Edited version of private ruling

Authorisation Number: 1011811217543

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Ruling

Subject: Foreign superannuation lump sum payment

Questions:

1. Is a portion of a lump sum payment received from a foreign superannuation fund included in your client's assessable income as applicable fund earnings under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997)?

2. Is your client entitled to an annual deductible amount in respect of the undeducted purchase price (UPP) of the foreign superannuation pension?

Answers:

1. Yes

2. No

This ruling applies for the following period:

Year ended 30 June 2009

The scheme commenced on:

1 July 2008

Relevant facts and circumstances

Your client is over 65 years of age.

Your client became an Australian resident for income tax purposes on a specific date in the relevant income year (the residency date).

A number of years earlier, your client became a member of a foreign superannuation pension scheme (the Scheme) established in a foreign country.

The foreign country's law for pensions had changed considerably prior to the payment of the lump sum payment. Prior to the change, your client was only allowed to have a % of his pension entitlement as a lump sum. However, under the commutation rules for pensions, if the total pension was less than a certain amount per annum, the pension could be commuted in full under the new rules.

As a result of the changes your client was permitted to commute their pension into a lump sum.

A commutation payment in full was paid into your client's bank account on a specific date in a recent income year (the payment date).

You have advised that the amount vested in your client in the Scheme on the residency date cannot be obtained. However, you have provided a letter from the Scheme with relevant amounts and dates. As a result, we have worked out your client's commutation factor on the residency date and the transfer value at the residency date.

Your client has not contributed to the Scheme since becoming a resident of Australia.

No employer has made any contribution to the Scheme after your client became a resident of Australia.

Your client is no longer entitled to any benefits under the Scheme after the commutation of the lump sum.

Reasons for decision

Summary of decision

A portion of the lump sum benefit your client received from a foreign superannuation pension scheme (the Scheme) is assessable as 'applicable fund earnings'. The amount of applicable fund earnings represents the increase or growth in the Scheme during the period your client was a resident of Australia.

The amount of applicable fund earnings is calculated by translating the lump sum benefit received from the Scheme at the exchange rate applicable on the day of receipt into Australian dollars, and deducting from this amount the Australian dollar equivalent of the lump sum benefit on the day just before the residency date at the exchange rate applicable on that day.

The applicable fund earnings are assessable in Australia. The remainder of the lump sum benefit is not assessable income and is not exempt income.

In regard to the undeducted purchase price (UPP), the UPP can only be used where a pension is payable from a superannuation fund. As your client commuted his pension into a lump sum, the deductible amount of a UPP is not allowable to your client.

Detailed reasoning

Lump sum payments transferred from foreign superannuation funds

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 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 superannuation fund is a foreign superannuation fund at a time if the fund is not an Australian superannuation fund at that time; and

· 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:

· the fund was established in Australia, or any asset of the fund is situated in Australia at that time; and

· at that time, the central management and control of the fund is ordinarily in Australia; and

· at that time either the fund had no member covered by subsection (3) (an active member) or at least 50% of:

· the total market value of the funds assets attributable to superannuation interests held by active members; or

· 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, your client's lump sum benefit is from a foreign superannuation pension scheme (the Scheme). It is evident that the Scheme, which is established in a foreign 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 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 a person has become an Australian resident.

Your client became a resident of Australia for tax purposes on the residency date and the lump sum benefit was paid directly to your client in the 2008-09 income year (that is, more than six months after your client became an Australian resident). Accordingly, a portion of the lump sum payment will be assessable under subsection 305-75(3).

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) 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:

· work out the total of the following amounts:

· 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;

· 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;

· 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;

· 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);

· multiply the resulting amount by the proportion of the total days during the period when you were an Australian resident;

· 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 your client will be assessed only on the income earned in the Scheme while your client was a resident of Australia. That is, your client will only be assessed on the accretion in the Scheme less any contributions made since your client 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 (AUD). The applicable fund earnings is the result of a calculation from two other amounts, and subsection 960-50(4) requires that when applying section 960-50 to amounts that are elements in the calculation of another amount you need to:

first, translate any amounts that are elements in the calculation of other amounts (except special accrual amounts); and

then, calculate the other amounts.

The table in 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 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 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 lump sum payment from the Scheme 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 to AUD at the exchange rate applicable at the time of receipt.

When the amount of the lump sum benefit that was vested in you just before the residency date (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, in this case, pounds sterling.

Regulation 960-50.01 of the Income Tax Assessment Regulations 1997 (ITAR 1997) 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, to which none of the other items apply. Under this item, the 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 lump sum benefit received from AFPS at the exchange rate applicable on the day of receipt to AUD (item 11 of the table in subsection 960-50(6)); and

· deducting from this amount the AUD equivalent of the lump sum benefit vested in the Scheme at the exchange rate applicable just before the residency date (item 11A of the table in subsection 960-50(6)).

Calculation of Assessable Amount

In your client's 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 client's benefit in the Scheme;

· the amount vested in your client when the lump sum was paid by the Scheme (as per paragraph 305-75(3)(b) of the ITAA 1997) will equal the value of the benefit paid directly to your client's Bank account in Australia;

· the result above is multiplied by proportion of days your client was a resident to the total number of days from when your client was a resident until the date the payment was made (paragraph 305-75(3)(c) of the ITAA 1997). In your client's 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 your client do not have any previous exempt fund earnings.

As noted above, the lump sum payment made in the 2008-09 income year is translated into AUD at the exchange rate applicable at the time the payment was received by your client in Australia.

In accordance with section 305-70 the applicable fund earnings is to be included in your client's assessable income for the 2008-09 income year.

Personal superannuation contribution

You raised a question as to whether your client can reduce the lump sum payment received from the Scheme by their personal contributions.

As previously determined, your client is assessed only on the income earned in the Scheme while your client was a resident of Australia. That is, your client will only be assessed on the accretion in the Scheme less any contributions made since your client 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.

As your client's personal contributions to the Scheme were made prior to them becoming a resident of Australia therefore no part of the amount was included in the calculation to determine the applicable fund earnings. Accordingly, the personal contribution cannot be deducted from the foreign lump sum payment.

Undeducted purchase price

The undeducted purchase price (UPP) of a superannuation pension generally represents the contributions made to secure the entitlement to the pension by a person after 30 June 1983 for which no taxation deduction has been allowed. This means the UPP can only be used where a pension is payable from a superannuation fund.

The UPP is claimed over the life of the pension in recognition of the fact that part of the pension received each year represents a refund of the contributions that have been made towards the pension. Each year a portion of the UPP can be used to reduce the pension income in the income tax return. This tax free part is called the deductible amount of the UPP. The deductible amount is calculated based on the UPP.

Where a person is entitled to both a pension and a lump sum payment, it must be determined whether the personal contributions made to a superannuation fund are undeducted contributions relating to the lump sum payment, or form part of the purchase price relating to the superannuation pension.

In this case, your client was entitled to a pension and a lump sum from the Scheme. However, your client has fully commuted their superannuation pension entitlement into a lump sum. This means that all of your client's personal contributions form part of the lump sum payment. Accordingly, your client is not entitled to claim a deductible amount of the UPP.