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Ruling

Subject: Transfer benefits from overseas pension scheme

Questions:

Is any part of the benefit proposed to be transferred from the Country A pension scheme to the Country B superannuation fund (the Country B Fund) assessable as applicable fund earnings where the taxpayer is a temporary resident of Australia?

Is any part of the lump sum benefit, paid within six months of becoming a resident of Australia, from the Country B Fund assessable as applicable fund earnings where the taxpayer is a permanent resident?

Is any part of the lump sum benefit, paid more than six months after becoming a resident of Australia, from the Country B Fund assessable as applicable fund earnings where the taxpayer is a permanent resident?

Answers:

No

No

Yes

This ruling applies for the following period:

30 June 2012

The scheme commences on:

1 July 2011

Relevant facts and circumstances

Your client arrived in Australia from Country A during the 2008-09 income year (the residency date) under a temporary visa.

Your client arrived in Australia with an intention to stay, and to become an Australian resident for tax purposes.

On leaving Country A, your client held money in a Country A pension scheme. Your client wants to move their funds from the Country A pension scheme to Australia.

Since arriving in Australia, your client has transferred as much as they are able to an Australian superannuation fund using their entire non-concessional contributions cap.

Your client still has a lump sum entitlement left in the Country A pension scheme. The lump sum is available to be transferred to certain overseas pension schemes in other overseas countries.

The Country A pension scheme rules require your client to transfer their funds in specific lump sums rather than in a piecemeal fashion. The Country A pension scheme rules also requires your client to move the funds to another recognised overseas pension scheme. Further, despite your client being over 65, pension laws in Country A requires your client to be a non-resident of Country A for a number of years before they can withdraw the funds from their overseas scheme or any recognised overseas pension scheme.

Your client sought advice from a financial planner in regards to options to move the money to a fund outside of Country A. Your client has been advised that they would be able to transfer all of their remaining funds from the Country A pension scheme to a superannuation fund in Country B (the Country B Fund) meets the Country A requirements.

Once your client meets the Country A non-resident rule they will then be able to withdraw the funds from the Country B fund as a lump sum and bring them to Australia.

Your client plans to rollover the benefits from the overseas pension scheme into the Country B Fund and the money will remain in the overseas fund until the non-resident requirement of the Country A has been met.

Any earnings on the investment in the Country B Fund will be taxable in that overseas country.

Recently, your client has applied for a permanent resident visa for Australia and is being considered by the Department of Immigration and Citizenship.

Your client is over 65 year of age.

Reasons for decision

Summary

The applicable fund earnings, in relation to a lump sum payment transferred from the Country A pension scheme to the Country B Fund while your client remains a temporary resident of Australia, are not included in your client's assessable income.

However, if the lump sum payment transferred from the Country A pension scheme to the Country B Fund is received or made:

· after your client becomes a permanent resident of Australia and

· more than six months after your client became an resident of Australian for tax purposes,

· any applicable fund earnings will be included in your client's assessable income.

The foreign investment fund (FIF) provisions no longer apply from 1 July 2010. Accordingly, Australian residents with non-controlling shareholdings in foreign companies or with interests in foreign trusts no longer need to include income on an attribution basis.

Detailed reasoning

Residency

Subsections 6-5(2) and 6-10(4) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident taxpayer includes ordinary or statutory income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

However, the foreign source income exemption for temporary residents, contained in subdivision 768-R of the ITAA 1997, provides an exemption for most foreign income derived by temporary residents of Australia.

A temporary resident is defined in subsection 995-1(1) of the ITAA 1997 as a person:

(a) who holds a temporary visa granted under the Migration Act 1958; and

(b) who is not an Australian resident within the meaning of the Social Security Act 1991; and

(c) whose spouse is not an Australian resident within the meaning of the Social Security Act 1991.

In particular, section 768-910 of the ITAA 1997 provides that ordinary income derived from a foreign source, excluding employment related income and capital gains on shares and rights acquired under employee share schemes, is non-assessable non-exempt income when derived by a temporary resident of Australia.

Similarly, section 768-910 of the ITAA 1997 provides that statutory income derived from a foreign source, excluding a net capital gain which is covered by section 768-915 and employment related statutory income, is non-assessable non-exempt income when derived by a temporary resident of Australia.

Assessability of the growth in the overseas pension scheme for the 2010-11 and subsequent income years

The FIF rules has been repealed by Schedule 1 of the Tax Laws Amendment (Foreign Source Income Deferral) Act (No 1) 2010 which received royal assent on 14 July 2010. This Act repeals the FIF rules and the deemed present entitlement rules in relation to the 2010-11 and later income years.

Therefore from 1 July 2010 Australian residents with non-controlling shareholdings in foreign companies or with interests in foreign trusts no longer need to include income on an attribution basis under the FIF rules.

In your case, if your client has an interest in foreign investment funds, regardless of whether your client retained the funds in the overseas pension scheme or transfers them to Australia or transfer into another foreign superannuation fund, as a temporary resident or a permanent resident of Australia, FIF provisions are not applicable from 1 July 2010.

Superannuation benefits from a foreign superannuation fund

Temporary resident

The following advice only applies where a lump sum payment from the Country B Fund is received by your client whilst your client is a temporary resident of Australia.

