Edited version of private ruling

Authorisation Number: 1011698010099

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Ruling

Subject: Lump sum payment from a foreign superannuation fund

Issue 1

Question

Is the lump sum payment to be received from the your client's overseas fund (the Fund) assessable under subdivision 305-B of the Income Tax Assessment Act 1997?

Answer: Yes.

A portion of the lump sum payment will be assessable if the payment is made after 6 months from the date your client became a resident of Australia.

Issue 2

Question 1

Is the growth in the Fund subject to tax in Australia?

Answer: No.

Question 2

Is your client's overseas pension income received by your client from the Fund assessable in Australia?

Answer: Yes.

This ruling applies for the following period

Year ending 30 June 2011

The scheme commenced on

18 August 2010

Relevant facts

Your client ceased employment in overseas in the 2010-11 income year.

Your client migrated to Australia and became a resident of Australia for tax purposes in the 2010-11 income year.

Your client is a member of an overseas fund (the Fund).

The Fund is a personal superannuation fund.

The Fund does not allow for access of benefits prior to retirement age.

No contributions have been made by your client or your client's employer into the Fund since your client became a resident of Australia.

No amounts have been transferred into the Fund from any other foreign superannuation fund after your client became a resident of Australia for tax purposes.

Your client intends to transfer their benefits in the Fund to Australia at a later date.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 27H.

Income Tax Assessment Act 1997 Section 6-5.

Income Tax Assessment Act 1997 Subsection 6-10.

Income Tax Assessment Act 1997 Subsection 6-10(4).

Income Tax Assessment Act 1997 Subsection 10-5.

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

Income Tax Assessment Act 1997 Subdivision 305-B

Income Tax Assessment Act 1997 Section 305-60

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)(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 Section 960-50.

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 Section 995-1.

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

International Tax Agreements Act 1953

Reasons for decision

Issue 1

Summary of decision

Where your client receives a lump sum benefit from the their overseas fund (the Fund) within 6 months of becoming an Australian resident, the amount is not assessable income and not exempt income.

Where the lump sum benefit is received more than 6 months after your client became an Australian resident, a portion of the lump sum benefit your client receives from the Fund is assessable as 'applicable fund earnings'. The applicable fund earnings represent the increase or growth in the Fund during the period your client was a resident of Australia.

The applicable fund earnings are assessable in Australia. The remainder of the lump sum benefit is not assessable income and is not exempt income.

Detailed reasoning

Lump sum payments transferred from foreign superannuation funds

Subdivision 305-B of the Income Tax Assessment Act 1997 (ITAA 1997) applies to superannuation benefits from foreign superannuation funds.

In order to determine whether subdivision 305-B of the ITAA 1997 applies, it is necessary to ascertain whether the payment is being made from a foreign superannuation fund.

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 this case, your client's lump sum benefit will be paid by your client's overseas fund (the Fund). It is evident that the Fund, 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 considers that the Fund is a foreign superannuation fund as defined in subsection 995-1(1).

Lump sums received within 6 months after Australian residency

Section 305-60 of the ITAA 1997 applies to lump sum payments from a foreign superannuation fund received within 6 months of a person becoming an Australian resident. Section 305-60 of the ITAA 1997 states:

A superannuation lump sum you receive from a foreign superannuation fund is not assessable income and is not exempt income if:

(a) you receive it within 6 months after you become an Australian resident; and

(b) it relates only to a period:

i. when you were not an Australian resident; or

ii. starting after you became an Australian resident and ending before you receive the payment; and

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

That is, where a person receives a superannuation lump sum from a foreign superannuation fund within 6 months of becoming an Australian resident, that amount is not assessable income and not exempt income.

In this case, your client migrated to Australia and became a resident of Australia for tax purposes in the 2010-11 income year. Your client intends to transfer their benefits in the Fund to Australia at a later date. Where the lump sum benefit is received from the Fund within 6 months of your client becoming an Australian resident the lump sum benefit amount is not assessable income and not exempt income under section 305-60 of the ITAA 1997.

