Edited version of private ruling

Authorisation Number: 1011782836805

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Ruling

Subject: Transfer of superannuation from foreign employer's superannuation fund

Questions:

1. Will any part of the amount transferred from a foreign superannuation fund to an Australian superannuation fund be included as concessional contributions for an income year for the purposes of Subdivision 292-B of the Income Tax Assessment Act 1997 (ITAA 1997) where the transfer takes place more than six months after becoming an Australian resident?

2. Will any part of the amount transferred from a foreign superannuation fund to an Australian superannuation fund be included as non-concessional contributions for an income year for the purposes of Subdivision 292-C of the ITAA 1997 where the transfer takes place more than six months after becoming an Australian resident?

3. Can your client make an election to have applicable fund earnings taxed in a complying Superannuation Fund?

Answers:

No.

Yes.

Yes.

This ruling applies for the following periods

Year ended 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts and circumstances

Your client became an Australian resident for tax purposes less than three years ago (the residency day).

On the residency day, you client made a non-concessional contribution to a complying superannuation fund in Australia that triggered the bring forward provisions.

Your client, who is over 55 years of age but under the age of 65, commenced employment over 15 years ago with an overseas employer (the employer).

Your client became a member of the employer sponsored superannuation fund (the Fund).

The normal retirement age in the overseas country is age 60. Your client can withdraw their benefits from the Fund at age 55, however your client has to retire from employment.

The Fund does not allow for access of benefits prior to retirement age. Members can not withdraw funds prior to retirement to purchase a home or meet educational or medical expenses.

No contributions have been made to the Fund, by your client or an employer, since your client became an Australian resident.

Your client is entitled to receive a lump sum from the Fund, which has to be withdrawn by a specific future date. Your client is aware that because of the contribution made on the residency day, no further non-concessional contributions can be made by or for them to a complying superannuation fund, without breaching the non-concessional contributions cap, until the three year bring forward period ends.

Your client intends to transfer their lump sum benefits from the Fund to an Australian superannuation fund.

You advised that your client will no longer have an interest in the Fund after the lump sum payment is made.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 305-70.
Income Tax Assessment Act 1997 Subsection 305-70(2).
Income Tax Assessment Act 1997 Subsection 305-70(3).
Income Tax Assessment Act 1997 Section 305-80.
Income Tax Assessment Act 1997 Subsection 305-80(2).
Income Tax Assessment Act 1997 Subsection 305-80(3).
Income Tax Assessment Act 1997 Subsection 292-20(2).
Income Tax Assessment Act 1997 Section 292-15.
Income Tax Assessment Act 1997 Section 292-25
Income Tax Assessment Act 1997 Paragraph 292-25(2)(c)
Income Tax Assessment Act 1997 Subsection 292-82(2).
Income Tax Assessment Act 1997 Subsection 292-82(3).
Income Tax Assessment Act 1997 Subsection 292-82(4).
Income Tax Assessment Act 1997 Section 292-410.
Income Tax Assessment Act 1997 Subsection 292-465(1).
Income Tax Assessment Act 1997 Subsection 292-465(2).
Income Tax Assessment Act 1997 Subsection 292-465(3).
Superannuation Industry (Supervision) Regulations 1994 Subregulation 5.01(1).
Superannuation Industry (Supervision) Regulations 1994 Subregulation 7.04(3).
Superannuation Industry (Supervision) Regulations 1994 Subregulation 7.04(4).
Superannuation Industry (Supervision) Regulations 1994 Subregulation 7.04(7).
Superannuation (Excess Non-concessional Contributions Tax) Act 2006 Section 4.
Superannuation (Excess Non-concessional Contributions Tax) Act 2006 Section 5.
Superannuation (Excess Concessional Contributions Tax) Act 2006 Section 4.
Superannuation (Excess Concessional Contributions Tax) Act 2006 Section 5.

