Edited version of private advice

Authorisation Number: 1012622889654

Ruling

Subject: Lump sum payment from a foreign superannuation fund

Question

1. Is any part of the benefits transferred from Pension Fund 1, a pension scheme in an overseas country, to an Australian superannuation fund assessable as applicable fund earnings under section 305-75 of the Income Tax Assessment Act 1997 (ITAA 1997)?

2. Is any part of the benefits transferred from Pension Fund 2, a pension scheme in an overseas country, to an Australian superannuation fund assessable as applicable fund earnings under section 305-75 of the ITAA 1997?

Answer

1. Yes.

2. Yes.

This ruling applies for the following period:

2013-14 income year

The scheme commences on:

1 July 2013

Relevant facts and circumstances

You ceased employment in an overseas country several years ago.

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

You held an interest in Pension Fund 1, a pension scheme in an overseas country.

The transfer value of the benefits in Pension Fund 1 on the day immediately before you became a resident of Australia was an amount.

You also held an interest in Pension Fund 2, a pension scheme in an overseas country.

The transfer value of the benefits in Pension Fund 2 on the day immediately before you became a resident of Australia was an amount.

You received a lump sum payment from Pension Fund 1 during the 2013-14 income year. You have stated that during the 2013-14 income year the lump sum payment was converted to Australian dollars of an amount.

You received a lump sum payment from Pension Fund 2 during the 2013-14 income year. You have stated during the 2013-14 income year the lump sum payment was converted to Australian dollars of an amount.

No further contributions have been paid to the Pension Funds since you became a resident of Australia.

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

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

You do not have an interest in the Pension Funds once the lump sums were paid.

The total payments from Pension Fund 1 and 2 were transferred to a complying 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 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 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

The 'applicable fund earnings' in respect of the lump sum payment paid from Pension Fund 1 is calculated as an amount.

Consequently, an amount of the lump sum payment from Pension Fund 1 must be included in your assessable income in the 2013-14 income year.

The 'applicable fund earnings' in respect of the lump sum payment paid from Pension Fund 2 is calculated as an amount.

Consequently, an amount of the lump sum payment from Pension Fund 2 must be included in your assessable income in the 2013-14 income year.

Alternatively, you can elect to have all or part of the 'applicable fund earnings' from Pension Fund 1 and Pension Fund 2 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 funds.

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 an 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.

The documentation provided indicates that in respect of your pension funds, benefits are only paid on retirement and the pension funds would meet the definition of a superannuation fund. In addition, it is clear the payer of the lump sum payment is established outside of Australia with their central management and control outside of Australia. Therefore, on the basis of the information provided, the Commissioner considers the lump sum payments you received are from a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997.

Applicable fund earnings

You became a resident of Australia for tax purposes several years ago and received the lump sum payment in respect of Pension Fund 1 on during the 2013-14 income year and Pension Fund 2 on during the 2013-14 income year. As this was more than six months after you became an Australian resident, in respect of each payment, 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 Funds 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.

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:

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

_ 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 you 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 you just before you 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 you first became an Australian resident.

Amounts to be used in calculation

The benefit in the Pension Fund 1 on the day before you became a resident of Australia was an amount. This is converted into Australian dollars at the exchange rate that applied on that day. The exchange rate applicable on a weekend or public holiday is the rate for the next closest day.

The benefit in the Pension Fund 2 on the day before you became a resident of Australia was an amount. This is converted into Australian dollars at the exchange rate that applied on that day. The exchange rate applicable on a weekend or public holiday is the rate for the next closest day.

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

During the 2013-14 income year your benefits in Pension Fund 1 was paid out to you in the form of a one-off lump sum. Therefore this is the amount vested in you when the lump sum was paid. This is converted into Australian dollars at the exchange rate that applied on that day. You have stated that during the 2013-14 income year the lump sum payment was converted to Australian dollars of an amount.

During the 2013-14 income year your benefits in Pension Fund 2 was paid out to you in the form of a one-off lump sum. Therefore this is the amount vested in you when the lump sum was paid. This is converted into Australian dollars at the exchange rate that applied on that day. You have stated that during the 2013-14 income year the lump sum payment was converted to Australian dollars of an amount.

'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 those periods. 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.

Pension Fund 1

Applying subsection 305-75(3) of the ITAA 1997 to you circumstances, the amounts to be used in calculating the applicable fund earnings for Pension Fund 1 is 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 Pension Fund 1

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).

An amount of the lump sum payment from Pension Fund 1 must be included as assessable 'applicable fund earnings' in your tax return for the 2013-14 income year.

Pension Fund 2

Applying subsection 305-75(3) of the ITAA 1997 to you circumstances, the amounts to be used in calculating the applicable fund earnings for Pension Fund 2 is 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 Pension Fund 2

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).

An amount of the lump sum payment from Pension Fund 2 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 'applicable fund earnings' from Pension Fund 1 and Pension Fund 2 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 funds 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.

Conclusion:

The part of the lump sum payment from Pension Fund 1 which was transferred to your Australian superannuation fund that is assessable as the applicable fund earnings is an amount.

The part of the lump sum payment from Pension Fund 2 which was transferred to your Australian superannuation fund that is assessable as the applicable fund earnings is an amount.

You can elect to have all or part of the 'applicable fund earnings' from Pension Fund 1 and Pension Fund 2 treated as assessable income of your complying Australian superannuation fund because immediately after the relevant payments were made, you will no longer have an interest in the foreign fund.