Private ruling: Lump sum payment from a foreign pension plan
Published: July 2011
Ruling period: Year ending 30 June 2005
Date scheme commenced: 1 July 2004

Ruling: Q1: Is a portion of the lump sum payment received from a foreign pension plan included in your client's assessable income as applicable fund earnings under section 305-70 of the Income Tax Assessment Act 1997 ? Advice/Answers No.



Reasons for decision: Summary: A portion of the lump sum benefit your client received from their foreign pension plan (the Plan) is assessable as 'applicable fund earnings'. The applicable fund earnings represents the increase or growth in the Plan during the period your client is a resident of Australia. In this case, the applicable fund earnings in relation to the lump sum benefit is Nil. | 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. | Detailed Reasoning - Foreign superannuation fund: A foreign superannuation fund is defined in subsection 995-1(1) of the ITAA 1997 as follows: · a superannuation fund is a foreign superannuation fund at a time if the fund is not an Australian superannuation fund at that time; and · 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: · the fund was established in Australia, or any asset of the fund is situated in Australia at that time; and · at that time, the central management and control of the fund is ordinarily in Australia; and · at that time either the fund had no member covered by subsection (3) (an active member ) or at least 50% of: · the total market value of the funds assets attributable to superannuation interests held by active members; or · 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 Plan is established overseas and 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 Plan is a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997. | Detailed Reasoning - 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 your client received the lump sum benefit is more than six months after they 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 your client became an Australian resident after the start of the period to which the lump sum relates. The calculation under this section effectively means that your client will be assessed only on the income earned in the Plan while they were a resident of Australia. That is, your client will only be assessed on the accretion in the Plan less any contributions made since they 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. | Detailed Reasoning - 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. The applicable fund earnings is the result of a calculation from two other amounts, and subsection 960-50(4) of the ITAA 1997 requires that when applying section 960-50 of the ITAA 1997 to amounts that are elements in the calculation of another amount you need to: · first, translate any amounts that are elements in the calculation of other amounts (except special accrual amounts); and · 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 client's 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 lump sum payment from the Plan 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 to Australian dollars at the exchange rate applicable at the time of receipt. For the purposes of this calculation it is accepted that the lump sum benefit was received at the time it was made to your client. When the amount of the lump sum benefit that was vested in your client just before the residency date (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, in this case, pounds sterling. Regulation 960-50.01 of the Income Tax Assessment Regulations 1997 (ITAR 1997) 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, to which none of the other items apply. Under this item, the 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 lump sum benefit received from the Plan at the exchange rate applicable on the day of receipt to Australian dollars (item 11 of the table in subsection 960-50(6)); and · deducting from this amount the Australian dollars equivalent of the lump sum benefit vested in the Plan at the exchange rate applicable just before the residency date (item 11A of the table in subsection 960-50(6)). In this case, no part of the payment received from the Plan is to be included in your client's assessable income for the 2004-05 income year.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns. | Relevant facts: Your client was employed overseas. | Your client is a member of a foreign pension plan (the Plan). | The Plan does not allow for access of benefits prior to retirement age. Benefits are available on retirement (not before age 50) or on the death of the member. | Your client became a resident of Australia for tax purposes in the relevant income year. | Your client chose to commute part of their pension entitlement to a lump sum under the rules of the Plan. This sum was converted to Australian dollars and paid to your client's bank account in the 2004-05 income year. | 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 305-75(5). | Income Tax Assessment Act 1997 Subsection 305-75(6). | Income Tax Assessment Act 1997 Section 960-50. | 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). | Income Tax Assessment Regulations 1997 Regulation 960-50.01.