Private ruling: Lump sum payment from a foreign pension fund
Published: September 2013
Ruling period: 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Is any part of the lump sum payment you received assessable as applicable fund earnings under section 305-70 of the Income Tax Assessment 1997 (ITAA 1997)? Advice/Answers Yes.

Relevant facts and circumstances: You and your spouse set up a retirement pension account overseas. Monies in the account were invested in a savings plan for retirement and could be withdrawn subject to approval by the pension trustees. Contributions in the account are invested until retirement when benefits are payable as a full pension or a mix of tax-free cash and pension. Normal retirement date is age 65, although earlier or later retirement is possible. You subsequently moved to and became an Australia resident. You were advised to withdraw both you and your spouse' retirement pensions as one lump sum before in the 2012-13 income year and that this was possible as you were over 50 years of age. In the 2012-13 income year you received a lump sum payment into your bank account. The date on which you will receive the lump sum benefit is more than six months after you became an Australian resident. The account is tax-free overseas.

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 305-75(2). | Income Tax Assessment Act 1997 Subsection 305-75(3). | Income Tax Assessment Act 1997 Paragraph 305-75(3)(a). | Income Tax Assessment Act 1997 Paragraph 305-75(3)(b). | Income Tax Assessment Act 1997 Paragraph 305-75(3)(c). | Income Tax Assessment Act 1997 Paragraph 305-75(3)(d). | Income Tax Assessment Act 1997 Subsection 305-80(1). | Income Tax Assessment Act 1997 Subsection 305-80(2). | Income Tax Assessment Act 1997 Subsection 960-50(1). | Income Tax Assessment Act 1997 Subsection 995-1(1).

Reasons for decision: Summary: The applicable fund earnings is to be included as assessable income in your tax return for the 2012-13 income year and is subject to tax at your marginal rate. | Detailed Reasoning - 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 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 subsections 305-75(2) or 305-75(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 becomes an Australian resident after the start of 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 funds 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. In the present case you and your spouse set up a retirement pension account overseas. Monies in the account were invested in a savings plan for retirement and could be withdrawn subject to approval by the pension trustees. Contributions in the account are invested until retirement when benefits are payable as a full pension or a mix of tax-free cash and pension. Normal retirement date is age 65, although earlier or later retirement is possible. As the account is set up for the express purpose of providing for the payment of benefits in the nature of superannuation it meets the definition of superannuation fund. As the Fund's central management and control is clearly not in Australia it is evident that the Fund is not an Australian superannuation fund as defined in subsection 295-95(2) of the ITAA 1997. Based on the information provided, the Commissioner considers that the Fund is a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997. Assessable Amount As noted above, 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 a person has become an Australian resident. The date on which you will receive the lump sum benefit is more than six months after you became an Australian resident. Accordingly, a portion of the lump sum benefit will be assessable under section 305-70 of the ITAA 1997. The amount included as assessable income is calculated under subsection 305-75(3) of the ITAA 1997 because you became an Australian resident after the start of the period to which the lump sum relates. Subsection 305-75(3) states: If you become an Australian resident after the start of the period to which the lump sum relates (but before you received it) 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 remainder of 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). The calculation of this portion effectively means that you will be assessed only on the income earned while you were a resident of Australia. That is, you will only be assessed on the accretion in your benefits less any contributions made since you became a resident of Australia. Furthermore, any amounts representative of earnings during periods of non-residency and certain capital amounts previously transferred 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. Together with the application of subsection 960-50(4) this has the result that the payment you received is translated into Australian dollars at the exchange rate applicable at the time of receipt. Similarly, the amount vested in you on the day before you became an Australian resident is converted to Australian dollars at the exchange rate that applied on that day. All exchange rates are published on the ATO's website. Calculation of the assessable amount of the payment from foreign superannuation fund In accordance with 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). The applicable fund earnings are to be included as assessable income in your tax return for the 2012-13 income year and are subject to tax at your marginal rate.