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Authorisation Number: 1011726675617

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Ruling

Subject: Transfer of benefits from foreign superannuation fund

Will any part of the transfer of benefits from an overseas superannuation fund be assessable as applicable fund earnings under section 305-70 of the Income Tax Assessment Act 1997?

Advice/Answers:

No.

This ruling applies for the following period:

1 July 2009 to 30 June 2010

The scheme commenced on:

1 July 2009

Relevant facts:

You ceased working for an overseas employer.

While overseas you were a member of an overseas fund (the foreign fund), a personal superannuation fund.

You arrived in Australia and became a resident of Australia for tax purposes on the date you arrived.

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.

An amount of has been transferred from the foreign fund to you in Australia.

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

The transfer value of the benefit in the foreign fund on the day before you became a resident of Australia for tax purposes has been provided by you.

The total of your benefits in the foreign fund are under $50,000 Australian dollars (AUD).

Assumptions:

The foreign fund is a 'superannuation fund' for the purposes of the ITAA 1997.

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 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

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 (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.

Your applicable fund earnings are NIL. Therefore no portion of the lump sum paid to you by the foreign fund is assessable as 'applicable fund earnings'. Accordingly, no part of the lump sum is to be included in your income tax return for the income year.

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) 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 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 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.

You were a member of an overseas fund (the foreign fund), a personal superannuation fund that is established overseas. 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).

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 a particular date (the residency date) and the lump sum benefit was transferred to an Australian superannuation fund 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).

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) 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 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 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)).

Calculation of Assessable Amount

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

· the total of the amounts in paragraph 305-75(3)(a) of the ITAA 1997 will equal the value of your benefit in the foreign fund on the day just before the residency date which has been calculated as the sum of the following.

(i) amount of the lump sum vested in you on the day before the residency date;

(ii) contributions made to the scheme for or by you after the residency date; and

(iii) amount transferred into the foreign fund from any other foreign superannuation fund.

· 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 value of the benefit (in foreign currency) transferred to you;

· The amounted vested in you just before you became a resident of Australia is subtracted from the total amount calculated above after both amounts are translated into AUD.

· The result 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 (paragraph 305-75(3)(c) of the ITAA 1997); and

· The total of the amounts in paragraph 305-75(3)(d) of the ITAA 1997 are added.

As noted above, the lump sum payment is translated into AUD at the exchange rate applicable (as determined by the Reserve Bank of Australia) at the time the payment was received by you in Australia.

Also as noted above, the amount in the foreign fund that was vested in you when you first became an Australian resident, is translated into AUD at the exchange rate applicable on the day just before the day you became an Australian resident.

The exchange rate applicable on this day is not available. Therefore the exchange rate on the next working day as determined by the Reserve Bank of Australia, will be used.

Based on the above, subtracting the AUD equivalent of the vested amount from the AUD equivalent of the lump sum payment produces a negative result.

Therefore there was no growth in the foreign fund while you were a resident of Australia. Accordingly, no part of the lump sum payment is to be included in your income tax return for the income year.