Edited version of your private ruling

Authorisation Number: 1012259977827

Ruling

Subject: Lump sum payment from a foreign superannuation fund

Issue

Question

Is any part of the benefits transferred from your client's foreign pension schemes to an Australian superannuation fund assessable as applicable fund earnings under section 305-75 of the Income Tax Assessment Act 1997 (ITAA 1997)

Answer

No.

This ruling applies for the following periods:

Year ending 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

A few years ago, your client migrated to Australia and became a permanent resident of Australia for tax purposes.

Your client was a member of two overseas pension fund (Fund A and Fund B) in the overseas country.

The balance of Fund A was transferred from Fund B after you became a resident of Australia.

You have advised the value of your client's benefits in the Fund A on the date your client became a resident of Australia.

Your client transferred Fund A in full to Australia

Your client no longer has an interest in the overseas pension funds.

Since your client migrated to Australia there have been no contributions to these pension funds.

Funds cannot be accessed from the overseas pension funds other than at retirement.

Assumptions

Your client could not provide the value of his benefits in Fund B as at the day before he became an Australian resident. However, your client provided the transfer value of the total benefits as at the commencement date of Fund A.

It is noted that the member benefits vested in Fund B is increased by the Retail Price Index (RPI). The value of Fund B at the day before your client became an Australian resident has been determined by discounting the value of that amount as at commencement date of Fund A by RPI.

The Commissioner considers it reasonable to assume that the transfer value of Fund B as at date of residency is the amount calculated using RPI.

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 305-70(1)

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 306-70

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

Superannuation Industry (Supervision) Act 1993 Section 10

Superannuation Industry (Supervision) Act 1993 Section 19

Superannuation Industry (Supervision) Act 1993 Section 62

Reasons for decision

Summary of decision

No part of the payment transferred from the overseas pension fund (Fund A) to your client's Australian superannuation fund is assessable as the applicable fund earnings relating to the payment are nil.

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 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.

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.

Under the definition of Australian superannuation fund in subsection 295-95(2) of the ITAA 1997 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.

Subsection 995-1(1) of the ITAA 1997 defines a superannuation fund as having the same meaning given by section 10 of the Superannuation Industry (Supervision) Act 1993 (SIS Act), which requires that the fund is a provident, benefit, superannuation or retirement fund.

Provident, benefit, superannuation or retirement fund

The issue of what constitutes a provident, benefit, superannuation or retirement fund was discussed by the Full Bench of the High Court in Mahony v. Federal Commissioner of Taxation (1967) 41 ALJR 232; (1967) 14 ATD 519 (Mahony).

In that case, Justice Kitto's judgement indicated that a fund does not satisfy any of the three provisions, that is, 'provident, benefit or superannuation fund', if there exist provisions for the payment of benefits 'for any other reason whatsoever'. In other words, though a fund may contain provisions for retirement purposes, it could not be accepted as a superannuation fund if it contained provisions that benefits could be paid in circumstances other than those relating to retirement.

In section 62 of the SIS Act, a regulated superannuation fund must be 'maintained solely' for the 'core purposes' of providing benefits to a member where the events occur:

· on or after retirement from gainful employment; or

· attaining a prescribed age; and

· on the members' death. (this may require the benefits being passed on to a member's dependants or legal representative).

Notwithstanding the SIS Act applies only to 'regulated superannuation funds' (as defined in section 19 of the SIS Act), and foreign superannuation funds do not qualify as regulated superannuation funds as they are established and operate outside Australia, the Commissioner views the SIS Act (and the SIS Regulations) as providing guidance as to what 'benefit' and 'specific future purpose' a superannuation fund should provide.

It is evident that the overseas fund (Fund A) is established outside of Australia. Similarly, the central management and control is outside of Australia.

On the basis of the information provided, the Commissioner considers that the overseas fund (Fund A) is 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 a few years ago and the payment was transferred from the overseas pension fund in the overseas country during the 2010-11 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 your client's assessable income.

The 'applicable fund earnings' are worked out under section 305-75. 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 overseas pension fund less any contributions your client made since he became a resident of Australia. Further, any amounts representative of earnings during the periods of non-residency, and transfers into the paying fund do not form part of the taxable amount when the overseas benefit is paid.

Subsection 305-75(5) of the ITAA 1997 defines previously exempt fund earnings as follows:

You have an amount of previously exempt fund earnings in respect of the lump sum if:

(a) part or all of the amount in the fund that was vested in you when the lump sum was paid (before any deduction for foreign tax) is attributable to the amount; and

(b) the amount is attributable to a payment received from a foreign superannuation fund; and

(c) the amount would have been included in your assessable income under subsection 305-70(2) by the application of this section, but for the payment having been received by another foreign superannuation fund.

