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Ruling

Subject: Transfer of benefits from UK pension scheme - divorce settlement

Question

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

Advice/Answers

Yes.

This ruling applies for the following period

Year ending 30 June 2012

The scheme commenced on

1 July 2011

Relevant facts

Your client and their former spouse arrived in Australia more than 10 years ago.

Your client and their former spouse subsequently divorced.

Divorce orders state that your former spouse was to do all acts and things necessary to split funds in their superannuation fund equally with your client.

In the 2010-11 income year your client's share of their former spouse benefits were transferred to their foreign fund.

Your client's foreign fund is established and administered overseas.

Benefits in your client's foreign fund may only be taken from age 55. A person may only take benefits earlier if they are in ill-health and are unable to work or if they are already had an existing right to retire earlier than age 55.

Your client did not contribute any amounts to their foreign fund after becoming a resident of Australia.

Your client wishes to transfer all her benefits in their foreign fund to their Australian superannuation fund.

Your client has not previously transferred any amounts from their foreign fund to Australia.

The date on which your client will receive the lump sum benefit is more than six months after they become an Australian resident.

Relevant legislative provisions

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

Income Tax Assessment Act 1997 Section 305-70.

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

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

Income Tax Assessment Act 1997 Section 305-80.

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 lump sum benefit your client received from their foreign fund is assessable as 'applicable fund earnings'.

The applicable fund earnings are assessable in Australia. The remainder of the lump sum benefit is not assessable income and is not exempt income.

Your client can elect to have some or all of the applicable fund earnings taxed in their Australian superannuation fund rather than having it included in their assessable income.

Detailed Reasoning

Lump sum payments transferred from foreign superannuation funds

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 the amount worked out under either subsections 305-75(2) or 305-75(3) of the ITAA 1997. Subsection 305-75(2) of the ITAA 1997 applies where the person was an Australian resident at all times during the period to which the lump sum relates. Subsection 305-75(3) of the ITAA 1997 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 of the ITAA 1997 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.

It is evident that your client's foreign fund, which is established overseas, is not an Australian superannuation fund as defined in subsection 295-95(2) of the ITAA 1997. Based on the information provided, the Commissioner considers that your client's foreign fund is a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997.

Assessable Amount

As noted above, the applicable fund earnings in relation to a lump sum payment from a foreign superannuation fund will be included in a person's assessable income where the payment is received more than six months after a person has become an Australian resident.

Your client's foreign fund is yet to make a lump sum benefit to your client. The date on which your client received the lump sum benefit is therefore more than six months after they became an Australian resident. Accordingly, a portion of the lump sum benefit will be assessable under section 305-70 of the ITAA 1997.

The amount included as assessable income is calculated under subsection 305-75(2) of the ITAA 1997 because your client was an Australian resident at all times during period to which the lump sum relates. Subsection 305-75(2) of the ITAA 1997 states:

If you were an Australian resident at all times during 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:

o work out the total of the following amounts:

o the part of the lump sum that is attributable to contributions made by or in respect of you on or after the day when you became a member of the fund (the start day);

o the part of the lump sum (if any) that is attributable to amounts transferred into the fund from any other foreign superannuation fund during the period;

o 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 income tax);

o add the total of all your previously exempt fund earnings (if any) covered by subsections (5) and (6).

The calculation of this portion effectively means that your client will be assessed only on the income earned in Pathfinder while they were a resident of Australia. That is, your client will only be assessed on the accretion in your client's foreign fund less any contributions made since they became a resident of Australia.

Furthermore, any amounts representative of earnings during periods of non-residency and certain capital amounts previously transferred 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. Together with the application of subsection 960-50(4) this has the result that the payment your client receives 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 your client became an Australian resident is converted to Australian dollars at the exchange rate that applied on that day.

Calculation of Assessable Amount

The crucial point here is the period to which the lump sum relates. This is the period during which the total lump sum accrued.

A lump sum is proposed to be transferred from your client's foreign fund to your client's Australian superannuation fund. As the lump sum payment is being transferred from your client's foreign fund, the applicable period to which the lump sum relates is the period during which all amounts in your client's foreign fund accrued. This period, will therefore, start on the day your client first had contributions made on her behalf into their foreign fund and will end on the date that the eventual transfer occurs.

It is considered that the date that the court ordered the pension sharing arrangement, has no bearing on the amount to be determined at paragraph 305-75(2)(a) of the ITAA 1997.

Further, the lump sum payment from your former spouse's fund to your client's foreign fund is relevant for subparagraph 305-75(2)(a)(ii) of the ITAA 1997, as it represents an amount transferred into your client's foreign fund from another foreign superannuation fund.

Election

A taxpayer transferring their overseas superannuation directly to an Australian complying superannuation fund more than six months after becoming a resident, may be able to elect under subsection 305-80(2) of the ITAA 1997 to have all or part of the payment treated as assessable income of the Australian superannuation fund.

As a result, the amount specified in the election notice will be included as assessable income of the superannuation fund and subject to tax at 15% rather than being included in the taxpayer's assessable income and subject to tax at the taxpayer's marginal rate.

To qualify, your client must, immediately after the relevant payment is made, no longer have an interest in the paying fund (subsection 305-80(1) of the ITAA 1997). The election must be in writing, specify the amount to be covered by the election and comply with any requirements specified in the Income Tax Regulations (subsection 305-80(3) of the ITAA 1997).

An amount that is covered by an election under section 305-80 of the ITAA 1997 will not be treated as either a concessional contribution or a non-concessional contribution to the Australian superannuation fund. Consequently, this amount will not count towards your client's concessional or non-concessional contributions caps for the relevant income year.

Because your client will transfer their whole entitlement in their foreign fund to an Australian superannuation fund, they may make a valid election.