Edited version of private ruling

Authorisation Number: 1011666190851

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Ruling

Subject: Lump sum payment from a foreign superannuation fund

Question 1

Is any part of the transfer of benefits made from a foreign superannuation scheme (the Fund) to a complying Australian superannuation fund assessable as applicable fund earnings?

Answer: Yes.

Question 2

Is any part of the benefits made from the Fund to be included in your assessable income as applicable fund earnings?

Answer: Yes.

This ruling applies for the following period:

Year ending 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

You are less than 65 years of age.

When you were an overseas resident and employee you transferred your benefits from your employer's pension scheme to a personal pension policy in an overseas fund (the Fund).

You ceased your overseas employment and over ten years ago you became an Australian resident for taxation purposes.

The value of your benefits in the Fund at the time that you became an Australian resident has been provided.

Subsequent to you becoming an Australian resident you were advised that there was a review of the Fund.

As a result of the review, you were made an offer of compensation (the payment) and this was added to your benefits in the Fund. The payment was designed to compensate you for financial losses incurred.

You state that the Fund does not allow for the early release of benefits for purposes other than retirement.

In the 2010-11 income year a lump sum payment from the Fund was deposited to your complying Australian superannuation fund. The lump sum payment represented all your benefits in the Fund.

Since you became an Australian resident no contributions were made by you or anyone on your behalf to the Fund.

Since lodging your application for a private ruling you have elected for the Australian superannuation fund to treat part of the lump sum payment as assessable income.

Relevant legislative provisions

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

Income Tax Assessment Act 1997 Subsection 295-95(2).

Income Tax Assessment Act 1997 Section 305-60.

Income Tax Assessment Act 1997 Section 305-70.

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 Paragraph 305-80(1)).

Income Tax Assessment Act 1997 Paragraph 305-80(2)).

Income Tax Assessment Act 1997 Paragraph 305-80(3)).

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).

Income Tax Assessment Regulations 1997 Regulation 960-50.01

Superannuation Industry (Supervision) Act 1993 Section 10.

Reasons for decision

Summary

A portion of the lump sum payment, made by your foreign superannuation fund to your complying Australian superannuation fund, is assessable as 'applicable fund earnings'. The applicable fund earnings represents the increase or growth in the foreign fund during the period you were a resident of Australia.

The applicable fund earnings is calculated by translating the amount received from the foreign 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 amount vested in the foreign fund on the day just before you first became an Australian resident at the exchange rate applicable on that day.

Detailed reasoning

Lump sum payments from foreign superannuation funds:

From 1 July 2007, the applicable fund earnings in relation to a lump sum payment (LSP) 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 LSP 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:

(b) a superannuation fund is a foreign superannuation fund at a time if the fund is not an Australian superannuation fund at that time; and

(c) 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.

Subsection 995-1(1) of the ITAA 1997, defines a superannuation fund as having the meaning given by section 10 of the Superannuation Industry (Supervision) Act 1993 (SIS Act), that is:

(a) a fund that:

(i) is an indefinitely continuing fund; and

(ii) is a provident, benefit, superannuation or retirement fund; or

(b) a public sector superannuation scheme;

Based on the information provided, it is considered that the overseas fund (the Fund), which is established in an overseas country, is a foreign superannuation fund.

Calculation of Assessable Amount

In this case you became a resident of Australia for tax purposes more than ten years ago and you transferred your benefits in the Fund to an Australian superannuation fund, more than six months after you became an Australian resident. Therefore, the exemption under section 305-60 of the ITAA 1997 will not apply.

Accordingly, a portion of your lump sum payment is assessable under section 305-70 of the ITAA 1997.

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

Further, 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 an overseas benefit is paid.

As you became an Australian resident after the start of the period to which the lump sum relates, the amount included as assessable income, and taxed at marginal rates of tax, is worked out under subsection 305-75(3) of the ITAA 1997.

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 payment you received as compensation is considered to represent lost earnings in the fund. As you were not entitled to this amount before you became a resident of Australia, the whole of the payment will be included in the amount vested in you under paragraph 305-75(3)(b) of the ITAA 1997.

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) 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 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 7 which relates to an amount of statutory income

· 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 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 assessable income by provisions about assessable income'.

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 you finally receive 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 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 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

In your case, the assessable amount is calculated as follows:

· the total of the amount in paragraph 305-75(3)(a) of the ITAA 1997 will equal the value of your benefit in the foreign fund on the day before you became an Australian resident.

The value of the benefits on that date are translated into Australian dollars at the exchange rate which applied on that date.

· the amount vested in you when the lump sum was paid by the foreign fund (as per paragraph 305-75(3)(b) of the ITAA 1997) will equal the amount credited to your account with the Australian superannuation fund;

· the result above is multiplied by the 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 (paragraph 305-75(3)(c) of the ITAA 1997). 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' and.

· the total of the amounts in paragraph 305-75(3)(d) of the ITAA 1997 will equal NIL, as it is accepted that you do not have any previous exempt fund earnings.

Based on the above, subtracting the Australian dollar equivalent of the vested amount from the Australian dollar equivalent of the lump sum payment produces your applicable fund earnings.

In accordance with section 305-70 the applicable fund earnings is to be included in your assessable income for the 2010-11 income year.

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 all or 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, you must, immediately after the relevant payment is made, no longer have an interest in the paying fund (subsection 305-80(1) of the ITAA 1997). The election must be in writing, specify the amount to be covered by the election and comply with any requirements specified in the Income Tax Assessment Regulations 1997 (subsection 305-80(3) of the ITAA 1997).

In your case you stated that you have no further interest in the foreign fund and all your benefits were transferred to a complying Australian superannuation fund. Further, you lodged an election under subsection 305-80 of the ITAA 1997 for part of the transferred benefits be treated as assessable income of the Australian superannuation fund.

In view of the above:

(i) part of the applicable fund earnings will be included as assessable income of the Australian superannuation fund and subject to tax at 15%; and

(ii) the remainder of your applicable fund earnings will represent assessable income which is to be included in your tax return for 2010-11 income year and taxed at marginal rates.