Edited version of your private ruling

Authorisation Number: 1012469307533

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

Yes.

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 migrated back to Australia permanently on AA/AA/200A.

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

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

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

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

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

The Reserve Bank of Australia exchange rate which applied on CC/CC/20CC was AU$1 = $0.YY

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.

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 Section 305-80.

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).

Income Tax Assessment Act 1997 Subsection 960-50(6).

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 $E.

This amount should be included in your client's assessable income in the relevant income year. However, your client can elect to have all or part of the above 'applicable fund earnings' treated as the assessable income of their complying Australian superannuation fund as your client no longer had an interest in the foreign superannuation fund immediately after the relevant payment was made.

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 overseas 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. 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

As noted, 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 becoming an Australian resident.

As your client returned to Australia permanently on AA/AA/200A, your client became a resident of Australia for tax purposes on this residency date. Your client received a lump sum payment in respect of the Pension Fund on CC/CC/20CC. 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 of the ITAA 1997. 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$). Furthermore subsection 960-50(4) of the ITAA 1997 provides that when foreign currency is an element in the calculation of another amount, translation must firstly occur prior to the calculation of any other amounts. Accordingly, 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 to Australian dollars at the exchange rate applicable on the day of receipt (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 11 of the table to subsection 960-50(6).

Amounts to be used in calculation

Based on the information you have provided, the value of the benefit in the Pension Fund on BB/BB/200B (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 $A to AU$C (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 CC/CC/20CC, your client's benefit 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 $B to AU$D (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 CC/CC/20CC. 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) $C

Subparagraph 305-75(3)(a)(ii) Nil

Subparagraph 305-75(3)(a)(iii) Nil

Paragraph 305-75(3)(b) $D

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:

$C+ nil + nil = $C

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

$D - $C = $E

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

$E + nil = $E.

Accordingly, the 'applicable fund earnings' in respect of the lump sum payment transferred to your client's Australian superannuation fund is $E.

Conclusion:

The amount of $E which was transferred to your client's Australian superannuation fund is assessable as 'applicable fund earnings' in the relevant income year. The remainder of the lump sum payment is not assessable income and is not exempt income, which will not need to be included in your client's tax return for the relevant income year.

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 taxed at 15%, rather than being included in the taxpayer's assessable income and subject to tax to the taxpayer's marginal rate.

You have advised that your client's Pension Fund was closed after the transfer of the pension fund payment in full to Australia. As your client no longer had an interest in the foreign fund immediately after the lump sum payment was made, your client can elect to have all or part of the above 'applicable fund earnings' treated as the assessable income of the complying superannuation 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).

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