Edited version of private ruling

Authorisation Number: 1011844143561

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject:

Lump sum payment from a foreign fund

Question

Is any portion of the lump sum payment made from the foreign fund included in the taxpayer's assessable income as applicable fund earnings under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following period

For the year ended 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts

Over 15 years ago you were working for an employer in an overseas country. During this period, you were a member of an overseas fund (Fund 1) and made voluntary contributions to the fund until you left the overseas country.

Over 10 years ago, you became an Australian resident for tax purposes.

After becoming an Australian resident, your total benefits in Fund 1 were transferred to Fund 2.

Over five years later, your total benefits in Fund 2 were transferred to Fund 3.

During the 2009-10 income year, your total benefits in Fund 3 were transferred to Fund 4.

There are restrictions on withdrawing monies from Fund 3 prior to retirement. However, the drawdown plan allows a tax-free withdrawal in the overseas country of up to a specified percentage to be taken in cash after reaching a specified age.

In the 2009-10 income year, you chose to take a percentage of your tax-free benefits as a lump sum.

The lump sum was made from Fund 4 to a bank account in the overseas country in the names of both your partner and yourself as a term deposit.

No contributions have been made by you or any other person on your behalf to any of the overseas funds since you became an Australian resident.

You have advised that your income for the 2009-10 income year includes salary and wages and interest on the term deposit.

Assumptions

You could not provide the value of your total benefits in Fund 1 as at the day before you became an Australian resident. However, you have provided a transfer value on another date.

Therefore, in order to determine the lump sum amount as at the day before you became an Australian resident, you have been advised that the following assumptions are being made in issuing the Notice of Private Ruling:

· by using the total transfer value you were able to provide, and

· the lump sum payment you took during the 2009-10 income year,

· the annual compound rate of growth of the transfer value has been calculated.

Based on this rate of growth and the other information provided, the Commissioner considers it reasonable to make an assumption concerning the amount of your transfer value as at the day before you became a resident.

Relevant legislative provisions

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

Income Tax Assessment Act 1997 Paragraph 295-95(2)(a).

Income Tax Assessment Act 1997 Paragraph 295-952)(b).

Income Tax Assessment Act 1997 Paragraph 295-95(2)(c).

Income Tax Assessment Act 1997 Section 305-70.

Income Tax Assessment Act 1997 Subsection 305-75(2).

Income Tax Assessment Act 1997 Paragraph 305-75(2)(a).

Income Tax Assessment Act 1997 Paragraph 305-75(2)(b).

Income Tax Assessment Act 1997 Paragraph 305-75(2)(c).

Income Tax Assessment Act 1997 Subsection 305-75(3).

Income Tax Assessment Act 1997 Subsection 305-75(5).

Income Tax Assessment Act 1997 Paragraph 305-75(5)(a).

Income Tax Assessment Act 1997 Paragraph 305-75(5)(b).

Income Tax Assessment Act 1997 Paragraph 305-75(5)(c).

Income Tax Assessment Act 1997 Subsection 305-75(6).

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 995-1(1).

Superannuation Industry (Supervision) Act 1993 Section 10.

Reasons for decision

Summary

A portion of the lump sum payment made by the foreign fund is assessable as 'applicable fund earnings'.

The amount, calculated as the previously exempt fund earnings, represents the accretions in Fund 2. This amount is assessable in the 2009-10 income year as your applicable fund earnings and will be subject to your marginal rate of tax.

Detailed reasoning

Lump sum payments from foreign superannuation funds

Where a lump sum payment (LSP) is transferred or received from a foreign superannuation fund more than six months after a person has become an Australian resident, part of that LSP will be assessable under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997). This assessable amount is called applicable fund earnings.

The applicable fund earnings is subject to tax at the person's marginal rate. The remainder of the LSP 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 subsection 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 an 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.

Subsection 995-1(1) of the ITAA 1997 defines a superannuation fund as having the same meaning given by section 10 of the Superannuation Industry (Supervision) Act 1993 (SIS Act), that is:

(a) a fund that:

I. is an indefinitely continuing fund; and

II. is a provident, benefit, superannuation or retirement fund; or

(b) a public sector superannuation scheme;

In the present case it is evident that the funds established in the overseas country are not Australian superannuation funds as defined in subsection 295-95(2) of the ITAA 1997.

