Edited version of private ruling

Authorisation Number: 1011871608622

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Ruling

Subject: Lump sum payment from an overseas pension scheme

Question

Is any part of a lump sum payment from received from an overseas pension scheme, included in your client's assessable income as applicable fund earnings under section 305-70 of the Income Tax Assessment Act 1997?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2010.

The scheme commences on:

1 July 2009.

Relevant facts and circumstances

Your client is aged between 50 and 65 years of age, and was previously a resident of a foreign country.

Whilst residing in the foreign country your client was a member of a foreign pension scheme (the pension scheme). The pension scheme is part of a pension fund authority in the foreign country.

Your client arrived in Australia and became a resident of Australia for tax purposes on a residency date which occurred X years ago.

In a letter sent to your client in 2009, the foreign pension fund authority advised that in accordance with the regulations governing the pension scheme, your client was entitled to a lump sum retirement grant. The retirement grant is tax-free in the foreign country.

A provisional Statement of Benefits was enclosed with the letter. The Statement shows the date of your client's last day of service with the participating employer, and the value of the retirement grant on that date. The Statement further discloses the date of your client's retirement from the pension scheme, and also shows the total value of the retirement grant payable at that date.

You have advised that the retirement grant was paid to your client on this date in 2009.

Since the residency date, your client has not made any contributions to the pension scheme.

In addition, no employer has made any contributions to the pension scheme for your client's benefit or on your client's behalf since your client became an Australia resident.

Also since the residency date, no amounts have been transferred into the pension scheme from any other foreign superannuation funds.

Relevant legislative provisions

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

Income Tax Assessment Act 1997 Section 305-70,

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

Income Tax Assessment Act 1997 Paragraph 305-70(2)(a),

Income Tax Assessment Act 1997 Subsection 305-70(3),

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

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

Income Tax Assessment Act 1997 Paragraph 305-75(3)(a),

Income Tax Assessment Act 1997 Paragraph 305-75(3)(b),

Income Tax Assessment Act 1997 Paragraph 305-75(3)(c),

Income Tax Assessment Act 1997 Paragraph 305-75(3)(d),

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),

Income Tax Assessment Regulations 1997 Regulation 960-50.01 and

Superannuation Industry (Supervision) Act 1993 Section 10.

Reasons for decision

Summary

The applicable fund earnings represents the increase or growth in the foreign superannuation fund during the period your client is a resident of Australia.

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

Because the applicable fund earnings in this case is $NIL, the entire lump sum payment received from the foreign pension scheme is not assessable income and is not exempt income and is therefore tax-free. Consequently, no amount of the payment is included in your client's assessable income in the 2009-10 income year.

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 transferred or 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 person's marginal rate of tax.

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) 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.

Subsection 995-1(1) of the ITAA 1997 also 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; or

(ii) is a provident, benefit, superannuation or retirement fund; or

(b) a public sector superannuation scheme.

Therefore, in order for the lump sum payment from the foreign pension scheme (the pension scheme) to be considered a payment from a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997, it must also satisfy the requirements set out in subsection 295-95(2). This means that the pension scheme should not be an Australian superannuation fund as defined in subsection 995-1(1) but must be a provident, benefit, superannuation or retirement fund as discussed above.

It is evident that the pension scheme, which is established in the foreign country, is established outside of Australia. Similarly, the central management and control of the pension scheme is outside of Australia.

On the facts provided, the Commissioner considers that the pension scheme is a foreign superannuation fund as defined in subsection 995-1(1). Therefore, the Commissioner considers that the retirement grant your client received from the pension scheme is a lump sum payment made from a foreign superannuation fund.

Assessable Amount

Your client became a resident of Australia for tax purposes on a residency date which occurred X years ago. You have advised that the retirement grant was paid to your client during 2009. The date on which your client received the lump sum payment is more than six months after they became an Australian resident. Accordingly, a portion of the lump sum payment will be assessable under section 305-70 of the ITAA 1997.

