Edited version of private ruling

Authorisation Number: 1011832810235

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Ruling

Subject: Lump sum payment from a foreign superannuation fund

Question

Is any part of the lump sum payment from an overseas pension scheme included in assessable income as applicable fund earnings?

Answer: Yes.

This ruling applies for the following period:

2011-12 income year

The scheme commences on:

1 July 2011

Relevant facts and circumstances

Your client is currently a resident of an overseas country.

Your client has been a resident the overseas country for over 15 years.

Your client's superannuation entitlements have accumulated entirely from their service in the overseas country.

Your client is considering returning to Australia from the overseas country in June 2011 and would become a resident for taxation purposes.

Your client will receive a benefit from the overseas country superannuation entity in March 2012.

The benefit is payable from consolidated revenue in accordance with the Scheme from the overseas country (the Scheme).

Your client will be receiving 100% of the benefit as a lump sum.

You advised that a member of the Scheme who has completed the required qualifying service can be paid a benefit on or after attaining the age of 60 years.

Your client retired voluntarily prior to reaching the normal retirement age of 65, and after completing the relevant service period.

Your client is over 60 years of age.

Relevant legislative provisions

Subsection 295-95(2) of the Income Tax Assessment Act 1997

Section 305-60 of the Income Tax Assessment Act 1997

Section 305-70 of the Income Tax Assessment Act 1997

Subsection 305-70(2) of the Income Tax Assessment Act 1997

Subsection 305-72(2) of the Income Tax Assessment Act 1997

Subsection 305-72(3) of the Income Tax Assessment Act 1997

Subsection 305-55(2) of the Income Tax Assessment Act 1997

Section 305-701 of the Income Tax Assessment Act 1997

Subsection 960-50(1) of the Income Tax Assessment Act 1997

Subsection 960-50(6) of the Income Tax Assessment Act 1997

Subsection 995-1(1) of the Income Tax Assessment Act 1997

Reasons for decision

Summary of decision

A portion of the lump sum to be paid by the Scheme to your client is assessable as 'applicable fund earnings'.

Detailed reasoning

Lump sum payments from foreign superannuation funds

Where a lump sum payment is received or transferred from a foreign superannuation fund within six months of a person becoming an Australian resident, that payment is not assessable income and is not exempt income under section 305-60 of the Income Tax Assessment Act 1997 (ITAA 1997).

The amount of applicable fund earnings in relation to a lump sum payment from a foreign superannuation fund that is received or transferred more than six months after a person has become an Australian resident will be assessable under section 305-70 of the ITAA 1997. The applicable fund earnings are subject to tax at the person's 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.

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 of the ITAA 1997 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 this case, the entity making the payment is a statutory scheme established under the relevant laws of the overseas country. It is not a 'superannuation fund' as that term is normally understood.

In both (Mahony v. Federal Commissioner of Taxation (1967) 41 ALJR 232; (1967) 14 ATD 519 and Scott v. Federal Commissioner of Taxation [No 2] (1966) 40 ALJR 265; (1966) 14 ATD 333; [1966] LB Co's Tax Serv 80; (1966) 10 AITR 290) it was considered that one feature of a fund is that monies are set aside or pooled together on trust for the benefit of its members. In this case, benefits are paid out of the general revenue of the overseas government.

Thus the statutory scheme (the Scheme) is not a superannuation fund and thus, not a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997.

However, subsection 305-55(2) of the ITAA 1997 extends the application of Subdivision 305-B, which deals with the taxation of superannuation benefits from foreign superannuation funds, to payments (other than pension payments) received from a scheme for the payment of benefits in the nature of superannuation upon retirement or death, provided the scheme:

· is not and never has been, an Australian superannuation fund or a foreign superannuation fund; and

· was not established in Australia; and

· is not centrally managed or controlled in Australia.

As noted above, the Scheme is a statutory scheme established under the relevant laws of the overseas country. The Scheme is set up for the express purpose of providing for the payment of benefits in the nature of superannuation upon retirement or death. Its central management and control is clearly not in Australia and it is neither an Australian superannuation fund or a foreign superannuation fund.

Therefore, Subdivision 305-B of the ITAA 1997 will apply to payments from the Scheme made to Australian residents. This subdivision includes sections 305-70 and 305-75.

Assessable Amount

You advised that your client proposes to become a resident of Australia for tax purposes in June 2011 (the residency date) and will receive a lump sum payment from the Scheme in March 2012. Therefore the retirement lump sum will be made to your client more than six months after he becomes an Australian resident. Accordingly, a portion of the lump sum 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 your client 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:

(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).

This calculation effectively means that your client will be assessed only on the income earned in the Scheme while he was a resident of Australia. That is, your client will only be assessed on the accretion in the Scheme less any contributions made since he 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. For the purposes of section 305-701 of the ITAA 1997, the 'applicable fund earnings' should be calculated by:

translating the lump sum payment received from the Scheme at the exchange rate applicable on the day of receipt to Australian dollars (item 11 of the table to subsection 960-50(6)); and

deducting from this amount the Australian dollars equivalent of the payment vested in the Scheme at the exchange rate applicable just before the residency date (item 11A of the table to subsection 960-50(6)).

Calculation of Assessable Amount

Based on the information you have provided, your client will be a resident of Australia in June 2011. Your client will receive a lump sum from the Scheme in March 2012. As mentioned above, as your client will receive the lump sum payment more than six months after be becomes a resident of Australia for taxation purposes, a portion of the lump sum payment will be assessable under subsection 305-75(3) of the ITAA-1997.

To calculate the assessable amount under subsection 305-75(3) of the ITAA 1997 (as advised above), your client will need to work out the total of the following amounts:

· the amount of the lump sum benefit vested in your client just before the residency date (the exact date your client became a resident of Australia for taxation purposes). The lump sum benefit vested in your client on the day just before the residency date is translated into Australian dollars at the exchange rate applicable for overseas dollars on the day just before the residency date;

· contributions made to the fund for or by your client after the residency date; and

· the amount (if any) transferred into the fund from any other foreign superannuation fund.

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

The lump sum benefit in the Scheme is translated into Australian dollars at the exchange rate applicable for overseas dollars at the time (the exact date in March 2011) your client receives the lump sum payment in Australia.

Under paragraph 305-75(3)(c) of the ITAA 1997, the result above is multiplied by the 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. In your client's case, the resident days and the total days will be 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 your client became a resident of Australia. Your client will need to add all previously exempt fund earnings (if any).

The amount calculated under subsection 305-75(3) of the ITAA 1997 is then included in your client's income tax return in the 2011-12 income year.