Summary

The lump sum payment to be received by your client is being paid by a foreign superannuation fund (the Fund).

The assessable amount (if any) calculated as the applicable fund earnings of the lump sum payment, is the amount calculated as the growth in the Fund from the date that your client became an Australian resident to the date the payment is made.

The amount of the applicable fund earnings in relation to the transfer of benefits from a foreign superannuation fund to an Australian superannuation fund that is covered by a choice made under section 305-80 of the ITAA 1997 is treated as assessable income of the Australian superannuation fund. The amount covered by the choice will not be treated as either concessional contribution or non-concessional contributions. Consequently, this amount will not count towards your client's concessional contributions cap or non-concessional contributions cap.

The remainder of the superannuation benefit transferred from the foreign superannuation fund will be treated as a non-concessional contribution to the Australian superannuation fund and will count towards your client's non-concessional contributions cap in the year it is received. This will include any amount of the applicable fund earnings not covered by the choice made under subsection 305-80(2) of the ITAA 1997.

Detailed reasoning

Lump sum payments 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 applicable fund earnings is subject to tax at the persons marginal rate. 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) of the ITAA 1997 applies where the person was an Australian resident at all times during the period to which the lump sum relates. Subsection 305-75(3) of the ITAA 1997 applies where the person becomes an Australian resident after the start of the period to which the lump sum relates.

In this case your client, who previously resided overseas, became a resident of Australia for taxation purposes on the residency day. Your client is a member of an employer sponsored superannuation fund (the Fund) based in the overseas country and proposes to transfer the benefits in the Fund to an Australian superannuation fund more than six months after your client became a resident of Australia.

Therefore the applicable fund earnings, calculated under subsection 305-75(3) of the ITAA 1997, in relation to the transfer of the superannuation benefits from the Funds will be assessable under section 305-70 in the relevant year of income that the transfer occurs.

Election under section 305-80 of the ITAA 1997

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 payment treated as assessable income of the Australian superannuation fund.

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

To qualify, the taxpayer must, immediately after the relevant payment is made, no longer have an interest in the paying fund (subsection 305-80(1) of the ITAA 1997). The election must be in writing, specify the amount to be covered by the election and comply with any requirements specified in the Income Tax Assessment Regulations 1997 (subsection 305-80(3) of the ITAA 1997).

As noted in the facts of this case, you advised that your client will have no further interest in the Fund when the benefits are transferred to the Australian superannuation fund. Therefore, your client can make an election under subsection 305-80 of the ITAA 1997 to have all or part of the assessable income treated as assessable income of the Australian superannuation fund.

Please note, if the Fund pays a lump sum directly to your client, who subsequently contributes it to their Australian superannuation fund, the election is not available and the applicable fund earnings will be taxable wholly to your client.

Concessional contributions

Concessional contributions made to superannuation funds are subject to an annual cap. For the 2010-11 income year, the annual cap is $25,000.

Concessional contributions include employer contributions and personal contributions claimed as a tax deduction.

A person will be taxed on concessional contributions over the cap at a rate of 31.5% (section 292-15 of the ITAA 1997 and sections 4 and 5 of the Superannuation (Excess Concessional Contributions Tax) Act 2006).

If a person has more than one fund, all concessional contributions made to all their funds are added together and count towards the cap.

Amounts in excess of the concessional contributions cap are also counted towards the non-concessional contributions cap.

Section 292-25 of the ITAA 1997 determines what amounts are concessional contributions for a financial year. Under paragraph 292-25(2)(c) the following amounts are excluded from being concessional contributions:

(i) so much of an amount that is transferred to a superannuation fund from a foreign superannuation fund and is included in the assessable income of the fund as a result of a choice made under section 305-80;

(ii) an amount that is a roll-over superannuation benefit to the extent that it contains an untaxed element that is not an excess untaxed roll-over amount;

(iii) a contribution made to a constitutionally protected fund (CPF).

