Edited version of private ruling

Authorisation Number: 1011540173221

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Ruling

Subject: Lump sum payment from overseas

Question

Does section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997) apply to the transfer of your monies in the superannuation fund established in a foreign country to Australia?

Answer

Yes

This ruling applies for the following period:

Year ending 30 June 2010

The scheme commences on:

1 July 2009

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You client is a dual citizen of Australia and a foreign country and is currently under 50 years of age.

Employment history

In 1993 your client left Australia to undertake overseas employment and became a permanent resident in the foreign country.

From 1994 to 2002 your client was employed by various organisations in an overseas region.

At the beginning of the 2001 calendar year, your client became a recognised member of a pension plan. The pension plan (Pension Plan 1), being an employer sponsored superannuation fund which had several hundred members, was established in a tax haven country and has a corporate trustee.

In mid-2002, your client commenced employment with another organisation and transferred your client's interests in Pension Plan 1 to the pension plan sponsored by that organisation (Pension Plan 2).

Pension Plan 2, which you stated was an employer sponsored superannuation fund with approximately twenty members, was established in a tax haven country. The trustee of Pension Plan 2 is a corporate trustee.

During the 2004 calendar year your client commenced employment with Company A which your client established to provide corporate advisory and consulting services. Company A's fee remuneration was based on potential transaction success fees calculated as a percentage of the value of the transaction.

Company A

You state that a company structure was selected for Company A so as to enable equity participation for future potential employees and that Company A's clients, who are typically financial institutions or corporations, had a strong preference to conduct any business with a corporate entity.

Company A's clients were also parties with whom your client had previous dealings. The services provided by your client for Company A were in the overseas region for corporate and financial clients. Your client was Company A's sole employee, director, secretary and shareholder.

You state that when the business was established, it was envisaged that further employees would join Company A. You also state that as events transpired additional resources were obtained by involving other organisations in the potential transactions and that due to lack of continuing business opportunities Company A did not take on other employees.

Contributions by Company A to Company A Superannuation Fund

You state that the company made two contributions to the Company A Superannuation Fund towards the end of the 2004 calendar year (prior to the resumption of your client's Australian residency, and that no one has made any contribution to the Company A Superannuation Fund by or on your client's behalf since the resumption of your client's Australian residency.

Financial reports

You provided the company's financial reports for 2004 to 2009, which show, among other things, Company A's share capital, income, accumulated losses and loan.

Company A Superannuation Fund

Under your client's employment with Company A your client was entitled to salary-sacrifice their remuneration into the Company A Superannuation Fund. Your client became a member of the Company A Superannuation Fund in late 2004.

You state that the Company A Superannuation Fund has only had one member, that is, your client. The Company A Superannuation Fund was established in a tax haven country by Company A to provide retirement benefits for your client and additional employees that the business may have later employed.

You state that the Company A Superannuation Fund is a private pension fund with one member and that it is an employer sponsored superannuation fund. As such, you consider that it is eligible for exemption from Australian taxation, under section 519 of the Income Tax Assessment Act 1936 (ITAA 1936), in respect of any foreign investment income that would otherwise be taken to accrue from a foreign investment fund.

Relevant provisions in the Company A Superannuation Fund's trust deed

Purpose of Scheme

According to the preamble of the Company A Superannuation Fund's trust deed, the Principal Employer is desirous of establishing a scheme (Scheme) to be known as the Company A Superannuation Fund to provide Relevant Benefits by way of pension and other related benefits for and in respect of such employees of the Principal Employer and of any of its connected companies as may be admitted to membership of the Scheme.

Definitions

Clause 2.1.1 of the trust deed defines the following terms:

'Principal Employer' means:

the company or any such company, firm or other person who undertakes to observe and perform those provisions of this Scheme which apply to a Principal Employer and whose participation in it is approved by the Trustees and thus becomes the Principal Employer for the purposes of this instrument.

'Benefit' means:

any Relevant Benefit payable in accordance with and subject to the provisions of the Rules.

'Relevant Benefits' means:

any pension, lump sum, gratuity or other like benefit given or to be given on retirement or on death, or by virtue of a pension sharing order or provision, or in anticipation of retirement, or, after retirement or death, except that it does not include any benefit which is to be afforded solely by reason of the disablement by accident of a person occurring during his service or of his death by accident so occurring and for no other reason.

