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Ruling

Subject: Foreign investment funds and foreign pension transfer

Question 1

Is the increase in value of your interest in a foreign pension fund included in your assessable income for the year ended 30 June 2010?

Answer: No.

Question 2

Is the amount transferred from your foreign pension fund to an Australian complying superannuation fund included in your assessable income for the year ended 30 June 2011?

Answer: No.

This ruling applies for the following periods:

Year ended 30 June 2010

Year ended 30 June 2011

The scheme commences on:

1 July 2009

Relevant facts and circumstances

You became a resident of Australia for tax purposes during the income year 2004-2005 when you emigrated from a foreign country.

You were a temporary resident of Australia before you became a permanent resident in income year 2008-2009.

You had an investment in the foreign pension fund.

You transferred this fund to an Australian complying superannuation fund.

There have been no contributions made to the foreign pension fund since you became a resident of Australia for tax purposes.

You no longer have any benefit in the foreign pension fund as it is completely closed and the entire fund has been transferred to Australia.

The actual amount received by the Australian fund was converted.

You have made no election as to how to pay any tax owing on this transfer.

Relevant legislative provisions

Income Tax Assessment Act 1936 Part XI

Income Tax Assessment Act 1936 Subsection 481(1)

Income Tax Assessment Act 1936 Subsection 483(2)

Income Tax Assessment Act 1936 Subsection 485(3)

Income Tax Assessment Act 1936 Section 486

Income Tax Assessment Act 1936 Subsection 515(1)

Income Tax Assessment Act 1936 Section 519

Income Tax Assessment Act 1936 Section 529

Income Tax Assessment Act 1997 Section 305-70

Income Tax Assessment Act 1997 Section 305-75

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

Income Tax Assessment Act 1997 Section 768-965

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

Income Tax Assessment Act 1997 Subsection 960-50(4)

Reasons for decision

Assessability of the increase in value under the foreign investment fund (FIF) rules

Australian resident taxpayers who have interests in certain FIF, may be subject to tax on an accruals basis on the growth in the value of their FIF under the FIF measures contained in Part XI of the ITAA 1936.

Application of the FIF measures

Foreign trusts are defined under the FIF provisions (subsection 481(1) of the ITAA 1936).

You had an investment in the foreign pension fund which is generally considered a foreign trust, therefore, this fund would be a foreign trust for FIF purposes (subsection 481(1) of the ITAA 1936).

Interest in a FIF

An interest in a FIF that is a foreign trust is:

· an interest in the capital or income of the trust - including a unit in a unit trust, or

· a legal document that confers an entitlement to acquire such an interest including an entitlement arising from an option or convertible note (subsection 483(2) of the ITAA 1936).

A foreign trust could include a superannuation or pension fund.

In your case, the trustees of the foreign pension fund held the income and capital in trust for you. Therefore, you had an interest in a foreign trust that satisfies the requirements of an interest in a FIF under subsection 483(2) of the ITAA 1936.

Interests in a FIF subject to the FIF measures

Section 529 of the ITAA 1936 is the operative provision of the FIF measures. It includes accrued FIF income in a taxpayer's assessable income, in relation to a notional accounting period of a FIF, for the year of income in which that notional accounting period ended.

The FIF measures apply to your interest in a FIF for the notional accounting period of the FIF that ended in your income year if:

· you had an interest in that FIF at the end of the income year

· you were a resident of Australia at any time in that income year (subsection 485(3) of the ITAA 1936).

You have been a resident of Australia for tax purposes since2004-05 income year and have had an investment in an FIF from that time until the amounts were transferred to the Australian fund however you did not have an interest in the FIF on 30 June 2011.

Accordingly the FIF measures will only apply to you for the period from the date you became a permanent resident of Australia to 30 June 2009 and the period 1 July 2009 to 30 June 2010.

The notional accounting period of an FIF will generally be 1 July to 30 June unless you elect to use another notional accounting period (section 486 of the ITAA 1936).

Exemption from FIF taxation

There are a large number of exemptions from attribution under the FIF measures and the three that are relevant in your case are summarised below.

(a) Exemption for an interest of A$50,000 or less

Individuals with small levels of offshore investments can qualify for an exemption. If the total of your interests and your associates' interests in foreign companies, trusts and life policies does not exceed A$50,000, the FIF taxation provisions will not apply to your investments (subsection 515(1) of the ITAA 1936.

