Edited version of your private ruling

Authorisation Number: 1012540830637

Ruling

Subject: a lump sum payment from a foreign pension fund

Question 1

Will any part of the benefit to be transferred from an overseas pension fund to a superannuation fund in Australia be assessable as applicable fund earnings under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Will you be entitled to choose under section 305-80 of the ITAA 1997 to include all or part of the applicable fund earnings (if any) in the assessable income of the Australian superannuation fund?

Answer

Yes.

This ruling applies for the following period:

2013-14 income year

The scheme commences on:

1 July 2013.

Relevant facts and circumstances

You held an interest in a pension fund in a foreign pension fund (the Pension Fund), a foreign superannuation fund as defined in subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997).

You advised that the date of residency was residency date.

The transfer value of the Pension Fund on the day before the residency date was [amount].

The foreign exchange rate on the day before the day you became an Australian resident was A$1 = X.

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

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

More than six months after residency date, you transferred your Pension Fund in full to a complying Australian superannuation fund. The lump sum payment was [amount] and converted by your Australian superannuation fund to A$[amount] at the exchange rate of A$1 = Y.

You no longer hold an interest in the Pension Fund

Funds cannot be accessed from the Pension Fund other than at death, retirement and invalidity.

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 Section 305-80

Income Tax Assessment Act 1997 subsection 305-80(1)

Income Tax Assessment Act 1997 subsection 305-80(2)

Income Tax Assessment Act 1997 subsection 305-80(3)

Income Tax Assessment Act 1997 Subsection 306-70

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)

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

In this case, the applicable fund earnings in relation to the lump sum payment is $[amount]. This amount must be included as 'applicable fund earnings' in your tax return for the 2013-14 income year.

However, you can elect to have all or part of your 'applicable fund earnings' treated as assessable income of your complying Australian superannuation fund because immediately after the relevant payment is made, you no longer had an interest in the foreign 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 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.

Applicable fund earnings

You received the lump sum payment more than six months after you became a resident of Australia for tax purposes. Therefore, section 305-70 applies to include the 'applicable fund earnings' in your 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, you are assessed only on the income earned (the accretion) in respect of the Pension Fund less any contributions you made since you became a resident of Australia. Further, 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 (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.

All exchange rates are published on the ATO's website.

Amounts to be used in calculation

The benefit in the Pension Fund on the day before you became a resident of Australia was [amount]. This is converted into Australian dollars at the exchange rate that applied on that day. The exchange rate on that day converts the amount of [amount] to A$[amount].

From the facts provided no contributions have been made to the Pension Fund since you migrated to Australia. There have been no transfers into the Pension Fund from other foreign pension schemes by you since becoming a resident of Australia.

More than six months after your residency date, a one off lump sum payment of [amount] was made from the Pension Fund your Australian superannuation fund. Therefore this is the amount vested in you when the lump sum was paid. This amount was converted into A$[amount] Australian dollars by your Australian superannuation fund.

'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. You were a resident for the whole of that 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.

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

305-75(3)(a)(i) $[amount]

305-75(3)(a)(ii) Nil

305-75(3)(a)(iii) Nil

305-75(3)(b) $[amount]

305-75(3)(c) 1

305-75(3)(d) Nil

Calculation of the assessable amount of the payment from Pension Fund 

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:

$[amount] + nil + nil = $[amount]

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

$[amount] less $[amount] is $[amount]

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

$[amount] x 1 = $[amount]

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

$[amount] + nil = $[amount] (cents ignored)

Therefore, your applicable fund earnings in accordance with subsection 305-75(3) of the ITAA 1997 for this lump sum is $[amount] . This must be included as assessable 'applicable fund earnings' in your tax return for the 2013-14 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 subject to tax at 15% rather than being included in the taxpayer's assessable income and subject to tax at the taxpayer's marginal rate.

You can elect to have all or part of the above 'applicable fund earnings' treated as assessable income of your complying Australian superannuation fund because immediately after the relevant payments were made, you no longer had an interest in the foreign 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).

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