Edited version of private ruling

Authorisation Number: 1011647073426

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Ruling

Subject: Lump sum payment from foreign superannuation fund

Issue

Question

Is any part of the lump sum payment transferred from a foreign pension scheme to an Australian superannuation fund assessable as applicable fund earnings under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Advice/Answers

Yes

This ruling applies for the following period

Year ending 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts

You are under 65 years of age.

You became a member of the foreign Pension Scheme (the Scheme) and commenced associated employment when you were not an Australian resident.

You are entitled to receive superannuation benefits comprising of a lump sum and pension from the Scheme when you reach 65 years of age.

Over 20 years ago, you ceased this employment and became an Australian resident for taxation purposes.

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

The Scheme provided you with an historic transfer value.

You no longer have any interest in the Scheme.

There have not been any amounts 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.

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

You are in the process of transferring your entitlements in the Scheme to the Fund.

Assumptions

Section 357-110 of Schedule 1 to the Taxation Administration Act 1953 (TAA) states:

If the Commissioner considers that the correctness of a private ruling or an oral ruling would depend on which assumptions were made about a future event or other matter, the Commissioner may:

· decline to make the ruling; or

· make such of the assumptions as the Commissioner considers to be most appropriate.

The documentation provided by you included your pension and lump sum entitlements and the annual rate applying to deferred benefits.

Based on these figures, the increase of your entitlement in the Scheme over this period was calculated.

Therefore, applying this rate of return to the total transfer value, the total transfer value at on the day immediately before your date of residency was calculated.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 295-95

Income Tax Assessment Act 1997 Section 305-70

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 Subsection 960-50(6)

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

Reasons for decision

Summary of decision

Your applicable fund earnings in respect of the amount transferred from the foreign Pension Scheme (the Scheme) and received by an Australian superannuation fund (the Fund) was calculated.

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 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 foreign Pension Scheme (the Scheme) is a foreign superannuation fund, with its central management and control 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.

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 the lump sum payment was received more than six months after you became an Australian resident. Therefore, a portion of the lump sum payment will be assessable under subsection 305-75(3) of the ITAA 1997.

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.

Further, any amounts representative of earnings during periods of non-residency and 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 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).

In your case, the amounts in paragraph 305-75(3)(a) of the ITAA 1997 are calculated as follows:

· the lump sum vested in you on residency date was calculated;

· contributions made to the Scheme for or by you after becoming an Australian resident is NIL;

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

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. 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:

(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 in 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 payment you finally received 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 Australian dollars at the exchange rate applicable at the time of receipt.

When the amount in the foreign fund that was vested in you just before you become 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 Australian dollars 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 foreign fund at the exchange rate applicable on the day of receipt to Australian dollars (item 11 of the table to subsection 960-50(6)) and deducting from this amount the Australian dollars equivalent of the amount vested in the 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 of assessable amount of the payment from a foreign superannuation fund

As determined above, the total of the amounts mentioned in paragraph 305-75(3)(a) of the ITAA 1997 was calculated. This amount is to be translated into Australian dollars at the exchange rate applicable on the day just before the day you became an Australian resident.

Paragraph 305-75(3)(b) of the ITAA 1997 requires that the amount calculated be subtracted from the total amount of the lump sum payment made to you by the Fund. However, before this can be done the total amount of the lump sum payment is translated into Australian dollars at the exchange rate applicable at the time the payment is received by you.

Under paragraph 305-75(3)(c) of the ITAA 1997, the result above is multiplied by proportion of days you were a resident to the total number of days from when you were a resident until the date the payment was made. In your case, the resident days and the total days are the same, and so 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). In your case, there are no previously exempt fund earnings.

Accordingly, the applicable fund earnings can be calculated.

Election

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 part of the payment treated as assessable income of the Australian superannuation fund.

As a result, the amount specified in the election notice will be included as assessable income of the superannuation fund and subject to tax at 15% rather than being included in the taxpayer's assessable income and subject to tax at the taxpayer's marginal rate.

To qualify, the taxpayer must, immediately after the relevant payment is made, no longer have an interest in the paying fund under subsection 305-80(1) of the ITAA 1997.

As you no longer have an interest in the Scheme you are eligible to make the election.