Private ruling: Lump sum payment from a foreign superannuation fund
Published: December 2014
Ruling period: Year ending 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: Is any part of the lump sum payment you will receive from a foreign superannuation fund assessable as applicable fund earnings under section 305-70 of the Income Tax Assessment 1997 (ITAA 1997)? Advice/Answer Yes.

Relevant facts and circumstances: You are a member of a foreign pension scheme (the Scheme). Monies in the Scheme are secured until normal retirement age. Normal retirement date is age 60, although earlier or later retirement is possible. You became a resident of Australia for tax purposes in the relevant income year. A letter from the Scheme confirms the value of your preserved pension as at the date you became an Australian resident payable at age 60. A transfer value statement from the Scheme shows the value of your preserved pension at a particular date in the 2013-14 income year and the total transfer value at that date. These values are guaranteed until a date in the 2014-15 income year. You have not made any contributions to the Scheme since becoming a resident of Australia. No amounts have been transferred into the Scheme from other foreign superannuation funds after you became a resident of Australia. You state you will transfer your balance in the Scheme to a complying Australian 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 305-75(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: A portion of the lump sum payment to be transferred from the Scheme will be included as assessable 'applicable fund earnings' in your tax return for the income year in which the transfer is made. As you will no longer have an interest in the Scheme after the transfer, you will be eligible to make an election to have all or part of the applicable fund earnings treated as assessable income of your complying Australian superannuation 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 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) 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 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. Monies in the Scheme are secured until normal retirement age. Normal retirement date is age 60, although earlier or later retirement is possible. As the Scheme 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 Scheme's central management and control is clearly not in Australia it is evident that the pension 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 Scheme 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. You became a resident of Australia for tax purposes in the relevant income year (the residency date). 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. | 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. 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. | Detailed Reasoning - Calculation of Assessable Amount: You are yet to transfer your benefits from Scheme. Until that transfer takes place, we are unable to advise you of the actual figure to be included as assessable 'applicable fund earnings' in your client's tax return for the income year in which the transfer is made. However, we will show you how the applicable fund earnings are calculated by using the transfer value of your benefits as at a date you provided. Please note that should the relevant amounts change then the applicable fund earnings will need to be recalculated. The value of your benefits in the Scheme on the day before you became a resident for tax purposes is converted into Australian dollars at the exchange rate that applied on that day. The value of your benefits in the Pension Scheme which have been provided is the amount vested in you if a transfer was made to a complying Australian superannuation fund on that date. This amount is converted into Australian dollars at the exchange rate that applied on that day. '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 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. Accordingly, subsection 305-75(3) of the ITAA 1997 is applied to your circumstances in calculating the applicable fund earnings. | Detailed Reasoning - Calculation of the assessable amount of the payment from the Pension Scheme: 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 result of this calculation is positive, a portion of the lump sum payment transferred from the Scheme would be included as assessable income in your tax return for the 2014-15 income year and subject to tax at your marginal rate. You may be able to elect to have all or part of the payment's applicable fund earnings treated as assessable income of the Australian superannuation fund. This is discussed below. | Detailed Reasoning - Election: A taxpayer who is 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's applicable fund earnings 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. To qualify, the taxpayer must, immediately after the relevant payment is made, no longer have an interest in the paying fund under subsection 305-80(1) of the ITAA 1997. As you no longer have an interest in the Scheme you are eligible to make the election.