Private ruling: Lump sum benefits transferred from foreign superannuation funds
Published: June 2012
Ruling period: For the year ended 30 June 2010 | This scheme commenced on | 1 July 2009

Ruling: Q1: Is any part of the benefits transferred from pension schemes in the overseas country to an Australian superannuation fund assessable as applicable fund earnings under section 305-70 of the Income Tax Assessment 1997 (ITAA 1997)? | A1: No.

Relevant facts and circumstances: Your client became a permanent resident of Australia for tax purposes upon migrating to Australia over three years ago. Your client was a member of a number of pension funds (the overseas funds) in an overseas country. The value of your client's benefits in each fund as at the date of residency has been provided. The rules of the overseas funds allow your client's total benefits to be transferred to a Qualifying Recognised Overseas Pension Scheme (QROPS) in Australia. During the 2009-10 income year and more than six months after becoming a permanent resident, your client's benefits were transferred from the overseas funds to a complying superannuation fund in Australia. Your client no longer has an interest in the overseas funds. Since your client migrated to Australia there have been no contributions or pension amalgamations to these overseas funds. There have been no transfers into the overseas funds from other foreign pension schemes by your client since becoming a resident of Australia. Funds cannot be accessed from the overseas funds in the overseas country other than at retirement. Assumptions Your client could not provide the total value of your client's benefits with each overseas fund as at the day before your client became an Australian resident; however an amount for the following day was, however, obtained for each fund. The Commissioner considers it reasonable to assume that the value of your client's benefits in each fund on the day your client became an Australian resident are the same as the day before your client became an Australian resident.

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 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 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 305-80. | 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). | Superannuation Industry (Supervision) Act 1993 Section 10. | Superannuation Industry (Supervision) Act 1993 Section 19. | Superannuation Industry (Supervision) Act 1993 Section 62. | Income Tax Assessment Regulations 1997 Regulations 960-50.01.

Reasons for decision: Summary: No part of the payments transferred from the overseas funds to your client's Australian superannuation fund are assessable as the applicable fund earnings relating to the payments are 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 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 payments, made from the overseas pension funds are established outside of Australia. Similarly, the central management and control is outside of Australia. On the basis of the information provided, the Commissioner considers that the overseas 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 over three years ago and the payments were transferred from the overseas funds during the 2009-10 income year. As this was 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 the overseas funds less any contributions your client made since they 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. | 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: (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 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 payments transferred for your client are not included in any of the other items in the table so the payments will fall within item 11. Under this item, the payments are translated into Australian dollars at the exchange rate applicable at the time of receipt. When the amounts in the foreign funds that were vested in your client just before your client 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 amounts received from the overseas funds at the exchange rate applicable on the day of receipt to Australian dollars and deducting from these amounts the Australian dollar equivalent of the amount vested in the funds at the exchange rate applicable just before the day your client first became an Australian resident. | Detailed Reasoning - Amounts to be used in calculation: The value of your client's benefits in the overseas funds 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. From the facts provided no contributions have been made to the overseas funds in the overseas country since your client migrated to Australia. There have been no transfers into the overseas funds in the overseas country from other foreign pension schemes by your client since becoming a resident of Australia. During the 2009-10 income year, your client's benefits were paid from the overseas funds to your client in the form of one-off lump sums which were transferred directly into a complying Australian superannuation fund. These amounts were vested for your client when the lump sums were paid. The amounts were converted into Australian dollars at the exchange rate that applied on the day they were transferred. '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 all 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 payments. 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 overseas fund are 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 and converted to Australian dollars 305-75(3)(c) 1 305-75(3)(d) Nil | Detailed Reasoning - Calculation of the assessable amount of each payment: 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). | Detailed Reasoning - Conclusion: As all the results calculated are less than zero, no amount of the lump sum payments from the overseas funds will be included as assessable 'applicable fund earnings' for the amounts transferred for the 2009-10 income year. | Detailed Reasoning - Further issues for you to consider: It is noted that in this case your client had a number of interests in an overseas fund, which your client transferred to a complying Australian superannuation fund on different dates. Had the applicable fund earnings in this case not been nil, the choice in section 305-80 of the ITAA 1997 would not have been available to your client in respect of the accounts transferred in an earlier date. This is because your client still had an interest in the overseas fund, which was not transferred until a later date.

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