Based on the information provided, however, the overseas funds are considered to be foreign superannuation funds as defined in subsection 995-1(1) of the ITAA 1997.

Calculation of Assessable Amount

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.

This calculation effectively means that you will be assessed only on the income earned in the fund while you were a resident of Australia. That is, you will only be assessed on the accretion in the fund less any contributions made since you became a resident of Australia.

Further, 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.

In this case, you became a resident of Australia for tax purposes more than six months after you became an Australian resident.

Because you became a member of Fund 4 after you became a resident of Australia, your lump sum payment will be assessable under subsection 305-75(2) of the ITAA 1997.

Subsection 305-75(2) of the ITAA 1997 states:

If you were an Australian resident at all times during the period to which the lump sum relates, 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 part of the lump sum that is attributable to contributions made by or in respect of you on or after the day when you became a member of the fund (the start day);

(ii) the part of the lump sum (if any) that is attributable to amounts transferred into the fund from any other foreign superannuation fund during 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 income tax);

(c) add the total of all your 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) of the ITAA 1997 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).

Subsection 305-75(5) of the ITAA 1997 applies to each transfer, from one overseas superannuation fund to another, of the monies representing the lump sum payment. Accordingly, a calculation of the applicable fund earnings must be made for each transfer as if the amounts had actually been paid to you.

It should be noted that section 305-70 of the ITAA 1997 applies even where the lump sum is paid into an overseas bank or investment account.

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:

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

· then, calculate the other amounts

Amounts to be used in calculation

You have agreed to our assumption for the value of your benefits in Fund 1 as at the day before you became a resident.

This amount, and the amounts you transferred to Fund 2, Fund 3 and Fund 4 are converted into Australian dollars at the Reserve Bank exchange rate applicable on the specified dates.

Because you only commuted a percentage of your benefits of your entitlement in Fund 4 into the lump sum, the calculation of your applicable fund earnings will only take into account that percentage of your entitlements in the overseas funds.

The calculation of your previously exempt fund earnings, in Australian dollars, of the specified percentage of your benefits transferred from Fund 1 to Fund 2 and from Fund 3 to Fund 4 produces a negative amount. Consequently, no applicable fund earnings will apply in respect of these transfers.

However, the calculation of your previously exempt fund earnings, in Australian dollars, of the specified percentage of your benefits transferred from Fund 2 to Fund 3 had a positive amount. Therefore this amount is the applicable fund earnings that will apply in respect of the accretions in Fund 2, which is the specified amount to be included in your assessable income.

During the 2009-10 income year, you chose to transfer the specified percentage of your benefits in Fund 4 to a bank account in the overseas country in the names of your partner and yourself.

You have advised that no contributions were made to the overseas funds by you or an employer since you became an Australian resident.

Lump sum payment

The assessable amount of your lump sum payment made by Fund 4 is calculated as follows.

The amount mentioned in paragraph 305-75(2)(a)(i) of the ITAA 1997 is Nil. Further, the amount mentioned in paragraph 305-75(2)(a)(ii) of the ITAA 1997 is equal to the amount mentioned in paragraph 305-75(2)(b) of the ITAA 1997.

Consequently, the amount calculated under paragraphs 305-75(a) and (b) of the ITAA 1997 is Nil.

Finally, paragraph 305-75(2)(c) of the ITAA 1997 requires that any previously exempt fund earnings calculated under subsections 305-75(5) and (6) are added to the total above. In your case, the total amount of your previously exempt fund earnings is the amount calculated in respect of the accretions in Fund 2.

Assessable amount of the payment from the foreign superannuation scheme

Based on the figures provided and in accordance with section 305-70 of the ITAA 1997 your applicable fund earnings in the 2009-10 income year is the Australian dollar amount representing the accretions in Fund 2, which is to be included in your assessable income for the 2009-10 income year.