'Rules' means:

the provisions of Schedule 3.

'Employee' means:

an employee or director (including a non-executive director) of an Employer, being an employer which carries on a trade or undertaking wholly or partly outside [a tax haven country] or carries on business or exercises function wholly or mainly outside [another tax haven country] as the case may be.

'Member' means:

a person whom, in respect of his/her employment in an Employer's trade or undertaking wholly outside [a tax haven country] or in an employer's business or exercise of functions wholly outside [another tax haven country] as the case may be, the Trustees in their discretion have invited to join the Scheme and who has joined the Scheme.

It is noted, however, that clause 1.1 of Schedule 3 to the trust deed stipulates that 'admission of Employees to membership shall be at the complete discretion of the Employer'.

'Employer' means:

the Principal Employer or any other company, firm or person which or who undertakes to observe and perform those provisions of this Scheme which apply to an Employer and whose participation in it is approved by the Trustees and the Principal Employer.

'Trust Period' means:

the period from the date of this instrument until the earliest of:

(a) the day on which shall expire the period of eighty years from the date hereof; and

(b) such day as the Trustees may declare to be the date of expiration of the Trust Period as is hereinafter provided".

Contributions

Clause 4.1 of the trust deed provides that each Employer may pay contributions under this Scheme in accordance with the Rules and that, unless otherwise provided by the Rules or agreed with the Members, the Employer shall have complete discretion as to the amount of those contributions.

Clause 4.3 provides that:

the Member may make contributions under this Scheme.

Clause 17.3 of the trust deed provides that:

on ceasing to participate in this Scheme, an Employer shall pay forthwith any outstanding contributions which it then owes but otherwise its liability to contribute shall cease.

Clause 2.1 of Schedule 3 to the trust deed provides that only an Employer or the Members can make contributions to the Scheme. Clause 2.2 requires amounts contributed to be allocated to the Member at the discretion of the Trustees. Under Clause 2.3 any transfer received and contributions paid in respect of any Member are to be allocated to the Member's Account.

Reserve Accounts

Clause 2.4 of Schedule 3 to the trust deed empowers the Trustees to establish one or more Reserve Accounts and, at the Trustees' discretion, to credit amounts to any such Reserve Account out of contributions made by Employers for the purpose of paying expenses and liabilities of the Scheme. Clause 2.5 provides that:

amounts may be credited from a Reserve Account into a Member's Account at the discretion of the Trustees.

Clause 14 of Schedule 1 to the trust deed provides that:

the expenses in connection with the preparation and establishment of this trust and all ongoing expenses of this trust will be paid by the Employers or may be paid from a Reserve Account in accordance with the Rules.

Transfer into or from the Company A Superannuation Fund

Clause 7.1 of the trust deed provides that:

if a member is entitled to benefits under another arrangement comparable with this Scheme the Trustees may accept a transfer of assets from that other arrangement (or the trustees or managers of it) in respect of such Member.

Clause 7.2 provides that if a Member becomes a member of another comparable arrangement, the Trustees may, with the Member's consent, transfer to that other arrangement (or the trustees or manager of it) for the benefit of the Member an appropriate cash sum in lieu of the Benefits which would otherwise arise under the Scheme in respect that Member.

Provision of Relevant Benefits and restriction

Clause 6.1 of the trust deed provides that:

the Trustees shall hold the Trust Fund and the income thereof upon trust during the Trust Period to pay or apply the Trust Fund and the income thereof in or towards the provisions of Relevant Benefits.

Clause 6.2 of the trust deed provides that:

no benefits shall be paid or applied from this Scheme to or in respect of a Member while such Member is in any employment with the Employer.

Clauses 7.1 and 7.2 of the trust deed allow the Trustees to accept transfer of benefits from, and to effect transfer of benefits to, another comparable arrangement in respect of a Member.

Principal trusts

Clause 6.4 of the trust deed provides that:

the Trustees shall hold and manage the Trust Fund under irrevocable trust.

Power to amend

Clause 13 of the trust deed permits the Principal Employer, with the consent of the Trustees, to vary the terms of the Scheme, provided that the variation will not:

(a) prejudice any pension or benefit already being paid or the accrued rights of any Beneficiaries or

(b) authorise payment of part or all of the Trust Fund or the income thereof to any Employers.