Transfers from foreign superannuation funds are not roll-overs, but are considered to be personal contributions of the member.

As noted earlier, the amount of the applicable fund earnings in relation to the transfer of benefits from a foreign superannuation fund to an Australian superannuation fund that is covered by a choice made under section 305-80 of the ITAA 1997 is treated as assessable income of the Australian superannuation fund. The amount covered by the choice will not be treated as a concessional contribution of the Australian superannuation fund. Consequently, this amount will not count towards the concessional contributions cap for the relevant year.

Non-concessional contributions

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 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).

As noted above, the amount of the applicable fund earnings that is covered by a choice made under subsection 305-80(2) of the ITAA 1997 is treated as assessable income of the Australian superannuation fund. Therefore, this amount will not be treated as a non-concessional contribution to the Australian superannuation fund and will not count towards the taxpayer's non-concessional contributions cap for the relevant year.

The remainder of the superannuation benefit transferred from the foreign superannuation fund will be treated as a non-concessional contribution to the Australian superannuation fund and will count towards the taxpayer's non-concessional contributions cap for the relevant year. This will include any amount of the applicable fund earnings not covered by the choice made under subsection 305-80(2) of the ITAA 1997.

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 up to two years future entitlements of non-concessional contributions.

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 that 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.

Your client has already triggered the bring forward when they contributed to an Australian superannuation fund on the residency day. Consequently, your client can not make any further non-concessional contributions to a complying superannuation fund, without exceeding their non-concessional cap, until the three year bring forward period ends.

Conditions of Accepting Contributions from 1 July 2007

It should also be noted that, under certain circumstances, if a person makes certain contributions to a complying superannuation fund that exceeds their non-concessional contributions cap, the fund must not accept those excess contributions in accordance with subregulation 7.04(3) of the Superannuation Industry (Supervision) Regulations 1994.

Fund-capped contributions

Under subregulation 7.04(3) of the Superannuation Industry (Supervision) Regulations 1994 (SISR):

… the regulated superannuation fund must not accept any fund-capped contributions in a financial year in respect of a member that exceed:

(a) if the member is 64 or less on 1 July of the financial year - three times the amount of the non-concessional contributions cap; or

(b) if the member is 65 but less than 75 on 1 July of the financial year - the non-concessional contributions cap.

Therefore, the trustee of a superannuation fund should, before accepting a contribution for a member, consider if the contribution is a fund-capped contribution.

In accordance with subregulations 5.01(1) and 7.04(7) of the SISR, fund-capped contributions are essentially contributions to the fund other than employer contributions. While subregulation 7.04(1) of the SISR specifically excludes certain contributions from being fund-capped contributions, benefits transferred from an overseas fund are not excluded.

Subregulation 7.04(4) of the SISR provides that:

If a regulated superannuation fund receives an amount in a manner that is inconsistent with subregulation...(3):

(a) the fund must return the amount to the entity or the person that paid the amount within 30 days of becoming aware that the amount was received in a manner that is inconsistent with subregulation...(3)

Therefore, that part of a fund-capped contribution that exceeds the relevant amount should be returned to the entity or person who made the contribution. In other words, it is only the amount in excess of the relevant amount that has been received in a manner that is inconsistent with subregulation 7.04(3) of the SISR.

This means that, for a taxpayer under 65 years of age, a complying superannuation fund can not accept more than $450,000 of member contributions from a taxpayer in an income year. As mentioned above, the entire amount transferred from a foreign superannuation fund is considered to be a member contribution.

In this case, you stated that your client intends to transfer their lump sum benefits from the Fund to a complying Australian superannuation fund by a specific date. If that foreign lump sum benefit exceeds the fund-capped amount applying at the time of the transfer (after translation to Australian dollars) a complying Australian superannuation fund must not accept those excess contributions in accordance with subregulation 7.04(3) of the Superannuation Industry (Supervision) Regulations 1994, and must return them to the payer - in this case, the Fund.