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Ruling

Subject: Lump sum payment from a foreign superannuation fund

Question:

Is any part of the benefit transferred from a foreign pension scheme to an Australian superannuation fund assessable as applicable fund earnings?

Answer: No.

This ruling applies for the following periods

Year ended 30 June 2011

The scheme commenced on

1 July 2010

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 were employed overseas and a member of a foreign pension scheme (the Scheme) which is a foreign pension fund.

Benefits in the Scheme are only payable on retirement, invalidity and death.

The Scheme was the only foreign superannuation fund in which you held benefits and you could withdraw benefits from it before retirement.

In the 2008-09 income year you became an Australian resident for tax purposes.

Since you became an Australian resident no contributions were made by you or anyone on your behalf to the Scheme.

In the 2010-11 income year your Australian superannuation fund (the Fund) received a lump sum payment from the Scheme.

The Fund is a complying Australian superannuation fund.

The transfer to the Fund resulted in you no longer having any benefits in the Scheme.

A letter has been provided which shows that the Administrator of the Scheme is unable to provide a transfer value as at the date you became an Australian resident.

You are less than 50 years of age.

Assumption

You have agreed to the rate of return in the Scheme, between the day you became a resident of Australia and the date the lump sum payment was received, as being that determined by the Australian Taxation Office from the documents provided.

Based on the above rate of return, the agreed transfer value of your superannuation entitlement was calculated.

Relevant legislative provisions

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

Income Tax Assessment Act 1997 Section 305-60.

Income Tax Assessment Act 1997 Section 305-70.

Income Tax Assessment Act 1997 Subsection 305-70.

Income Tax Assessment Act 1997 Section 305-75.

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

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

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

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

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).

Reasons for decision

Summary

The 'applicable fund earnings' in respect of the lump sum payment paid from the foreign superannuation fund is calculated as zero.

Consequently, no amount of the lump sum payment will be included in your assessable income in the 2010-11 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 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 remainder of the lump sum payment is not assessable income and is not exempt income.

The applicable fund earnings is subject to tax at the person's marginal rate. 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 subsection 305-75(2) or (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 was not an Australian resident at all times during the period to which the lump sum relates.

Before determining whether an amount is assessable under section 305-70 of the ITAA 1997 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.

Therefore, on the basis of the information provided, the Commissioner considers the lump sum payment you received is from a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997.

Applicable fund earnings

You became a resident of Australia for tax purposes in the 2008-09 income year and you received the lump sum payment from the Scheme in the 2010-11 income year when it went into your Australian complying superannuation fund (the Fund). As this was more than 6 months after you became an Australian resident, section 305-70 of the ITAA 1997 applies to include the 'applicable fund earnings' in your assessable income.

The 'applicable fund earnings' are worked out under section 305-75 of the ITAA 1997. As mentioned earlier, 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:

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, you are assessed only on the income earned (the accretion) in respect of the Scheme less any contributions you made since you 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:

· 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 an amount which was calculated as the value of your benefit on the day before you became a resident of Australia. This is converted into Australian dollars at the exchange rate that applied on that day. That rate was applied and the value of the overseas benefit was converted into Australian dollars.

You stated that no contributions were made to the Scheme by yourself or anyone on your behalf after you became an Australian resident.

No amounts were transferred into the fund from other foreign superannuation funds during the period.

In the 2010-11 income year your benefits in the Scheme were paid out to you in the form of a once-off lump sum which was directly deposited by the Scheme into your Fund. Therefore this is the amount vested in you when the lump sum was paid. This is converted into Australian dollars at the exchange rate that applied on that day. The documentation provided the shows the value of the benefit when and its converted value in Australian dollars.

'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 case, that period is from a date in the 2008-09 income year to a date in 2010-11 income year which shows you were 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 lump sum.

Applying subsection 305-75(3) to your circumstances, the amounts referred to above are used in calculating the applicable fund earnings.

Calculation of the assessable amount of the payment from foreign superannuation fund

In your case, the calculation made under subsection 305-70(3) of the ITAA 1997 results in a figure which is less than zero.

Subsection 305-70(3) of the ITAA 1997 states that the applicable fund earnings is the amount worked out under this provision which is not less than zero. In this instance, as the amount worked out is less than zero the applicable fund earnings amount under subsection 307-75(3) is nil.

Accordingly, no part of the lump sum payment received by you client from the Scheme is to be included in your income tax return for the relevant income year.

Conclusion:

No part of the lump sum payment from a foreign superannuation fund which was transferred to your Australian superannuation fund is assessable as the applicable fund earnings relating to the payment is nil.