Power to declare date of expiration of Trust Period and to apply Trust Fund

Clause 15 of the trust deed empowers the Trustees to declare by instrument a date earlier than the day mentioned in paragraph (a) of the definition of the Trust Period in clause 2.1.1 as the expiration date of the Trust Period.

On expiry of the Trust Period, clause 17.4 of the trust deed requires the Trustees to apply the Trust Fund and the income thereof for the provision for Relevant Benefits. The clause reads:

The Trustee shall on the expiration of the Trust Period apply the Trust Fund and the income thereof and apply the proceeds in the provision of Relevant Benefits to or in respect of the Member in such amounts and manner as the Trustees decide reflects the interest of such Member in the Scheme, but no such Benefits shall actually be paid to or in respect of any Member while he is in any employment with an Employer. Save for any Benefits which are in the form of an immediate lump sum, the Benefits being provided shall be secured by the purchase of any appropriate policy or annuity contract in the name of the Beneficiary concerned from an insurance company.

Benefits

Clause 3.2 of Schedule 3 to the trust deed requires the Trustees to procure the provision at the Relevant Date of such annuities payable for the life of the Member (and/or one or more of the other Beneficiaries referable to such Member) as the Accumulated Amount will buy. Clause 3.3 empowers the Trustees to commute all or any part of an annuity for life payable to the Member if, prior to the Relevant Date, the Member notifies the Trustees of his desire to so commute.

Clause 12.1 of Schedule 3 to the trust deed defines the following:

'Accumulated amount' means:

the value of accumulated funds and assets of the Scheme in respect of the Member as recorded in the Member's Account, such value being the capital (together with any accretions thereon) and income at the Relevant Date.

'Relevant Date' means:

the earliest of the following:

(i) the Normal Retirement Date of the Member;

(ii) the date of retirement (at any age) through reason of Incapacity;

(iii) the date of leaving Service with the Employer if the Member is aged over 50";

(iv) the Member attaining the age of 50 where he has previously left Service with the Employer;

(v) death of the Member; or

(vi) where not later than 30 days before any of the dates mentioned in (i) to (v) has arisen the Member by notice in writing informs the Trustees of his wish to postpone the Relevant Date the Relevant Date shall be such later date as the Trustees and the Member shall agree.

'Normal Retirement Date' means, in relation to the Member, the date of attainment of age 55.

Clauses 5.1, 5.2 and 5.3 of Schedule 3 to the trust deed provide that if a Member dies a lump sum benefit not exceeding the Member's Accumulated Amount shall be held by the Trustees and may at the discretion of the Trustees be paid or applied to or for the benefit of such one or more of the Beneficiaries or to the legal personal representatives of the Member.

'Beneficiary' is defined in clause 2.1.1 of the trust deed as:

any Member's spouse or any Member's issue or any parent of a Member or Member's spouse and any issue of any Member's issue or other person to whom a Benefit is to be paid under the Rules.

Returning Reserve Account balance to Employers

Clause 3.4 of Schedule 3 to the trust deed provides that:

any balance of a Reserve Amount and the income thereof which remains after the provisions of Relevant Benefits to the Member shall be paid to the Employers in such proportions as the Trustees determine having regard to the amounts contributed to the Scheme Reserve Account by the respective Employers.

Trustees and investment manager/custodian

The trustee of the Company A Superannuation Fund is responsible for all investment decisions in relation to the fund's member account and the funds of the Company A Superannuation Fund are held by a custodian company.

Amounts contributed to the Company A Superannuation Fund

The amounts contributed to the Company A Superannuation Fund by Company A and when they were made are as follows:

Late 2004 An amount was rolled-over from Pension Plan 2 to the Company A Superannuation Fund.

End of 2004 a salary-sacrifice contribution was made to the Company A Superannuation Fund V

a contribution was also made to the fund's Reserve Account. This Reserve Account was established under clause 2.4 of Schedule 3 to the funds Trust Deed to meet the ongoing expenses of the fund as an employer superannuation fund.

As noted above, clause 14 of Schedule 1 to the trust deed provides that:

the expenses in connection with the preparation and establishment of this trust and all ongoing expenses of this trust will be paid by the Employers or may be paid from a Reserve Account in accordance with the Rules.

In relation to the Company A Superannuation Fund's annual cost of maintenance they are born by this Reserve Account; however, if funds are insufficient, you state that Company A is responsible for maintaining the Company A Superannuation Fund.

