Private ruling: Lump sum payment from foreign pension schemes
Published: June 2012
Ruling period: 2009-10 income year
Date scheme commenced: 1 July 2009

Ruling: Q1: Are any part of the benefits transferred from your client's overseas pension scheme (Pension Account 1) to an Australian superannuation fund assessable as applicable fund earnings under section 305-75 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No. | Q2: Are any part of the benefits transferred to an Australian superannuation fund from your client's overseas pension scheme (Pension Account 2) assessable as applicable fund earnings under section 305-75 of the ITAA 1997? | A2: No. | Q3: Are any part of the benefits transferred to an Australian superannuation fund from your client's overseas pension scheme (Pension Account 3) assessable as applicable fund earnings under section 305-75 of the ITAA 1997? | A3: No. | Q4: Are any part of the benefits transferred to an Australian superannuation fund from your client's overseas pension scheme (Pension Account 4) assessable as applicable fund earnings under section 305-75 of the ITAA 1997? | A4: No.


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 Subsection 306-70 | Income Tax Assessment Act 1997 Subsection 960-50(1) | Income Tax Assessment Act 1997 Subsection 960-50(4) | Income Tax Assessment Act 1997 Subsection 995-1(1) | Superannuation Industry (Supervision) Act 1993 Section 10 | Superannuation Industry (Supervision) Act 1993 Section 19 | Superannuation Industry (Supervision) Act 1993 Section 62

