Edited version of your private ruling

Authorisation Number: 1012459093855

Ruling

Subject: Lump sum payment from a foreign superannuation fund.

Question

Is any part of the benefits transferred from your foreign pension plan to your client's 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 ended 30 June 2013.

The scheme commences on:

1 July 2012.

Relevant facts and circumstances

Your client became an Australian resident for taxation purposes on AA/AA/200A.

Your client held an interest in a public sector pension scheme (the Pension Fund) established in the foreign country.

The value of your client's pension fund on BB/BB/200B was A.

The exchange rate which applied on BB/BB/200B was AU$1 = 0.XX

Your client could not obtain a figure for the day before their client became an Australian resident for the Pension Fund (CC/CC/200C). Your client and the Commissioner have agreed that the value of the pension account on CC/CC/200C was the same as it was 2 days prior, i.e. A.

Your client received a lump sum payment of B from the Pension Fund on DD/DD/20DD.

The exchange rate which applied on DD/DD/20DD was AU$1 = 0.YY

Your client transferred the pension fund payment in full to Australia.

The pension fund was then closed in the foreign country.

There have been no contributions to the Pension Fund since your client migrated to Australia.

There have been no transfers into the Pension Fund from other foreign pension schemes since becoming a resident of Australia.

Funds cannot be accessed from the Pension Fund other than at retirement.

Your client transferred the lump sum payment in full from the Pension Fund to a complying Australian superannuation fund.

Your client intends to have your Australian superannuation fund pay the tax on the applicable fund earnings (if any) on your behalf.

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 Paragraph 305-75 (3)(c)

Income Tax Assessment Act 1997 Subsection 305-75 (5)

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

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

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

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

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

The 'applicable fund earnings' in respect of the lump sum payment transferred from the Pension Fund to your client's Australian superannuation fund is calculated as zero. Consequently, no amount of the benefit transferred from the Pension Fund will be included in your client's assessable income in the relevant income year.

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 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. Subsection 305-75(3) applies where the person was not 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.

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.

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), that is:

(a) a fund that:

(i) is an indefinitely continuing fund; and

(ii) is a provident, benefit, superannuation or retirement fund; or

(b) a public sector superannuation scheme.

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

· on or after retirement from gainful employment; or

· attaining a prescribed age' and

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

While 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 of Australia, the Commissioner views the SIS Act (and the SIS Regulations) as providing guidance as to what 'benefit' or 'specific future purpose' a superannuation fund should provide.

In this case, you have advised that your client's lump sum benefit was paid from the Pension Fund. The Pension Fund is a public sector superannuation scheme which only releases benefits on retirement. Furthermore, the Pension Fund is established in the foreign country and has its central management and control outside of Australia. Accordingly, the Pension Fund is not an 'Australian superannuation fund' as defined in subsection 295-95(2) of the ITAA 1997. Therefore, on the basis of the information provided, the Commissioner considers the lump sum payment you received to be 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 on AA/AA/200A and received the lump sum payment in respect of the Pension Fund on DD/DD/20DD. As this was more than six months after you became an Australian resident, section 305-70 applies to include the 'applicable fund earnings' in your client's Australian superannuation fund's 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 Pension Fund less any contributions you made since becoming a resident of Australia. 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 (AU$). For the purposes of section 305-70, the 'applicable fund earnings' should be calculated by:

· translating the lump sum payment received from the overseas superannuation fund at the exchange rate applicable on the day of receipt to Australian dollars (item 11 of the table to subsection 960-50(6)); and

· deducting from this amount the Australian dollar equivalent of the payment vested in the overseas superannuation fund at the exchange rate applicable on the day immediately before the residency date (item 11A of the table to subsection 960-50(6)).

Amounts to be used in calculation

It is assumed that the value of the benefit in the Pension Fund on CC/CC/200C (the day before your client became a permanent resident for tax purposes) was A. This is converted into Australian dollars at the exchange rate that applied on that day. The exchange rate on BB/BB/200B was AU$1 = 0.XX which converts the amount of A to AU$D (cents ignored).

From the facts provided no contributions have been made to the Pension Fund since your client migrated to Australia. There have also been no transfers into the Pension Fund from other foreign pension schemes since your client became a resident of Australia.

On DD/DD/20DD, your client's benefits in the Pension Fund was paid out to your client in the form of a lump sum of B which was directly transferred into a complying Australian superannuation fund. Therefore this is the amount vested in your client when the lump sum was paid. This is converted into Australian dollars at the exchange rate that applied on that day. That rate was AU$1 = 0.YY which converts the amount of B to AU$E (cents ignored).

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 AA/AA/200A to DD/DD/20DD. Your client was a resident for the whole of this 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.

Calculation of Assessable Amount

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 for the Pension Fund are as follows:

Subparagraph 305-75(3)(a)(i) $D

Subparagraph 305-75(3)(a)(ii) Nil

Subparagraph 305-75(3)(a)(iii) Nil

Paragraph 305-75(3)(b) $E

Paragraph 305-75(3)(c) 1

Paragraph 305-75(3)(d) Nil

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

$D+ nil + nil = $D

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

$D - $E = -$F

To this figure we add the amounts determined under paragraph 305-75(3)(d) - nil

-$F + nil = -$F.

As the amount is less than zero, no amount of the lump sum payment from the Pension Fund will be included in your client's Australian Superannuation fund's assessable income for the relevant income year as 'applicable fund earnings'.

Conclusion:

No part of the payment made from the Pension Fund to the your client's Australian superannuation fund is assessable in the relevant income year as the applicable fund earnings relating to the transfer payment is nil.