The applicable fund earnings is the result of a calculation from two other amounts and subsection 960-50(4) of the ITAA 1997 states when applying section 960-50 to amounts that are elements in the calculation of another amount you need to:

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

2. 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:

3. item 7 which relates to an amount of statutory income

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

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

Item 7 of the table in subsection 960-50(6) of the ITAA 1997 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 client's assessable income by provisions about assessable income'.

However, item 7 deals with the translation of an amount of statutory income. 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.

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 payment your client finally receives 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 into AUD at the exchange rate applicable at the time of receipt.

When the amount in the Scheme that was vested in your client just before becoming 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 (ITAR) 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 amount received from the 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 amount vested in the fund at the exchange rate applicable just before the day your client first became an Australian resident (item 11A of the table to subsection 960-50(6)).

On the date your client became an Australian resident for tax purposes, the daily exchange rate for that day applied.

The transfer value is converted to Australian dollars using the exchange rate for that day.

On the date the benefits were to be transferred to your client's Fund account, the daily exchange rate for that day is applied to the amount of the benefit.

Applicable fund earnings

As stated above paragraph 305-75(3)(b) of the ITAA 1997 requires that the amount calculated above be subtracted from the total amount of the final lump sum payment to be made by the Scheme.

Therefore, the assessable amount of your client's benefit transferred from the Scheme is derived out of the total payment received in your client's Fund account.

Assessable amount and choice

In accordance with section 305-70 the applicable fund earnings is included in your client's assessable income.

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 elect under subsection 305-80(2) of the ITAA 1997 to have all or part of the applicable fund earnings treated as assessable income of the Australian superannuation fund.

In order to have the choice for your client's fund, rather than your client, to be taxed on the applicable fund earnings the following conditions must be satisfied:

· section 305-70 of the ITAA 1997 must apply to the superannuation lump sum being paid from a foreign superannuation fund because the payment is received more than six months after Australian residency commenced

· your client is treated as receiving the lump sum as expressed under section 307-15 of the ITAA 1997 as your client requested the Trust make the payment to a complying superannuation fund rather than to your client

· all of the lump sum must be paid into a complying superannuation fund and no part is received by your client

· immediately after the lump sum was paid into the complying superannuation fund, your client no longer has a superannuation interest in the foreign superannuation fund. A pension would be an interest in a superannuation fund

· subsection 305-80(3) of the ITAA 1997 states the election (the choice) must be in writing and must comply with any requirements specified in the regulations.

If the full amount of the payment is transferred to your client's complying superannuation fund and no choice is made, the applicable fund earnings are included in your client's assessable income and will be subject to marginal rates of tax. Any part of the applicable fund earnings that are chosen to be included in the assessable income of the complying superannuation fund are not included in your client's assessable income.

Issue 2

Detailed reasoning

To qualify for a foreign income tax offset (previously known as a "foreign tax credit") for an income year, the taxpayer must have paid foreign income tax on an amount that is included in their Australian assessable income for that year. As your client has made no such payment, your client is not entitled to a foreign income tax offset.

Further, in the tax treaty between the foreign country and Australia, there is no mention of the transfer of money between two superannuation funds.