Value of benefit

You advised that at the end of the 2004 calendar year your client resumed their Australian residency for tax purposes. You also advised the amount of your client's interests in the Company A Superannuation Fund at this time.

Since your client resumed their Australian residency:

(a) no further contributions have been made by your client to the Company A Superannuation Fund nor have any contributions been made by any other party on your client's behalf; and

(b) your client's only overseas interests are those held in the Company A Superannuation Fund.

Your client is still a director of Company A but your client's activities with Company A ceased approximately six months following your client's return to Australia in 2004. You state that your client had attempted to maintain the commercial opportunities and relationships that Company A had established but its business activities were wound down for a variety of business reasons including the time zone issue.

Possible transfer of benefits to Australia

Your client is seriously contemplating the direct transfer of all your client's interests in the Company A Superannuation Fund to your client's Australian superannuation fund, a self managed superannuation fund (SMSF).

Your client has also been in discussions with the Company A Superannuation Fund's trustee, which advised your client that it would be wiling to resign in favour of another professional trustee company. In this case, you are considering a third party corporate trustee in Australia as the new trustee.

In replacing the Company A Superannuation Fund's trustee your client stated that the steps that would be undertaken are:

1. Further to clause 13 of the Trust Deed (the Deed), which deals with Amendments, a resolution will be made to delete clause 9.4 of the Deed which currently states:

[A foreign country] and Australian resident trustees are excluded from being appointed as trustees of the scheme.

2. An Australian Prudential Regulation Authority (APRA) approved trustee submits consent to act as trustee;

3. Pursuant to clause 9.1 of the Deed the principal employer appoints the APRA approved trustee.

4. The new trustee amends the Deed to comply with Australian Superannuation Law pursuant to clause 13.1 of the Deed which states:

The Principal Employer shall have power with the consent of the Trustees, or if at any time there is no Principal Employer under the Scheme and for the purposes of this instrument, the Trustees acting alone shall have power, from time to time by instrument to alter modify or add to the terms of the Scheme (including without limitation to the Rules) ….

5. The assets are placed in the name of the new trustee.

6. The new trustee declares the law of a State in Australia as the proper law of the trust.

7. The new trustee elects for the fund to be a regulated superannuation fund in accordance with the SIS provisions.

You have stated that no discussions have taken place with the prospective third party corporate trustee in Australia nor has any advice been sought or received from the APRA in relation to your client's above proposed actions.

Assumptions

None made

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 292-15.

Income Tax Assessment Act 1997 Section 292-20.

Income Tax Assessment Act 1997 Subsection 292-20(2).

Income Tax Assessment Act 1997 Section 292-25.

Income Tax Assessment Act 1997 Paragraph 292-25(2)(c).

Income Tax Assessment Act 1997 Section 292-85.

Income Tax Assessment Act 1997 Subsection 292-85(2).

Income Tax Assessment Act 1997 Subsection 292-85(3).

Income Tax Assessment Act 1997 Subsection 292-85(4).

Income Tax Assessment Act 1997 Section 292-90.

Income Tax Assessment Act 1997 Section 292-410.

Income Tax Assessment Act 1997 Section 295-95.

Income Tax Assessment Act 1997 Subsection 295-95(2).

Income Tax Assessment Act 1997 Section 295-200.

Income Tax Assessment Act 1997 Section 295-320.

Income Tax Assessment Act 1997 Section 295-330.

Income Tax Assessment Act 1997 Section 305-55.

Income Tax Assessment Act 1997 Section 305-70.

Income Tax Assessment Act 1997 Subsection 305-70(2).

Income Tax Assessment Act 1997 Subsection 305-70(3).

Income Tax Assessment Act 1997 Section 305-75.

Income Tax Assessment Act 1997 Subsection 305-75(3).

Income Tax Assessment Act 1997 Section 305-80.

Income Tax Assessment Act 1997 Subsection 305-80(1).

Income Tax Assessment Act 1997 Subsection 305-80(2).

Income Tax Assessment Act 1997 Subsection 305-80(3).

Income Tax Assessment Act 1997 Section 960-50.

Income Tax Assessment Act 1997 Subsection 960-50(1).

Income Tax Assessment Act 1997 Subsection 995-1(1)

Income Tax Assessment Act 1936 Section 515.