Subsection 305-75(6) of the ITAA 1997 states:

The amount of your previously exempt fund earnings is the amount mentioned in paragraph (5)(c) (disregarding the addition of previously exempt fund earnings under subsection (2) or (3) of this section).

Subsection 305-75(5) of the ITAA 1997 applies to transfers from one overseas superannuation fund to another, of the monies representing the lump sum payment. Accordingly, a calculation of the applicable fund earnings must be made for the transfers as if the amounts had actually been paid to you.

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 (A$). The applicable fund earnings is the result of a calculation from two other amounts and subsection 960-50(4) states that 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.

The table in subsection 960-50(6) of the ITAA 1997 sets out the translation rules. Only the following items are relevant to determining the issue in your case:

· item 11 which deals with a receipt or payment to which none of the other items apply, and

· item 11A which applies to amounts that are neither receipts nor payments and to which none of the other items apply.

Item 11 of the table in subsection 960-50(6) of the ITAA 1997 applies to a receipt or payment where none of the other items applies. The payment your client finally received is not included in any of the other items in the table so it will fall within item 11. Under this item, the payment is translated into Australian dollars at the exchange rate applicable at the time of receipt.

When the amount in the foreign fund that was vested in your client just before he became a resident of Australia (subparagraph 305-75(3)(a)(i) of the ITAA 1997) is determined of the vested amount expressed in the foreign currency.

Regulation 960-50.01 of the Income Tax Assessment Regulations 1997 (ITAR) modifies the table in subsection 960-50(6) of the ITAA 1997 to include item 11A that applies to amounts other than receipts and payments, and for which none of the other items apply. Consequently the vested amount is translated into Australian dollars at an exchange rate that is reasonable having regard to the circumstances.

Therefore, for the purposes of section 305-70 of the ITAA 1997, the 'applicable fund earnings' should be calculated by translating the amount received from the foreign fund at the exchange rate applicable on the day of receipt of Australian dollars and deducting from this amount the Australian dollar equivalent of the amount vested in the fund at the exchange rate applicable just before the day your client first became an Australian resident, adding any previously exempt fund earnings amounts that may apply, translated using the same principles.

Amounts to be used in calculation

You advised that the account in the overseas pension fund (Fund A) was opened with an initial balance of which was transferred from another overseas pension (Fund B).

As noted in the assumptions, your client did not provide the value of his benefits Fund B on the day before he became a resident of Australia. The value of the total benefits in Fund B on the date of residency is assumed to be amount calculated using RPI. This amount is converted into Australian currency at the exchange rate that applied on the date of residency.

The opening balance in Fund A is converted into Australian currency at the exchange rate that applied on the date that the fund was opened.

From the facts provided no contributions have been made to Fund A since your client migrated to Australia.

Your client's benefit was paid from the overseas pension fund to your client in the form of one-off lump sum which was transferred directly into a complying Australian superannuation fund. Therefore, this is the amount vested for your client when the lump sum was paid. This amount is converted into Australian dollars at the exchange rate 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.

Previously Exempt Fund Earnings Amount

You advised that the account in Fund A was opened with an initial balance which transferred from Fund B.

As noted in the assumptions, your client did not provide the value of his benefits in Fund B on the day before he became a resident of Australia. The value of the total benefits in Fund B on residency date is assumed to be the amount calculated using RPI. This amount is converted into Australian currency at the exchange rate that applied on the date of residency.

The opening balance in Fund A is converted into Australian currency at the exchange rate that applied on day that the fund was opened.

The previously exempt fund earnings amount is worked out by the taking the difference between the converted amounts of Fund A and Fund B.

Calculation of the assessable amount of the payment from Fund A

Applying subsection 305-75(3) of the ITAA 1997 to your client's circumstances, the amounts to be used in calculating the applicable fund earnings are as follows:

Calculation of the assessable amount of the payment from Fund A

In accordance with subsection 305-75(3) of the ITAA 1997 the amounts determined at subparagraphs 305-75(3)(a)(i),(ii) and (iii) are added.

This total is then subtracted from the amount determined under paragraph 305-75(3)(b).

This figure is multiplied by the proportion of the total days determined under paragraph 305-75(3)(c).

The amount determined under paragraph 305-75(3)(d) is then added to this total.

As the result is less than zero, no amount of the lump sum payment received will be included as assessable 'applicable fund earnings' in your client's tax return for the 2010-11 income year.

Conclusion:

As the result for the overseas pension fund is less than zero, no amount of the lump sum payment received will be included as assessable 'applicable fund earnings' in your client's tax return for the 2010-11 income year.