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Ruling

Subject: Lump sum payment from foreign superannuation fund

Question

Is a portion of a foreign lump sum payment to be included in your assessable income as applicable fund earnings, in accordance with section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

This ruling applies for the following period:

2008-09 income year.

The scheme commences on:

1 July 2008.

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You are under age 55.

You state that you became a member of a foreign pension scheme (the Foreign Fund) more than six years ago.

During the 2005-06 income year you became a resident of Australia for tax purposes (the residency date).

The Reserve Bank of Australia's foreign exchange rate on the day before the day you became an Australian resident was A$1 = P.

A 'Transfer Value Statement' for the 'guaranteed period' during the 2008-09 income year was issued by the Foreign Fund. It states that the transfer value of your benefits at during the 2008-09 income year was X.

You are a member of an Australian complying superannuation fund (the Aus Fund).

In the 2008-09 income year, a letter was sent by the Foreign Fund to the trustee of the Aus Fund. In this letter entitled 'Transfer of Pension Credit', the Foreign Fund advised that you had chosen to transfer your pension benefit to the Aus Fund.

A 'Transfer Statement' was enclosed with this letter. This statement discloses the transfer value of your benefits was X.

The Foreign Fund booklet 'Your Guide', states that:

...all 'preserved benefits' are increased in line with the cost of living. They are index-linked from the date you leave.

Your pension will be increased to take into account increases in the cost of living. This is called 'index-linking' because the increases are related to rises in the foreign index (the Index).

Preserved pensions and lump sums are also increased so they keep their value.

The booklet further states that the rules of the Foreign Fund do not allow for access to benefits prior to your retirement, and require that monies are held in the Foreign Fund for retirement only. Benefits are available on retirement (not before age 55), invalidity, the death of the member or the member moving overseas permanently.

In the 2008-09 income year $XX was transferred to the Aus Fund in respect of your entitlements in the Foreign Fund.

You no longer have an interest in the Foreign Fund.

No contributions have been made to the Foreign Fund since you became an Australian resident. Also since this date, no amounts have been transferred into the Foreign Fund from any other foreign superannuation funds.

Relevant legislative provisions

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

Income Tax Assessment Act 1997 Subsection 295-200(2).

Income Tax Assessment Act 1997 Subsection 295-200(3).

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)(b).

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 305-80.

Income Tax Assessment Act 1997 Subsection 305-80(2).

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 960-50(6).

Income Tax Assessment Act 1997 Subsection 995-1(1).

Income Tax Assessment Regulations 1997 Regulation 960-50.01.

Superannuation Industry (Supervision) Act 1993 Section 10.

Reasons for decision

Summary

The applicable fund earnings in relation to the lump sum is Nil. Therefore, no part of the payment received from the Aus Fund is to be included in your assessable income for the 2008-09 income year.

Detailed Reasoning

Lump sum payments transferred 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 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 Foreign Fund) 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) of the ITAA 1997. This means that the Foreign Fund 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.

The Foreign Fund is established outside of Australia. Similarly, the central management and control of the Foreign Fund is outside of Australia. On the facts provided, the Commissioner considers that the Foreign Fund is a foreign superannuation fund as defined in subsection 995-1(1). Therefore, the Commissioner considers that the lump sum payment transferred to your Australian fund from the Foreign Fund is a lump sum payment made from a foreign superannuation fund.

Assessable Amount

You became a resident of Australia for tax purposes during the 2005-06 income year (the residency date). Your deferred pension benefit of X was transferred from the Foreign Fund to the Aus Fund during the 2008-09 income year. The lump sum payment was made by the Foreign Fund to the Aus Fund more than six months after you 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 you 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, you will be assessed only on the income earned in the Foreign Fund (the accretion) while you were a resident of Australia, less any contributions made since you 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 you 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 you 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

The Foreign Fund did not provide the value of your preserved pension benefit on the day immediately before the residency date. Preserved benefits in the Foreign Fund increase by a foreign index (the Index).

The Commissioner will assume that the transfer value of your preserved pension benefit on the day before the residency date, was X, based on the Index increases for the period between your residency date and your payment date. Accordingly, this value will be used as the amount for the day just before you became an Australian resident. This amount is converted into Australian dollars at the exchange rate that applied on that day.

The daily exchange rate which prevailed on the day just before the residency date was A$1 = P. Therefore the vested amount converted to Australian dollars is:

Y ÷  P =  $YY.

You made no contributions to the Foreign Fund after the residency date. Further, no contributions have been made to the Foreign Fund by an employer on your behalf. No transfers were made to the Foreign Fund from other foreign superannuation funds.

The lump sum payment of X is converted into Australian dollars at the exchange rate that applied at the time it was received by Aus Fund in Australia.

The payment was received by the Aus Fund in the 2008-09 income year. The amount of this lump sum in Australian dollars received by the Aus Fund on this date was $XX.

'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 this case, 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 lump sum payment.

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) $YY

subparagraph 305-75(3)(a)(ii) NIL

subparagraph 305-75(3)(a)(iii) NIL

paragraph 305-75(3)(b) $XX

paragraph 305-75(3)(c) 1

paragraph 305-75(3)(d) NIL.

Calculation of the assessable amount of the payment from the Foreign Fund

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 together as follows:

$YY + NIL + NIL = $YY.

This total is then subtracted from the amount determined under paragraph 305-75(3)(b), $246,855.04, to produce the following result:

$XX less $YY equals -$ZZ.

This figure is multiplied by the proportion of the total days determined under paragraph 305-75(3)(c) - '1':

-$ZZ × 1 = -$ZZ.

To this figure we add the amounts determined under paragraph 305-75(3)(d) - NIL:

-$ZZ + NIL = -$ZZ.

However, because the result of the calculation in subsection 305-75(3) of the ITAA 1997 is less than zero, your applicable fund earnings will be Nil.

Therefore, no part of the payment received from the Fund is to be included in your assessable income for the 2008-09 income year.