The applicable fund earnings in relation to the lump sum payment are calculated under subsection 305-75(3) of the ITAA 1997. In this instance, subsection 305-75(3) applies because your client became an Australian resident after the start of the period to which the lump sum relates.

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).

In short, your client will be assessed only on the income earned in the pension scheme (the accretion) while your client was a resident of Australia, less any contributions made since your client became an Australian resident.

Further, any amounts representative of earnings during periods of non-residency and certain capital transfers 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. 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:

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

(b) then, calculate the other amounts.

Consequently, the lump sum payment your client received is translated into Australian dollars at the exchange rate applicable at the time of receipt. Similarly, the amount vested in the fund on the day before he became an Australian resident is converted to Australian dollars at the exchange rate that applied on that day.

Amounts to be used in the calculation

As noted in the facts, in a letter sent to your client during 2009, the foreign pension fund authority advised that in accordance with the regulations governing the pension scheme, your client was entitled to a lump sum retirement grant.

A provisional Statement of Benefits showing how your client's benefits were calculated was enclosed with the letter. The Statement shows that the retirement grant was calculated by reference to your client's final salary with the participating employer in the foreign country.

The Statement discloses the date of your client's last day of service with the previous employer, and the value of the retirement grant on that date.

As your client became a resident of Australia a number of days later, it is reasonable to conclude the value of the retirement lump sum on the day before the residency date was also the value of the retirement grant on the date of your client's last day of service. Accordingly, this will be used as the amount for the day before your client became an Australian resident. This is converted into Australian dollars at the exchange rate that applied on that day.

You have advised that no contributions were made to the pension scheme by your client or an employer after the residency date. You have also advised that no amounts were transferred into the pension scheme from other foreign superannuation funds during the period.

As noted earlier, the retirement grant was paid to your client during 2009. Therefore this is the amount vested in your client when the lump sum was paid. This is converted into Australian dollars at the exchange rate that applied at the time the lump sum payment was made to your client.

'The period' for the purposes of paragraph 305-75(3)(c) of the ITAA 1997 commences on the day on which the person first became an Australian resident and ceases on the day the lump sum is paid. In your client's case, that period is from the residency date which occurred X years ago to the date on which the lump sum was paid, and your client was a resident for the whole of that period. Therefore, the Australian resident days and the total days are the same, and so the proportion to be used in the calculation is 1.

There are no previously exempt fund earnings in relation to the retirement grant.

Therefore, applying subsection 305-75(3) of the ITAA 1997 to these circumstances, the amounts to be used in calculating the applicable fund earnings are as follows:

subparagraph 305-75(3)(a)(i) the amount as advised by the foreign entity

subparagraph 305-75(3)(a)(ii) NIL

subparagraph 305-75(3)(a)(iii) NIL

paragraph 305-75(3)(b) the lump sum payment

paragraph 305-75(3)(c) 1

paragraph 305-75(3)(d) NIL.

Calculation of the assessable amount of the payment from the pension scheme

In accordance subsection 305-75(3) of the ITAA 1997 the amounts determined at sub-paragraphs 305-75(3)(a)(i), (ii) and (iii) are added. In this case, this amount totals $X.

This total is then subtracted from the amount determined under paragraph 305-75(3)(b), $Y. It follows that $Y less $X equals negative $Z.

This figure is multiplied by the proportion of the total days determined under paragraph 305-75(3)(c) - '1'. Accordingly, negative $Z × 1 = negative $Z.

To this figure we add the amounts determined under paragraph 305-75(3)(d) - NIL. Therefore, negative $Z + NIL = negative $Z.

As the amount calculated under subsection 305-75(3) of the ITAA 1997 is less than zero, the applicable fund earnings in relation to the lump sum payment is $NIL. As a result, the entire lump sum payment from the pension scheme is not assessable income and is not exempt income, in accordance with subsection 305-70(3) of the ITAA 1997. Consequently, no amount of the lump sum payment is included in your client's assessable income in the 2009-10 income year.