Reasons for decision: Summary: The 'applicable fund earnings' in respect of the lump sum payments paid from Pension Accounts 1 to 4 is calculated as zero. Consequently, no amount of the lump sum payments from these accounts will be included in your client's assessable income in the 2009-10 income year. | Detailed Reasoning - Lump sum payments transferred from foreign superannuation funds: From 1 July 2007 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 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. | 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. Under the definition of Australian superannuation fund in subsection 295-95(2) of the ITAA 1997 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. Subsection 995-1(1) of the ITAA 1997 defines a superannuation fund as having the same meaning given by section 10 of the Superannuation Industry (Supervision) Act 1993 (SIS Act), which requires that the fund is a provident, benefit, superannuation or retirement fund. | Detailed Reasoning - Provident, benefit, superannuation or retirement fund: The issue of what constitutes a provident, benefit, superannuation or retirement fund was discussed by the Full Bench of the High Court in Mahony v. Federal Commissioner of Taxation (1967) 41 ALJR 232; (1967) 14 ATD 519 ( Mahony ). In that case, Justice Kitto's judgement indicated that a fund does not satisfy any of the three provisions, that is, 'provident, benefit or superannuation fund', if there exist provisions for the payment of benefits 'for any other reason whatsoever'. In other words, though a fund may contain provisions for retirement purposes, it could not be accepted as a superannuation fund if it contained provisions that benefits could be paid in circumstances other than those relating to retirement. In section 62 of the SIS Act, a regulated superannuation fund must be 'maintained solely' for the 'core purposes' of providing benefits to a member when the events occur: · on or after retirement from gainful employment; or · attaining a prescribed age; and · on the member's death. (this may require the benefits being passed on to a member's dependants or legal representative). Notwithstanding the SIS Act applies only to 'regulated superannuation funds' (as defined in section 19 of the SIS Act), and foreign superannuation funds do not qualify as regulated superannuation funds as they are established and operate outside Australia, the Commissioner views the SIS Act (and the SIS Regulations) as providing guidance as to what 'benefit' or 'specific future purpose' a superannuation fund should provide. It is evident that the payers of the lump sum payments, Pension Funds 1 to 4 only provide benefits on retirement. They therefore meet the definition of a superannuation fund. In addition, they are established outside of Australia and their central management and control is also outside of Australia. On the basis of the information provided, the Commissioner considers that the Pension Funds are foreign superannuation funds as defined in subsection 995-1(1) of the ITAA 1997. | Detailed Reasoning - Applicable fund earnings: Your client became a resident of Australia for tax purposes in the 2006-07 income year and she received the lump sum payments in respect of Pension Account 1 to 4 in the 2009-10 income year. As all the payments were received 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: · work out the total of the following amounts: · 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; · 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; · 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; · 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); · multiply the resulting amount by the proportion of the total days during the period when you were an Australian resident; · 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 earned (the accretion) in respect of Pension Accounts 1 to 4 less any contributions your client made since becaming 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. | 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 (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: · 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 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 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 he 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. | Detailed Reasoning - Amounts to be used in calculation: 305-75(3)(a)(i): The value of the benefit in Pension Account 1 to 4 on the day before your client became a resident of Australia is converted into Australian dollars at the exchange rate that applied on that day. 305-75(3)(a)(ii): From the facts provided no contributions have been made to Pension Account 1, Pension Account 2 and Pension Account 3 since your client migrated to Australia. However, contributions were made to Pension Account 4 by your client and employer after your client became a resident of Australia. Each contribution is converted into Australian dollars at the exchange rate that applied on the day it was made. In an ATO fact sheet titled 'Foreign exchange rates Translation (conversion) to Australian dollars - foreign currency exchange rates to use', the exchange rate applicable on a weekend or public holiday is the rate for the next closest day. Therefore if the date of the contribution was made on a weekend or a public holiday the exchange rate available on the next closest day is used. The total of the converted amount is worked out. As a percentage of the total benefit in Pension Account 4 was transferred to Australia and the rest remained in the foreign country, the contributions made after your client became a resident must be divided in the same proportion for the amount transferred to Australia and that left in the fund in the foreign country. This is in accordance with subparagraph 305-75(3)(a)(ii). Therefore that percentage in Australian dollars is the amount that relates to the transfer to Australia. 305-75(3)(a)(iii): There have been no transfers into Pension Account 1 to 4 from other foreign pension schemes by your client since becoming a resident of Australia. 305-75(3)(b): During the 2009-10 income year, your client's benefits in the Pension Accounts 1 to 4 were transferred directly into a complying Australian superannuation fund. Therefore this is the amount vested in your client when the lump sums were paid. These are converted into Australian dollars at the exchange rate that applied on the day of the transfer. 305-75(3)(c): '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 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. 305-75(3)(d): There are no previously exempt fund earnings in relation to any of the lump sums. 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 each Pension Fund are as follows: 305-75(3)(a)(i) The amount, converted to Australian dollars, vested in your client before he 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 | Detailed Reasoning - Calculation of the assessable amount of the payment from 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 is less than zero, no amount of the lump sum payment from any of the Pension Funds will be included as assessable 'applicable fund earnings' in your client's tax return for the 2009-10 income year. | Detailed Reasoning - Conclusion:: No part of the lump sum payments from any of the Pension accounts which were transferred to your client's Australian superannuation fund are assessable as the applicable fund earnings relating to all the payments are nil.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | Your client migrated to Australia in the 2006-07 income year as a temporary resident and later became a permanent resident. | Your client held interests in Pension Account 1, Pension Account 2, Pension Account 3 and Pension Account 4 which are pension funds in a foreign country. | You have advised the following regarding the various Pension Accounts: | The value of Pension Account 1 and 4 on the date your client became a resident of Australia; and | The value of Pension Account 2 and 3 on the day before your client became a resident of Australia. | Your client received lump sum payments from Pension Accounts 1 to 4 on various dates in the 2009-10 income year more than six months after your client became a resident of Australia. | Your client split her Pension Account 4 account and transferred part of it to Australia. The remaining amount was transferred to a new Pension fund which is still open. | Your client transferred Pension Account 1, Pension Account 2 and Pension Account 3 in full to Australia. | Pension Account 1, Pension Account 2, Pension Account 3 and Pension Account 4 were then closed in the country X. | There have been no contributions to Pension Account 1, Pension Account 2, and Pension Account 3 since your client migrated to Australia. | Contributions were made by your client to Pension Account 4 after she became a resident of Australia. | There have been no transfers into Pension Accounts 1 to 4 from other foreign pension schemes by your client since becoming a resident of Australia. | Funds cannot be accessed from Pension Accounts 1 to 4 other than at retirement. | Your client paid the lump sum payments from Pension Account 1 to 4,to a complying Australian superannuation fund. | Assumptions: The applicant could not obtain a figure for the day before their client became an Australian resident for Pension Account 1 and Pension Account 4. An amount for the following day was, however, obtained. | The Commissioner considers it reasonable to assume that the value of Pension Account 1 and Pension Account 4 on the day before your client became a resident of Australia were the same as they were on the date she became a resident.