From 1 July 2007 the applicable fund earnings in relation to a lump sum payment from a foreign superannuation fund that is received more than six months after a taxpayer has become an Australian resident will be assessable under section 305-70 of the ITAA 1997. The remainder of the lump sum payment is not assessable income and is not exempt income.

Section 10-5 of the ITAA 1997 lists the provisions in respect of statutory income. Relevantly included in this list is section 305-70.

As previously mentioned, subdivision 768-R of the ITAA 1997 provides tax relief for most foreign income derived by temporary residents of Australia.

In particular, subsection 768-910(1) of the ITAA 1997 provides that statutory income derived from a foreign source, excluding a net capital gain which is covered by section 768-915 and employment related statutory income, is non-assessable non-exempt income when derived by a temporary resident of Australia.

Therefore applicable fund earnings in relation to lump sum payments from the Country B Fund while your client still a temporary resident, being statutory income from a foreign source, are non-assessable non-exempt income under subsection 768-910(1) of the ITAA 1997 if a person is a temporary resident of Australia when the person derived the income.

Subsection 6-15(3) of the ITAA 1997 provides that if an amount is non-assessable non-exempt income, it is not assessable income. Therefore, applicable fund earnings in relation to a lump sum payment from a foreign superannuation fund for a temporary resident is not assessable income.

Permanent resident - Lump sum payment received less than six months after becoming an Australian resident

The following advice only applies where a lump sum payment from the Country B Fund is received by your client whilst your client is a permanent resident of Australia.

If the lump sum payment is received within six months from the date your client become a resident of Australia (that is, when your client arrived in Australia and held a temporary visa), section 305-60 of the ITAA 1997 applies:

A superannuation lump sum you receive from a foreign superannuation fund is not assessable income and is not exempt income if:

(a) you receive it within 6 months after you become an Australian resident; and

(b) it relates only to a period:

(i) when you were not an Australian resident; or

(ii) starting after you became an Australian resident and ending before you receive the payment; and

(c) it does not exceed the amount in the fund that was vested in you when you received the payment.

Accordingly, if the lump sum payment made by the Country B Fund is received within six months of your client becoming an Australian resident, the amount will not be included in your client assessable income in Australia.

It should be noted that the six month period referred to in section 305-60 of the ITAA 1997 will also include the period your client had held a temporary visa. This is because your client is still a resident of Australia for income tax purposes whilst holding the temporary visa.

As such, the six month period referred to in section 305-60 of the ITAA 1997 commenced on the residency date, the date your client arrived in Australia. Any lump sum your client receives in the future will not be non-assessable non-exempt income under this section.

Permanent resident - Lump sum payment received more than six months after becoming an Australian resident

The following advice only applies where a lump sum payment from the Country B Fund is received by your client whilst your client is a permanent resident of Australia.

The applicable fund earnings in relation to a lump sum payment from a foreign superannuation fund that is received more than six months after a person has become an Australian resident will be assessable under subsection 305-70(2) of the ITAA 1997. The remainder of the lump sum payment is not assessable income and is not exempt income (subsection 305-70(3)).

The applicable fund earnings represent the increase or growth in the Country B Fund during the period your client was a resident of Australia (temporary and permanent).

The applicable fund earnings is calculated by:

· translating the amount received from the Country B Fund at the exchange rate applicable on the day of receipt into Australian dollars;

· deducting from this amount the Australian dollar equivalent of the amount vested in the Country B Fund on the day just before your client first became an Australian resident at the exchange rate applicable on that day; and

· add the total of all previously exempt fund earnings (if any).

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.

In this case, your client intends to transfer his lump sum entitlement from the overseas pension scheme to Fund A after he became a resident of Australia (i.e. after the residency date). The lump sum will be paid to your client once your client meets overseas country's non-resident rule. Accordingly, there will be previously exempt fund earnings.

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.

In this case, your client lodged an application for permanent residency a month ago. The application is being considered by the Australian Immigration Department. Your client intends to withdraw their funds from the Country B Fund once they satisfied the Country A's non-resident requirement which is in couple years time and bring it to Australia. If your client obtains permanent residence, then subsection 305-75(3) of the ITAA 1997 would apply to determine the amount of the applicable fund earnings (if any) in relation to the lump sum payment made by the Country B Fund.

This calculation effectively means that your client will be assessed only on the income earned in the Country B Fund while your client was a resident of Australia. That is, your client will only be assessed on the accretion in the Country B Fund less any contributions made since your client became a resident of Australia.

Further issues for you to consider:

Bring forward provision - subsections 292-85(3) and (4) of the ITAA 1997

We note that your client has already transferred funds from their Country A pension scheme to Australia. Please note that if your client triggered the bring forward provision, further contributions to complying Australian superannuation funds before the bring forward period ends may have excess contributions tax consequences.

Acceptance of contributions - 'work test'

Further, we note that your client entered Australia on a temporary visa, and that your client has now turned 65 years of age. After age 65, a person must meet the work test, in accordance with Regulation 7.04 of the Superannuation Industry (Supervision) Regulations 1994, at the time a personal contribution is made.