In your case, this exemption does not apply as the total value of your interests exceeds $50,000.

(b) Employer-sponsored superannuation funds

If you are a natural person with an interest in a FIF that is an employer-sponsored superannuation fund, you may qualify for this exemption.

The FIF must be a superannuation fund maintained by your employer, or an associate of your employer, for the benefit of their employees. Also, you must be an employee or former employee of the employer (section 519 of the ITAA 1936).

Your investment in your foreign pension fund is not exempt from the FIF measures as the fund was not maintained by an employer or former employer.

(c) Exemption for temporary residents

From 1 July 2006, if you are a temporary resident at the end of an income year the FIF provisions will not apply to an interest you hold in a FIF for the notional accounting period that ends in that income year, in accordance with section 768-965 of the ITAA 1997.

You will qualify as a temporary resident if you meet all of the following conditions:

· you hold a temporary visa granted under the Migration Act 1958

· you are not an Australian resident within the meaning of the Social Security Act 1991, and

· your spouse (if applicable) is not an Australian resident within within the meaning of the Social Security Act 1991.

In your case, you were a temporary resident and then you became a permanent resident, therefore, you are not eligible for this exemption for the period from the date you became a permanent resident to 30 June 2009 and the period 1 July 2009 to 30 June 2010.

Methods of FIF taxation

There are three methods for working out taxation for an interest in a FIF, depending on your access to certain information on the FIF.

Most taxpayers liable to tax under the FIF measures will use the market value method which works out the movement in market value of the FIF interest between two annual reporting dates.

Use the deemed rate of return method if you are unable to establish a market value for your FIF interest and you have not elected to use the calculation method.

Use the calculation method if you have access to the financial accounts of the FIF and are able to determine the FIF's calculated profit or calculated loss.

More information on the methods of FIF taxation is available in chapter 4 of the Foreign investment funds guide.

FIF income included in your assessable income for the year ended 30 June 2009

The opening market value of a FIF interest at the time of you becoming a permanent resident was more than the value at the end of the notional accounting period, 30 June 2009.

There were no brought forward losses or acquisitions, disposals or distributions during the accounting period.

As the FIF amount is negative, the amount is a FIF loss. This FIF loss will be used to reduce gross FIF income in a later year.

FIF income included in your assessable income for the year ended 30 June 2010

The opening market value of a FIF interest at 1 July 2009 less than the value at the end of the notional accounting period, 30 June 2010.,.

There were no acquisitions, disposals or distributions during the accounting period.

Reducing the amount by the unapplied previous FIF loss resulted in a FIF loss.

As the FIF amount is negative, the amount is a FIF loss.

Amounts transferred from the overseas pension fund.

Applicable fund earnings

Section 305-70 of the ITAA 1997 generally provides that an Australian resident taxpayer who receives a lump sum from a foreign superannuation fund more than 6 months after becoming an Australian resident must include the 'applicable fund earnings' of the lump sum in their assessable income.

Where income has been previously assessed due to the operation of the Australian foreign investment fund (FIF) taxation provisions on the foreign pension scheme, the amount previously assessed may reduce the assessable amount.

You may be able to make an election to include some of your applicable fund earnings in your fund's assessable income. This will mean that your fund will pay the tax on the amount of your applicable fund earnings you elect, instead of you. Your fund pays income tax at 15% which may be less than the rate of tax that you pay.

The amount included in your personal assessable income is the amount by which the gross payment made to you on the payment day exceeds the amount properly payable to you on the first day during the period to which the payment relates that you became a resident of Australia, plus any contributions made after that day.

The 'applicable fund earnings' are worked out under section 305-75 of the ITAA 1997. Subsection 305-75(3) applies where the person becomes an Australian resident after the start of the period to which the lump sum relates.

Subsection 305-75(3) of the ITAA 1997 states that if you become an Australian resident after the start of 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 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 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, they are assessed only on the income earned (the accretion) in respect of the foreign fund transfer less any contributions made since the taxpayer became a resident of Australia. Further, any amounts representative of earnings during periods of non-residency, and 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) states 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.

You were not subject to the FIF taxation in the year ended 30 June 2010 as there was a FIF loss. You have not made an election to include your applicable fund earnings in the Australian fund's assessable income. You have not made any contributions to the foreign pension fund since you became an Australian resident.

Value of the foreign pension fund at the day you became a resident of Australia using the RBA exchange rate of the day gives a loss. Therefore there are no applicable fund earnings.