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Ruling

Subject: Foreign lump sum payment

Question

Is any part of the lump sum payment transferred from a foreign superannuation fund to an Australian superannuation fund assessable as applicable fund earnings under section 305-70 of the Income Tax Assessment Act 1997?

Answer

Yes.

This ruling applies for the following period

Year ending 30 June 2009

The scheme commenced on 1 July 2008

Relevant facts

While working overseas you were a member of the foreign fund.

You joined the foreign fund more than eleven years ago.

You became a resident of Australia for tax purposes a number of years ago.

No contributions were made to the foreign fund for you or by you on or after you became a resident of Australia for tax purposes.

In the beginning of the 2008-09 income year, your total benefits were transferred from the foreign fund to an Australian complying superannuation fund (the Australian Fund).

The foreign fund is unable to provide you with a value of your benefits as at the date you became an Australian resident for tax purposes.

You no longer have an interest in the foreign fund.

You intend to have the Australian Fund pay tax on your behalf on any applicable fund earnings.

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 Subsection 305-75(5).

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

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

The applicable fund earnings is calculated by translating the amount received from the foreign fund at the exchange rate applicable on the day of transfer into Australian dollars (AUD), and deducting from this amount the AUD equivalent of the amount vested in the foreign fund on the day just before you first became an Australian resident at the exchange rate applicable on that day.

The applicable fund earning is the amount to be specified in the election notice made to the Australian superannuation fund.

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 applicable fund earnings is subject to tax at the personal'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 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.

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 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 the foreign fund, which is established in 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 fund in overseas is a foreign superannuation fund as defined in subsection 995-1(1).

Applicable fund earnings

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.

You became a resident of Australia for tax purposes a number of years ago. The foreign fund made a lump sum benefit payment to you in the 2008-09 income year. The date on which you will receive the lump sum benefit is more than six months after you 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(3) of the ITAA 1997 because you became an Australian resident after the start of the period to which the lump sum relates. Subsection 305-75(3) states:

If you become an Australian resident after the start of the period to which the lump sum relates (but before you received it) 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 remainder of 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).

The calculation of this portion effectively means that you will be assessed only on the income earned in the foreign fund while you were a resident of Australia. That is, you will only be assessed on the accretion in the foreign fund less any contributions made since you 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 AUD. Together with the application of subsection 960-50(4) this has the result that the payment you received is translated into AUD at the exchange rate applicable at the time of receipt. Similarly, the amount vested in the fund on the day before you became an Australian resident is converted to AUD at the exchange rate that applied on that day.

Election under section 305-80 of the ITAA 1997

A person transferring their overseas superannuation directly to an Australian complying superannuation fund more than six months after becoming a resident, can elect under subsection 305-80(1) of the ITAA 1997 to have part of the payment otherwise assessable under section 305-70 of the ITAA 1997 treated as assessable income of the Australian superannuation fund.

Section 305-80 of the ITAA 1997 states as follows:

1. This section applies if:

(a) section 305-70 applies to a superannuation lump sum that is paid from a foreign superannuation fund; and

(b) you are taken to receive the lump sum under section 307-15; and

(c) all of the lump sum is paid into a complying superannuation fund; and

(d) immediately after the lump sum is paid the complying superannuation fund, you no longer have a superannuation interest in the foreign superannuation fund.

2. You may choose for all or part of your applicable fund earnings worked out under section 305-75 (but not exceeding the amount of the lump sum) to be included in the assessable income of the complying superannuation plan.

3. Your choice:

(a) must be in writing; and

(b) must comply with the requirements (if any) specified in the regulations.

The amount specified in the election notice is included in the assessable income of the superannuation fund and subject to tax at 15% rather than being included in the person's assessable income and subject to tax at the person's marginal rate.

To qualify, the person must, immediately after the relevant payment is made, no longer have an interest in the paying fund. Therefore section 305-80 of the ITAA 1997 will not apply unless the person transfers their total superannuation interest in the foreign superannuation fund to a complying superannuation fund in Australia.

The election must be made in writing and comply with the requirements specified in the Income Tax Assessment Regulations 1997.

As you no longer have an interest in the foreign fund you are eligible to make the election.

Conclusion

You will need to advise your Australian superannuation fund the assessable amount (the applicable fund earnings) relating to the payment transferred from the foreign Fund.