Lump sums received more than 6 months after Australian residency

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 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 subsections 305-75(2) or 305-75(3) of the ITAA 1997. Subsection 305-75(2) applies where the person was an Australian resident at all times during the period to which the lump sum relates. Subsection 305-75(3) applies where the person becomes an Australian resident after the start of the period to which the lump sum relates.

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 a person has become an Australian resident.

Your client became a resident of Australia for tax purposes in the 2010-11 income year (the residency date). Your client intends to transfer their benefits in the Fund to Australia at a later date. Where your client receives a lump sum payment from the Fund more than six months after they became an Australian resident a portion of the lump sum benefit will be assessable under section 305-70 of the ITAA 1997.

The amount included as assessable income is calculated 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. Subsection 305-75(3) 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;

(c) 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);

(d) multiply the resulting amount by the proportion of the total days during the period when you were an Australian resident;

(e) add the total of all previously exempt fund earnings (if any) covered by subsections (5) and (6).

The calculation of this portion effectively means that your client will be assessed only on the income earned in the Fund while they were a resident of Australia. That is, your client will only be assessed on the accretion in the Fund less any contributions made since they 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. 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 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 lump sum payment from the Fund 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 to Australian dollars at the exchange rate applicable at the time of receipt.

When the amount of the lump sum benefit that was vested in your client 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 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 lump sum benefit received from the Fund at the exchange rate applicable on the day of receipt to Australian dollars (item 11 of the table in subsection 960-50(6)); and

· deducting from this amount the Australian dollars equivalent of the lump sum benefit vested in the Fund at the exchange rate applicable just before the residency date (item 11A of the table in subsection 960-50(6)).

Issue 2

Summary of decision

The assessable income of an Australian resident includes ordinary income and statutory income derived directly or indirectly from all sources whether in or out of Australia and includes annuities and superannuation pensions.

Further, a convention with the relevant country provides that pensions and annuities paid to a resident of Australia shall be taxable only in Australia.

Therefore, the overseas pension received by your client will be included in their assessable income and will form part of their statutory income.

Detailed reasoning

Assessability of the growth in the Fund for the 2010-11 and subsequent income years

The foreign investment fund (FIF) rules has been repealed by the Tax Laws Amendment (Foreign Source Income Deferral) Bill (No1) 2010 which received royal assent as Act No 114 of 2010. This Act repeals the FIF rules and the deemed present entitlement rules in relation to the 2010-11 and later income years.

Therefore, from 1 July 2010 Australian residents with non-controlling shareholdings in foreign companies or with interests in foreign trust no longer need to include income on an attribution basis under the FIF rules.

In this case, if your client has an interest in foreign investment funds, regardless of whether they retained the funds overseas or transfer them to Australia, as a temporary resident or a permanent resident of Australia, FIF provisions are not applicable from 1 July 2010.

Assessability of pension income received from the Fund

Sections 6-5 and 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997) provide that the assessable income of an Australian resident includes ordinary income and statutory income they derived directly or indirectly from all sources whether in or out of Australia.

Section 10-5 of the ITAA 1997 lists the provisions about assessable income. Included in this list is section 27H of the Income Tax Assessment Act 1936 (ITAA 1936) which provides that annuities and superannuation pensions are included in assessable income.

In determining liability to Australian tax of foreign sourced income received by a resident, it is necessary to consider not only the income tax laws but also any applicable double tax agreement contained in the International Tax Agreements Act 1953 (the Agreements Act).

Section 4 of the Agreements Act incorporates that Act with the ITAA 1936 and ITAA 1997 so that those Acts are read as one.

The Agreements Act contains the double tax agreement between Australia and the relevant overseas country (the Convention). The Convention operates to avoid the double taxation of income received by Australian and the relevant overseas country.

The Convention applies to income or gains for the income year beginning on 1 July 2004 and thereafter.

The Convention provides that pensions and annuities paid to a resident of Australia shall be taxable only in Australia.

Therefore, the pension received by your client from the overseas fund will be included in their assessable income under section 27H of the ITAA 1936, and will form part of your client's statutory income under subsection 6-10(4) of the ITAA 1997.