Edited version of private ruling

Authorisation Number: 1011773648431

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: Foreign lump sum payment

Question

Is any part of the benefits transferred from a superannuation fund in an overseas country to an Australian superannuation fund applicable fund earnings under section 305-75 of the Income Tax Assessment Act 1997?

Answer: No.

This ruling applies for the following period

Year ending 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts

You are less than 55 years of age and formerly resided in an overseas country (the overseas country).

During your employment overseas you made contributions to a fund in the overseas country (the foreign fund).

You ceased your overseas employment and resumed your Australian residency in the 20XX-XX income year.

The daily exchange rate on the day before you resumed your Australian residency is that provided by the Reserve Bank of Australia.

In the 20XX-XX income year the administrators of the foreign fund (the Administrators) provided you with, amongst other matters:

· the transfer value of your benefits;

· a form which was required to be completed;

· your pension benefits which would normally be paid at your date of leaving and that when the payment is made in the 20XX-XX income year; and

· your lump sum benefit, which would normally be paid at your date of leaving and the payment is made in the 20XX-XX income year.

No contributions have been made to the foreign fund since you resumed your Australian residency for taxation purposes.

In the 20XX-XX your benefits in the foreign fund were transferred to your account with a complying Australian superannuation fund (the Australian Fund).

You stated that the Administrators have not provided a transfer value as at the date you became an Australian resident.

Assumptions

You have advised that you are unable to obtain the transfer value of your superannuation entitlement on the day you became a resident of Australia from Administrators.

You have agreed to an assumption being made on the rate of return in the foreign fund between the day you became a resident of Australia and the date the lump sum payment was received.

Based on this rate of return, the Commissioner is prepared to assume a transfer value of your superannuation entitlement on the day before you became an Australian resident.

Relevant legislative provisions

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(6).
Income Tax Assessment Act 1997 Subsection 995-1(1).

Reasons for decision

Summary

No 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.

The calculations made in your case show there were nil applicable fund earnings.

Detailed reasoning

Lump sum payments transferred 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 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 have any application.

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 the present case, it is evident that the fund established in the overseas country, the foreign fund, is not an Australian superannuation fund as defined in subsection 295-95(2) of the ITAA 1997. However, the Commissioner considers that the foreign fund is a foreign superannuation fund as defined 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.

In your case, you became a resident of Australia for tax purposes in the 2008-09 income year and the lump sum payment was made to a complying Australian superannuation fund (the Australian Fund) in the 2010-11 income year (that is, more than six months after you became an Australian resident). Therefore, a portion of your lump sum payment will be assessable under section 305-75 of the ITAA 1997.

The calculation effectively means that you will be assessed only on the income earned in the UK 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 an Australian 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:

(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).

Subparagraph 305-75(3)(a)(i) of the ITAA 1997 is the amount vested in you on the day before you became an Australian resident for tax purposes. In other words, this is the lump sum payment you would have been entitled to receive if you were allowed to be paid a lump sum on that date.

No other contributions were made to the foreign fund for or by you after you became an Australian resident and no transfers were received from other foreign superannuation funds.

Foreign currency conversion

Subsection 960-50(1) of the ITAA 1997 states that an amount in a foreign currency is to be translated into AUD. For the purposes of section 305-70 of the ITAA 1997, the 'applicable fund earnings' should be calculated by:

· translating the lump sum payment 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 payment vested in the foreign fund at the exchange rate applicable just before the residency date (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 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.

This amount is translated into Australian dollars at the exchange rate on the day before you became an Australian resident as determined by the Reserve Bank of Australia.

· 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) equals 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 a figure less than zero.

Subsection 305-70(3) of the ITAA 1997 states that the applicable fund earnings is the amount worked out under this provision which is not less than zero. In this instance, the amount worked out is less than zero. Therefore, the applicable fund earnings amount under subsection 307-75(3) is nil.

Accordingly, no part of the lump sum payment received by you from the foreign fund is to be included in your income tax return 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 applicable fund earnings treated as assessable income of the Australian superannuation fund.

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

In your case, it is noted that you had the lump sum payment directly deposited into your superannuation account with the Australian Fund, which is a complying Australian superannuation fund, and that you no longer have any interests in the foreign fund.

As the applicable fund earnings relating to your foreign lump sum payment is nil, none of the lump sum needs to be included in assessable income of the Australian Fund under subsection 305-70(2) of the ITAA 1997.

Notwithstanding the above it should be noted the full amount of the lump sum payment does represent a non-concessional contribution.

Non-concessional contributions

From 1 July 2007, non-concessional contributions made to a complying superannuation fund are subject to an annual cap (subsection 292-85(2) of the ITAA 1997). For the 2010-11 income year onwards the annual cap is always six times the concessional contributions cap. Therefore, for the 2010-11 income year the annual cap is $150,000.

Non-concessional contributions include:

· personal contributions for which an income tax deduction is not claimed;

· contributions a person's spouse makes to the person's superannuation fund account (spouse contributions); and

· transfers from foreign superannuation funds (excluding amounts included in the fund's assessable income).

A person will be taxed on non-concessional contributions over the cap at the rate of 46.5% (section 292-80 of the ITAA 1997 and sections 4 and 5 of the Superannuation (Excess Non-concessional Contributions Tax) Act 2006). The person will be required to ask their superannuation fund to release an amount that is equal to the tax liability (section 292-410 of the ITAA 1997).

As a concession, to accommodate larger contributions, persons under age 65 in an income year are able to bring forward future entitlements to two years worth of non-concessional contributions. This means a person under age 65 will be able to contribute non-concessional contributions totalling $450,000 over three income years without exceeding their non-concessional contributions cap (subsections 292-85(3) and (4) of the ITAA 1997).

The bring forward will be triggered automatically when contributions in excess of the annual non-concessional contributions cap are made in an income year by a person who is under age 65 at any time in the year where a bring forward has not already commenced (subsection 292-85(3) of the ITAA 1997).

Where a bring forward has been triggered, the two future years' entitlements are not indexed.

In your case, as none of your lump sum is assessable income of the Australian Fund, the full amount of the lump sum is a non-concessional contribution.

As you are under 65 years of age in the 2010-11 income year you are able to bring forward future entitlements to two years worth of non-concessional contributions. The bring forward has been triggered as you contributed an amount in excess of the annual non-concessional cap to an Australian superannuation fund in the 2010-11 income year.

Conclusion:

No part of the lump sum payment from a foreign superannuation fund which was transferred to your Australian superannuation fund is assessable as the applicable fund earnings relating to the payment is nil.