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Ruling

Subject: Lump sum payment from a foreign superannuation fund

Question

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

Advice/Answers

No.

This ruling applies for the following period

Year ending 30 June 2013

The scheme commenced on

1 July 2012

Relevant facts

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

You joined the foreign fund more than three years ago.

Benefits in the foreign fund can not be withdrawn until a member retires from work. The earliest withdrawal could be made when a member is 55 years.

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

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

In the 2012-13 income year your balance in the foreign fund was transferred into your Australian complying superannuation fund.

You intend to have your Australian complying superannuation fund pay tax on your behalf on any applicable fund earnings in accordance with section 305-80 of the income Tax Assessment Act 1997.

You state that the foreign fund is unable to provide you with the value of your policy as at the date you became an Australian resident for tax purposes.

You no longer have an interest in the foreign fund.

Assumptions

You are unable to provide the value of lump sum benefit in the foreign fund on the day immediately before your residency date.

Entitlements in the foreign fund are calculated with reference to cost of living.

Based on this information and the figures you have provided, the Commissioner of Taxation is prepared to make an assumption of the value of your lump sum in the foreign fund on the date before you became a resident of Australia.

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 Paragraph 305-75(3)(a).

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

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

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

Income Tax Assessment Act 1997 Subsection 305-80(1).

Income Tax Assessment Act 1997 Subsection 305-80(2).

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

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

Reasons for decision

Summary of decision

No part of the payment received from the foreign fund will be included in your assessable income for the relevant income year

You may transfer the lump sum benefit from the foreign fund directly to your Australian complying 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 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.

In the present case, you were a member of a foreign superannuation fund. Benefits in the foreign fund can not be withdrawn until a member retires from work. The earliest withdrawal could be made when a member is 55 years. As the foreign fund is set up for the express purpose of providing for the payment of benefits in the nature of superannuation upon retirement and benefits are only paid on retirement the foreign fund meets the definition of superannuation fund.

The foreign fund's central management and control is clearly not in Australia, so the foreign fund is not an Australian superannuation fund as defined in subsection 295-95(2) of the ITAA 1997.

Based on the information provided, the Commissioner of Taxation considers that the 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.

You became a resident of Australia for tax purposes a few years ago (the residency date). In the 2012-13 income year your balance in the foreign fund was transferred into your Australian complying superannuation fund. The date on which you 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 while you were a resident of Australia. That is, you will only be assessed on the accretion in your benefits 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 Australian dollars. Together with the application of subsection 960-50(4) this has the result that the payment you received is translated into Australian dollars at the exchange rate applicable at the time of receipt. Similarly, the amount vested in you on the day before you became an Australian resident is converted to Australian dollars at the exchange rate that applied on that day.

Calculation of Assessable Amount

No contributions were made after the residency date. No transfers were from other foreign superannuation funds.

Therefore, the total of the amounts mentioned in paragraph 305-75(3)(a) of the ITAA 1997 comprises:

· the amount of the lump sum benefit vested in you just before the residency date;

· contributions made for or by you after the residency date;

· the amount transferred from any other foreign superannuation fund.

The lump sum benefit vested in you just before the residency date is translated into Australian dollars at the exchange rate applicable on that day. As this day falls on a weekend, the exchange rate which prevailed on the following Monday applies.

Paragraph 305-75(3)(b) of the ITAA 1997 requires that the amount calculated above be subtracted from the total amount of the lump sum benefit made to you.

The lump sum benefit payment is translated into Australian dollars at the exchange rate which prevailed on the payment date.

Under paragraph 305-75(3)(c) of the ITAA 1997, this result is then multiplied by the proportion of the days you were an Australian resident to the total number of days from the residency date until the date the payment was made. As the resident days and the total days are the same, the proportion to be used in the calculation is 1.

Paragraph 305-75(3)(d) of the ITAA 1997 concerns previously exempt fund earnings calculated under subsections 305-75(5) and (6). Previously exempt fund earnings are the applicable fund earnings of any amounts transferred from one foreign superannuation fund to another foreign superannuation fund after you became a resident of Australia. In your case, there are no previously exempt fund earnings.

Based on the above the applicable fund earnings in relation to your lump sum benefit is less than A$0.

As your applicable fund earnings in relation to the lump sum benefit is less than zero, there will not be any applicable fund earnings under subsection 305-75(3) of the ITAA 1997.

Therefore, no part of the payment received from the foreign fund will be included in your assessable income for the relevant income year.

You may transfer the lump sum benefit from the foreign fund directly to your Australian complying superannuation fund.