Edited version of private ruling

Authorisation Number: 1011676676415

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Ruling

Subject: Transfer of benefits from foreign superannuation fund

Question:

Is any portion of a lump sum payment transferred from a foreign fund to an Australian complying 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 ended 30 June 2010

The scheme commenced on:

1 July 2009

Relevant facts:

You are under 55 years of age, and you were previously a citizen of a foreign country.

Whilst you were a foreign resident you became a member of the foreign fund.

You became an Australian resident for income tax purposes in the 2008-09 income year (the residency date).

No contributions were made to the foreign fund by you, or anyone else on your behalf, since you became an Australian resident for taxation purposes.

You are unable to provide the transfer value of your vested benefits at the residency date, as the foreign fund declined to provide this information to you. However, the foreign fund confirmed they used the retail price index (RPI) to work out your transfer value.

In a statement provided by the foreign fund we worked out your transfer benefit at the residency date.

In the 2009-10 income year, a lump sum payment was transferred to an Australian complying superannuation fund.

You no longer have a superannuation interest in the foreign fund after transferring the benefits to the Australian superannuation fund.

Based on the information provided relevant amounts and dates regarding calculating applicable fund earnings are as follows:

Ÿ residency date

Ÿ payment date;

Ÿ transfer amount on the residency date; and

Ÿ transfer value at the residency date (estimated).

Assumption

You advised us that you are unable to provide the transfer value of your vested benefits on the day you became an Australian resident for income tax purposes (the residency date), as the foreign fund declined to provide this information to you. However, the foreign fund confirmed that in calculating the transfer they used the retail price index (RPI) to up rate the transfer value.

The Commissioner considers it appropriate to make assumptions regarding the following:

The rate of increase in the foreign fund over a specific period.

The transfer value of your benefits in the foreign fund on the day before you became an Australian resident.

This ruling is given on the basis of the facts stated in the description of the scheme as set out above. Any material variation from these facts (including any matters not stated in the description above and any departure from these facts) will mean that the ruling will have no effect. No entity will then be able to rely on this ruling as the Commissioner will consider that the scheme has been implemented in a way that is materially different from the scheme described.

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 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 Section 305-80.

Income Tax Assessment Act 1997 Subsection 305-50(1).

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).

Reasons for decision

Summary of decision

A portion of any lump sum payment transferred to an Australian superannuation fund from a foreign superannuation fund is assessable as 'applicable fund earnings'. 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 (AUD), and deducting from this amount the AUD 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.

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

Consequently, you do not need to decide if you want your Australian superannuation fund to pay the income tax in respect of your foreign lump sum payment as there is no assessable amount.

Detailed reasoning

Lump sum payments transferred 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 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 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 was not an Australian resident at all times during 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 of the ITAA 1997 will not apply to the payment received.

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 fund's 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 foreign fund was established in the foreign country. Its central management and control would ordinarily be outside of Australia. Therefore the foreign fund 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.

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 on the residency date and the lump sum benefit was transferred to an Australian superannuation fund in the 2009-10 income year (that is, more than six months after you became an Australian resident). Consequently, the exemption under section 305-60 of the ITAA 1997 will not apply.

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

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

Further, any amounts representative of earnings during periods of non-residency, and transfers 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:

(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).

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) of the ITAA 1997 states when applying section 960-50 of the ITAA 1997 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 payment you 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 foreign fund that was vested in you just before you 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 foreign fund 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 you first became an Australian resident (item 11A of the table to subsection 960-50(6)).

Election

It is noted that you intend to choose to have the Australian superannuation fund include your applicable fund earnings in its assessable income, rather than pay tax on it yourself. However, as determined above, the applicable fund earnings relating to your foreign lump sum payment is Nil. Thus none of this lump sum 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.