Edited version of your private ruling

Authorisation Number: 1012541033561

Ruling

Subject: Lump sum payment from a foreign pension scheme

Question

Is any part of the lump sum payment paid to your client from a foreign pension fund assessable as applicable fund earnings?

Answer

Yes

This ruling applies for the following period

Year ending 30 June 2013

The scheme commenced on

1 July 2012

Relevant facts and circumstances

Your client first became an Australian resident in the in the 1960s.

Your client is over 60 years of age.

Your client returned to an overseas country in a later year.

Your client returned to Australia permanently in the 1980s.

Your client held an interest in a pension fund (Pension Fund) in an overseas country.

The Pension Fund is an employer sponsored superannuation fund and a foreign superannuation fund as defined in subsection 995-1(1) of the Income Tax Assessment Act 1997.

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

Your client received a lump sum payout from the Pension Fund in the 2012-13 income year.

You advised that the Pension Fund calculates increases to member benefits based primarily on the Retail Price Index (RPI).

You have provided a copy of your client's benefit statement from the Pension Fund.

Recently, we contacted your office and were advised by your assistant that you have agreed to the value of the Pension Fund on the residency date being a specific amount.

Your client is receiving monthly pension income from the Pension Fund.

Assumptions

The applicant could not obtain a figure from the Pension Fund on the day before their client became an Australian resident. The applicant advised that the pension scheme calculates increases to member benefits based primarily on the Retired Price Index (RPI).

The RPI increased by a specific % between the residency date and the payment day. A value of a specific amount was calculated using the increase in CPI and the total retirement grant amount show on the statement provided,.

Consequently, the Commissioner considers it is reasonable to assume that your client's benefit from the Pension Fund the day before your client became a resident of Australia was a specific amount.

Relevant legislative provisions

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 960-50(1)

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

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

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

Reasons for decision

Summary

An amount paid to your client from a foreign Pension Fund will be included as assessable 'applicable fund earnings' in your client's tax return for the 2012-13 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.

Applicable fund earnings

Your client became a resident of Australia for tax purposes in the 1995-86 income year and received the lump sum payment in respect of his entitlement in the Pension Fund in the 2012-13 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 she earned (the accretion) in respect of your client's pension with the Pension Fund less any contributions your client made since your client became a resident of Australia. Any amounts representative of earnings during periods of non-residency, and transfers into an institution 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.

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:

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

Ÿ 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 they became a resident of Australia (subparagraph 305-75(3)(a)(i) of the ITAA 1997) is determined, there is no actual receipt or payment of an amount. All that occurs is a determination 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 to 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.

Amounts to be used in calculation

The value of the benefit in the Pension Fund on the day before your client became a permanent resident for tax purposes is converted into Australian dollars at the exchange rate that applied on that day.

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

During the 2012-13 income year, your client's benefits in the Pension Fund were paid out to your client in the form of a one-off lump sum. You have not provided us with the lump sum amount in English pounds however you stated that the lump sum amount in Australian dollars is a specific amount. The Commissioner accepts this figure.

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. 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.

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:

305-75(3)(a)(i) The amount, converted to Australian dollars, vested in your client before they became a resident of Australia

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

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

305-75(3)(b) The amount of the lump sum payment received, converted to Australian dollars

305-75(3)(c) 1

305-75(3)(d) Nil

Calculation of the assessable amount of the payment from the 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:

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):

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

As the amount determined is greater than zero, this portion of the lump sum payment paid directly to your client will be included as assessable 'applicable fund earnings' in your client's tax return for the 2012-13 income year.