Edited version of private ruling

Authorisation Number: 1011773779053

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Ruling

Subject: Transfer of benefits from an overseas pension scheme

Question

Is any part of the lump sum payment from an overseas pension scheme 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:

2010-11 income year

The scheme commences on:

1 July 2010

Relevant facts and circumstances

You were a member of an overseas pensions scheme, an employer sponsored scheme overseas during the 20XX-XX income year and the 20XX-XX income year.

You emigrated to Australia from an overseas country for employment purposes during the 20XX-XX income year.

You requested a transfer of your overseas pension rights from overseas pension scheme during the 20XX-XX income year to a qualifying Australian Superannuation scheme under Qualifying Recognised Overseas Pension Scheme (QROPS).

A transfer payment was received in your Australian superannuation fund account during the 20XX-XX income year.

The Australian superannuation fund is a complying superannuation fund.

You do not have any further interest in the overseas pensions fund.

No contributions were made into the overseas pensions fund after the 20XX-XX income year.

You are under 55 years of age.

A letter dated during the 20XX-XX income year from the overseas pension scheme provided the per annum value of the deferred pension benefit as at date of leaving (a specific date during the 2007-08 income year) and currently (a specific date during the 2010-11 income year)

Assumption

The lump sum benefit vested in you on a specific date during the 20XX-XX income year (the date before residency date) is Amount B.

Relevant legislative provisions

Subsection 295-95(2) of the Income Tax Assessment Act 1997
Section 305-70 of the Income Tax Assessment Act 1997
Subsection 305-75(2) of the Income Tax Assessment Act 1997
Subsection 305-75(3) of the Income Tax Assessment Act 1997
Paragraph 305-75(3)(a) of the Income Tax Assessment Act 1997
Paragraph 305-75(3)(b) of the Income Tax Assessment Act 1997
Paragraph 305-75(3)(c) of the Income Tax Assessment Act 1997
Paragraph 305-75(3)(d) of the Income Tax Assessment Act 1997
Subsection 305-75(5) of the Income Tax Assessment Act 1997
Subsection 305-75(6) of the Income Tax Assessment Act 1997
Section 960-50 of the Income Tax Assessment Act 1997
Subsection 960-50(1) of the Income Tax Assessment Act 1997
Subsection 960-50(4) of the Income Tax Assessment Act 1997
Subsection 995-1(1) of the Income Tax Assessment Act 1997

Reasons for decision

Summary

The applicable fund earnings in respect of the lump sum payment paid from the overseas pensions scheme is nil.

Consequently, no amount of the lump sum payment of Amount A will be included in your assessable income in the 2010-11 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.

In this case, the lump sum benefit was paid from the overseas pension scheme. It is evident that the overseas pensions scheme, which is established in the overseas country, 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 overseas pensions scheme 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.

You became a resident of Australia for tax purposes during the 20XX-X income year and the lump sum benefit was transferred to Australia 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.

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).

Subsection 305-75(5) of the ITAA 1997 defines previously exempt fund earnings as follows:

You have an amount of previously exempt fund earnings in respect of the lump sum if:

(a) part or all of the amount in the fund that was vested in you when the lump sum was paid (before any deduction for foreign tax) is attributable to the amount; and

(b) the amount is attributable to a payment received from a foreign superannuation fund; and

(c) the amount would have been included in your assessable income under subsection 305-70(2) by the application of this section, but for the payment having been received by another foreign superannuation fund.

Subsection 305-75(6) states:

The amount of your previously exempt fund earnings is the amount mentioned in paragraph (5)(c) (disregarding the addition of previously exempt fund earnings under subsection (2) or (3) of this section).

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). Together with the application of subsection 960-50(4) this has the result that the payment you received is translated into AUD 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 AUD at the exchange rate that applied on that day.

Calculation of Assessable Amount

Based on the information you have provided, the date you became a resident of Australia (date of residency) was during the 2008-09 income year. From the information contained in the letter dated during the 2010-11 income year from the overseas pensions scheme that provided the per annum value of the deferred pension benefit on the date of leaving (a specific date during the 2007-08 income year) and currently (a specific date during the 2010-11 income year), we have made the assumption that the value of the lump sum benefit when you left the overseas pensions scheme on a specific date during the 2007-08 income year was Amount B. In this instance, it is accepted that the value of your lump sum in the fund on the date you became a resident of Australia, on a specific date during the 2008-09 income year was also Amount B.

No contributions were made to the fund after the residency date, and no transfers were made to the fund from other foreign superannuation funds.

Therefore, the total of the amounts mentioned in paragraph 305-75(3)(a) of the ITAA 1997 is Amount B, comprising:

· the amount of the lump sum benefit vested in you just before the residency date (a specific date during the 2008-09 income year) = Amount B;

· contributions made to the fund for or by you after the residency date = NIL;

· the amount transferred into the fund from any other foreign superannuation fund = NIL.

The lump sum benefit vested in you on a specific date during the 2008-09 income year is translated into Australian dollars at the exchange rate applicable on the day just before the residency date.

There is no official exchange rate for the date before you became a resident of Australia (on a specific date during the 2008-09 income year) as it occurred on a Sunday. Accordingly as the next business day is Monday on a specific date during the 2008-09 income year, the exchange rate for that day will be used.

The daily exchange rate which prevailed on a specific date during the 2008-09 income year was A$1 = rate of exchange for the overseas country.

Accordingly, the vested lump sum benefit of Amount B converted to Australian dollars is:

Amount B ÷ rate of exchange for the overseas country = Amount C (cents ignored)

Paragraph 305-75(3)(b) of the ITAA 1997 requires that the amount calculated above be subtracted from the total amount of the lump sum benefit made by the fund.

The lump sum benefit of Amount A in the fund is translated into Australian dollars at the exchange rate applicable at the time you received the lump sum payment in Australia. The daily exchange rate which prevailed on a specific date during the 2010-11 income year was A$1 = rate of exchange for the overseas country.

Accordingly, the lump sum benefit of Amount A converted to Australian dollars is:

Amount A ÷  rate of exchange for the overseas country = Amount D (cents ignored)

Based on the above, subtracting the Australian dollars equivalent of the lump sum benefit vested in you as at the date of residency from the Australian dollars equivalent of the lump sum benefit on a specific date during the 2010-11 income year:

Amount D - Amount C = -Amount E

Under paragraph 305-75(3)(c) of the ITAA 1997, the result above 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. 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'.

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.

However, because the result of the calculation in subsection 305-75(3) of the ITAA 1997 is less than zero, your applicable fund earnings will be Nil.

Therefore, no part of the payment received from the overseas pensions scheme is to be included in your assessable income for the 2010-11 income year.