Edited version of private ruling

Authorisation Number: 1011773732658

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Ruling

Subject: Lump sum payments from overseas retirement annuities

Question

Is any part of the lump sum payments received from overseas retirement annuities, included in your assessable income as applicable fund earnings under section 305-70 of the Income Tax Assessment Act 1997?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 2010.

The scheme commences on:

1 July 2009.

Relevant facts and circumstances:

You are aged between 50 and 65 years of age, and you were previously a resident of a foreign country.

Whilst residing in the foreign country you made contributions to a number of retirement annuities in the foreign country.

You commenced making contributions to a retirement annuity fund (the fund) over 20 years ago.

You also commenced making contributions to a retirement annuity policy over 15 years ago.

You arrived in Australia and became a resident of Australia for tax purposes on a residency date which occurred over 10 years ago.

In a letter sent to you the issuer of the retirement annuity policy (the policy issuer) advised the value of your policy on the day before you became an Australian resident.

A Schedule emailed to you by the sponsor of the fund, shows that the value of the fund policy in the month you became an Australian resident. You state that this is the value of the fund policy on the day before you became an Australian resident.

During the 20XX-XX income year you received lump sum payments from both of these retirement annuities.

The rules of the retirement annuity policy provide that members are only entitled to withdraw their benefits on retirement, invalidity or death.

The rules of the fund provide that members are only entitled to withdraw their benefits on retirement, invalidity, death or leaving the foreign country.

In mid February 2010, a lump sum payment from the retirement annuity policy was deposited into your bank account in the foreign country.

Several weeks later a lump sum payment from the fund your policy was deposited into your bank account in the foreign country.

Neither you nor any other party has made any contributions to these retirement annuities since you became an Australian resident. Also since the residency date, no amounts have been transferred into these retirement annuities from any other foreign superannuation funds.

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 Subsection 305-70(2),
Income Tax Assessment Act 1997 Paragraph 305-70(2)(a),
Income Tax Assessment Act 1997 Subsection 305-70(3),
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 Subsection 995-1(1) and
Income Tax Assessment Regulations 1997 Regulation 960-50.01.

Reasons for decision

Summary

A portion of each lump sum payment made by these overseas retirement annuities is assessable as 'applicable fund earnings'. The applicable fund earnings represents the increase or growth in each annuity policy during the period you are a resident of Australia.

The applicable fund earnings of each lump sum payment is the assessable amount to be included in your income tax return for the 2009-10 income year. Your applicable fund earnings is assessable in Australia and is subject to tax at your marginal rate of tax.

The remainder of each respective lump sum payment is not assessable income and is not exempt income. As such, each of these amounts is tax-free.

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 transferred or 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 'applicable fund earnings' is subject to tax at the person's marginal rate of tax.

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.

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.

From the facts of this case it is accepted that both the fund and the retirement annuity policy are superannuation funds. It is evident that each fund established in ther foreign country is not an Australian superannuation fund as defined in subsection 295-95(2) of the ITAA 1997.

Therefore, each retirement annuity is a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997.

Assessable Amount

You became a resident of Australia for tax purposes on a residency date which occurred over 10 years ago. The lump sum payment from the retirement annuity policy was made to you in mid February 2010. The lump sum payment from the fund was made to you several weeks later.

Each lump sum payment was made to you more than six months after you became an Australian resident. Accordingly, a portion of each lump sum payment 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 you became an Australian resident after the start of 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).

The calculation of this portion effectively means that you will be assessed only on the income earned in each of these retirement annuity policies while you were a resident of Australia. That is, you will only be assessed on the accretion in each retirement annuity policy less any contributions made since you 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) 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.

Consequently, the payment you received is translated into Australian dollars at the exchange rate applicable at the time of receipt.

Similarly, the amount vested in the fund on the day before you became an Australian resident is converted to Australian dollars at the exchange rate that applied on that day.

Calculation of 'Applicable Fund Earnings'

In a letter sent to you the issuer of the retirement annuity policy (the policy issuer) advised the value of your policy on the day before you became an Australian resident.

You were also advised on the value of your policy in the fund during the month you became an Australian resident. You state that this is the value of this policy on the day before you became an Australian resident.

You made no personal contributions to these retirement annuities after the residency date. Further, no contributions to these retirement annuities party contributions have been made by another party on your behalf. Also since this date, no transfers were made to these retirement annuities from other foreign superannuation funds.

Therefore, the total of the amounts mentioned in paragraph 305-75(3)(a) of the ITAA 1997 for the payments from these retirement annuities is made up of:

· the amount of each lump sum payment vested in you on the day before became a resident of Australia for tax purposes;

· contributions made to each retirement annuity policy for or by you after you became an Australian resident; and

· the amount transferred into each retirement annuity policy from any other foreign superannuation fund.

Each lump sum that was vested in you when you first became an Australian resident is translated into Australian dollars at the exchange rate applicable on the day just before the residency date.

Each amount calculated above is subtracted from the total amount of the payment made by each respective retirement annuity policy (paragraph 305-75(3)(b) of the ITAA 1997). Each lump sum payment is translated into Australian dollars at the exchange rate applicable at the time you received each payment. Thus the Australian dollar equivalent of each vested amount is subtracted from the Australian dollar equivalent of each respective lump sum payment.

Under paragraph 305-75(3)(c) of the ITAA 1997, each result is then multiplied by the proportion of the days you were an Australian resident to the total number of days from when you became an Australian resident until the date the payment was made.

In your case the resident days and total days are the same, and so the proportion to be used in the calculation of the 'applicable fund earnings' for each payment is 1.

Paragraph 305-75(3)(d) of the ITAA 1997 concerns previously exempt fund earnings calculated under subsections 305-75(5) and (6). Previously exempt fund earnings are the applicable fund earnings of any amounts transferred from one foreign superannuation fund to another foreign superannuation fund after you became a resident of Australia. In your case, there are no previously exempt fund earnings.

Assessable amount of the payment from each retirement annuity

The difference between the Australian dollar equivalent of each lump sum payment and the Australian dollar equivalent of each vested amount is the 'applicable fund earnings' worked out under subsection 305-75(3) of the ITAA 1997.

In accordance with subsection 305-70(2) of the ITAA 1997 the applicable fund earnings of each lump sum payment is to be included in your assessable income for the 2009-10 income year. Each amount is subject to tax at your marginal rate of tax.

The remainder of each lump sum payment is not assessable income and is not exempt income in accordance with subsection 305-70(3) of the ITAA 1997. As such, each of these respective amounts is tax-free in your hands.