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Ruling

Subject: Foreign superannuation lump sum

Question:

Is a portion of a lump sum payment received from a foreign retirement fund included in your client's assessable income as applicable fund earnings under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer: Yes.

This ruling applies for the following period:

Year ended 30 June 2009

The scheme commenced on:

1 July 2008

Relevant facts and circumstances

Your client is over 60 years of age and became an Australian resident for income tax purposes during the 1993-94 income year (the residency day). Prior to this date your client was a resident of an overseas country (the overseas country).

Whilst an overseas resident, your client commenced a plan (the Plan) with a foreign fund in the overseas country.

The benefits of the Plan were paid by the foreign fund when the Plan matured during the 2008-09 income year (the maturity date).

Whilst your client was living in the overseas country your client made regular periodic contributions to the Plan.

Since your client became a resident of Australia, your client annually paid a fixed annual premium (contribution) to the Plan. The total contributions made by your client since becoming an Australian resident have been provided.

The terms of the Plan stated that:

o on death before the maturity date, the balance in the accumulation account becomes available to purchase an annuity; or

o on survival to the maturity date, the balance in the accumulation account becomes available to purchase an annuity and there is a guaranteed minimum amount that will be available.

Your client received a proportion of the total benefits in the Plan as a lump sum payment. The remaining benefits will be used in the future to purchase a non-commutable lifetime from the overseas country.

Details of your client's total benefits in the Plan on maturity, in the currency of the overseas country (the foreign currency), have been provided.

Your client's entitlements in the Plan relating to the lump sum amount was transferred to your client's bank account in the overseas country (the bank account) on the maturity date. Some of the monies in the bank account were used by your client for personal use.

Your client's non lump sum benefits were reinvested with the Plan in a separate account with the intention to purchase an annuity.

You state that the total benefits are not taxable in the overseas country.

The Plan did not allow for early release of benefits but only for the release of benefits on retirement, invalidity, death or emigration from the overseas country.

Your client's interests in the original plan with the foreign fund cease when the non lump sum benefits are re-invested in an annuity.

The transfer value of your client's benefits at the residency day have been provided in a letter from the foreign fund.

Assumptions:

In the absence of Reserve Bank of Australia conversion rates your client agreed to use other published daily currency conversion rates.

Your client also agreed that, for each year from the residency day to the Plan's maturity, the annual contributions to the foreign fund were made on the same specific day.

Relevant legislative provisions:

Income Tax Assessment Act 1997 Subsection 6-5(2).

Income Tax Assessment Act 1997 Subsection 6-10(4).

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

Income Tax Assessment Act 1997 Section 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 960-50(1).

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

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

Reasons for decision

Summary

A portion of the benefits your client received from the Plan, in relation to a matured policy, is assessable as 'applicable fund earnings', that is, the increase or growth in the foreign fund from the date that your client became a resident of Australia.

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

In this case, the applicable fund earnings in relation to the lump sum benefit has been calculated.

Accordingly, this calculated amount is the assessable amount of your client's assessable fund earnings from the Plan.

Detailed reasoning

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

Further, it should be noted the inclusion of ordinary or statutory income as assessable income of a taxpayer is not dependant upon when it is physically received by the taxpayer, or received in Australia, but when the income 'is applied or dealt with in any way' on the taxpayer's behalf or as the taxpayer directs.

In your client's case, the lump sum payment, which your client became entitled to upon the maturity of the policy in the Plan, requires consideration as to whether section 305-75 of the ITAA 1997 applies.

Lump sum payments 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 ITAA 1997.

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 subsection 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 fund's 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.

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

Applicable fund earnings

Your client became a resident of Australia for tax purposes in the 1993-94 income year and received, that is, became entitled, to the lump sum payment in respect of the Plan on the maturity date in the 2008-09 income year. As this was more than six months after your client became an Australian resident, section 305-70 applies to include the 'applicable fund earnings' in their 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, your client is assessed only on the income earned (the accretion) in respect of the Plan less any contributions made since they 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.

Amounts to be used in calculation

The Plan advised your client of the value of their benefits in the Plan as at the date on which your client became a resident. This will be used as the amount for the day before your client became a resident of Australia. This is converted into Australian dollars at the exchange rate that applied on the day before your client became a resident.

Information provided shows the total amounts contributed annually by your client to the Plan since becoming a resident. These amounts, which were paid in the foreign currency, have accordingly been converted into Australian dollars at the exchange rate that applied on the dates on which the contributions were made.

No amounts were transferred into the Plan from other foreign superannuation funds after your client became a resident of Australia.

On the Plan's maturity date, a portion of your client's total benefits was paid as a lump sum payment into your client's overseas bank account and the remaining benefits will be used to purchase a non-commutable lifetime annuity.

Accordingly, the total amount vested in your client when the Plan matured was converted into Australian dollars at the exchange rate that applied on that day.

'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 your client's date of Australian residency to the Plan's maturity date 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 lump sum.

Therefore, applying subsection 305-75(3) of the ITAA 1997 to your client's circumstances and the details provided above, the applicable fund earnings are determined.

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

In your client's case, the calculation made under subsection 305-70(3) of the ITAA 1997 shows there was growth in the Plan held with the foreign fund from the period that your client became an Australian resident to the Plan's maturity date.

The calculation shows that assessable applicable fund earnings relating to your client's benefits in the foreign fund exceed the amount of the lump sum payment.

However, subsection 305-70(2) of the ITAA 1997 states that only so much of the lump sum as equals the applicable fund earnings is included in assessable income. Therefore, the assessable income will be limited to the amount of the lump sum in any case where the lump sum is less than the applicable fund earnings.

Accordingly, the amount included as assessable income for the lump sum is the lump sum paid into your client's foreign bank account, converted into Australian currency.