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Ruling

Subject: Lump sum payment from foreign superannuation fund

Question

Is any portion of the lump sum payment from a foreign superannuation fund assessable as applicable fund earnings under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer: No.

This ruling applies for the following period

Year ending 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts

You are under 60 years of age.

You became a member of an overseas Pension Scheme (the Scheme) and commenced employment associated with the Scheme, when you were a resident of a foreign country.

Upon reaching retirement age, you were entitled to receive superannuation benefits comprising of a lump sum and pensions from the Scheme.

You ceased this employment and then became an Australian resident for taxation purposes.

You received a statement from the Scheme that outlined your entitlement to an annual pension and a lump sum payment on leaving the Scheme, as well as the final total transfer value of your benefit.

You are a member of a complying superannuation fund (the Fund).

The Fund acknowledged receiving a transfer payment from the Scheme.

You were unable to obtain the per annum value of your deferred pension benefit on or about residency date from the Scheme.

Documents provided show your deferred entitlements in the Scheme increased in accordance with RPI.

You no longer had any interest in the Scheme, including any pension, after you transferred your entitlements to the Fund.

No amounts were transferred into the Scheme from any other foreign superannuation fund since you became an Australia resident.

No contributions have been made to the Scheme since you became a resident of Australia.

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 Section 305-75.

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 Subsection 960-50(1).

Income Tax Assessment Act 1997 Subsection 960-50(6).

Income Tax Assessment Act 1997 Subsection 995-1(1).

Taxation Administration Act 1953 Section 357-110.

Reasons for decision

Summary

A portion of any lump sum payment transferred from a foreign superannuation fund is assessable as 'applicable fund earnings'. The applicable fund earnings is calculated by translating the payment received from the foreign superannuation fund at the exchange rate applicable on the day of receipt into Australian dollars, and deducting from this amount the Australian dollar equivalent of the payment on the day just before the residency date at the exchange rate applicable on that day.

Because the applicable fund earnings in your case is $NIL, the entire payment is not assessable income and is not exempt income.

Consequently, a choice to have your fund pay the income tax in respect of your foreign lump sum payment will have no effect.

Detailed reasoning

Lump sum payments 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 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) 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.

Before determining whether an amount is assessable under subsection 305-70(2) 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(2) 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) 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 Scheme, which is established overseas, is not an Australian superannuation fund as defined in subsection 295-95(2) of the ITAA 1997. Based on the information provided, the Commissioner accepts that the Scheme is a foreign superannuation fund, as defined in subsection 995-1(1) of the ITAA 1997.

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.

You became a resident of Australia for tax purposes and your deferred pension benefit was transferred from the Scheme into your Fund. The lump sum payment was made by the Scheme to the Fund more than six months after you became an Australian resident.

Accordingly, the applicable fund earnings in relation to the lump sum payment is assessable under section 305-70 of the ITAA 1997.

The 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:

(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 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 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:

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

(b) 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 Scheme is not included in any of the other items in the table. Therefore the payment will fall within item 11. Under this item, the payment is translated to AUD at the exchange rate applicable at the time of receipt.

When the amount of the lump sum payment that was vested for 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, in this case, pounds sterling.

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, your applicable fund earnings should be calculated by:

translating the lump sum payment received from the Scheme at the exchange rate applicable on the day of receipt by the Fund to AUD (item 11 of the table to subsection 960-50(6)); and

deducting from this amount the AUD equivalent of the payment vested in the Scheme at the exchange rate applicable just before the residency date (item 11A of the table to subsection 960-50(6)).

Calculation of Applicable Fund Earnings

The Scheme has not provided you with the per annum value of your deferred pension benefit on the day immediately before the residency date.

Documents provided show your entitlements in the Scheme increased in accordance with the RPI. Between the residency date and the payment date, the RPI increased and the Commissioner will assume that the transfer value of your deferred pension benefit increased by the same amount.

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

Therefore, the total of the amounts mentioned in paragraph 305-75(3)(a) of the ITAA 1997 was derived, comprising:

· the amount of the lump sum payment vested in you on the date you became an Australian resident for tax purposes;

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

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

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

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 made by the Scheme.

The lump sum payment is translated into AUD at the exchange rate applicable at the time it was received by the Fund. The payment was received into your Fund on this date.

Under paragraph 305-75(3)(c) of the ITAA 1997, this result is then multiplied by the proportion of the days you were an Australian resident to the total number of days from the residency date until the date the payment was made. As the resident days and the total days are the same, the proportion to be used in the calculation 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 your case, there are no previously exempt fund earnings.

Subsection 305-75(3) of the ITAA 1997 states that the applicable fund earnings is the amount worked out under this provision which is not less than zero. In this instance, the amount worked out is less than zero. Accordingly the applicable fund earnings under subsection 305-75(3) is NIL.

Consequently, the entire payment from the Scheme is not assessable income and is not exempt income, in accordance with subsection 305-70(3) of the ITAA 1997.

Choice

It is noted that you intend to choose to have the Fund include your applicable fund earnings in its assessable income, rather than pay tax on it yourself. However as discussed above, the applicable fund earnings relating to your foreign lump sum payment is NIL. Thus none of this lump sum payment needs to be included in assessable income under subsection 305-70(2) of the ITAA 1997.

Consequently, a choice you make under section 305-80 of the ITAA 1997 in respect of the payment will have no effect.