Income Tax Assessment Act 1936 Section 519.

Income Tax Assessment Regulations Subregulation 960-50.01(1).

Income Tax Rates Act 1986 Subsection 26(2).

Income Tax (Transitional Provisions) Act 1997 Section 292-20.

Income Tax (Transitional Provisions) Act 1997 Subsection 292-20(2).

Superannuation (Excess Concessional Contributions Tax) Act 2006 Section 4.

Superannuation (Excess Concessional Contributions Tax) Act 2006 Section 5.

Superannuation (Excess Non-concessional Contributions Tax) Act 2006 Section 4.

Superannuation (Excess No-concessional Contributions Tax) Act 2006 Section 5.

Superannuation Industry (Supervision) Act 1993 Section 10.

Superannuation Industry (Supervision) Act 1993 Subsection 10(1).

Superannuation Industry (Supervision) Act 1993 Section 14.

Superannuation Industry (Supervision) Act 1993 Section 19.

Superannuation Industry (Supervision) Act 1993 Section 40.

Superannuation Industry (Supervision) Act 1993 Subsection 42(1).

Superannuation Industry (Supervision) Act 1993 Subsection 42(1A).

Superannuation Industry (Supervision) Act 1993 Section 45

Superannuation Industry (Supervision) Act 1993 Section 62

Superannuation Industry (Supervision) Regulations 1994 Paragraph 7.04(3)(a)

Reasons for decision

Summary

A portion of the lump sum payment made by the Company A Superannuation Fund to an Australian superannuation fund is assessable as 'applicable fund earnings'. The applicable fund earnings represents the increase or growth in the Company A Superannuation Fund during the period your client was a resident of Australia.

The applicable fund earnings is calculated by:

· translating the amount received from the Company A Superannuation Fund at the exchange rate applicable on the day of receipt into Australian dollars (AUD); and

· deducting from this amount the AUD equivalent of the amount vested in the Company A Superannuation Fund on the day just before your client first became an Australian resident at the exchange rate applicable on that day.

If all the benefits your client has in the Company A Superannuation Fund is transferred as a lump sum from the Company A Superannuation Fund to an Australian complying superannuation fund, your client may choose for part or all of the amount of applicable fund earnings to be included in the assessable income of the complying superannuation fund.

Detailed reasoning

Lump sum payments made from a foreign superannuation fund

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 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 a payment is being made from a foreign superannuation fund. If the entity making the payment is not a superannuation fund, then section 305-70 will not apply to the payment received.

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.

Superannuation fund

The term 'superannuation fund' is defined in subsection 995-1(1) of the ITAA 1997 having the same meaning given by section 10 of the Superannuation Industry (Supervision) Act 1993 (SIS Act).

Subsection 10(1) of the SIS Act defines 'superannuation fund' as follows:

(a) a fund that:

(i) is an indefinitely continuing fund; and

(ii) is a provident, benefit, superannuation or retirement fund; or

(b) a public sector superannuation scheme

The High Court examined both the terms superannuation fund and fund in Scott v. Commissioner of Taxation of the Commonwealth (No. 2) (1966) 10 AITR 290; (1966) 40 ALJR 265; (1966) 14 ATD 333 (Scott). In that case, Justice Windeyer stated:

I have come to the conclusion that there is no essential single attribute of a superannuation fund established for the benefit of employees except that it must be a fund bona fide devoted as its sole purpose to providing for employees who are participants money benefits (or benefits having a monetary value) upon their reaching a prescribed age. In this connexion fund, I take it, ordinarily means money (or investments) set aside and invested, the surplus income there from being capitalised. I do not put this forward as a definition, but rather as a general description.

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. Commissioner of Taxation (Cth) (1967) 41 ALJR 232; (1967) 14 ATD 519 (Mahony). In that case, Justice Kitto held that a fund had to exclusively be a provident, benefit or superannuation fund and that connoted a purpose narrower than the purpose of conferring benefits in a completely general sense. This narrower purpose meant that the benefits had to be characterised by some specific future purpose such as the example given by Justice Kitto of a funeral benefit.

Furthermore, 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 following events occur:

(i) on or after retirement from gainful employment; or

(ii) attaining a prescribed age; and

(iii) on the members death. (This may require the benefits being passed on to a members dependants or legal representative).

Though section 62 of the SIS Act also allows a superannuation fund to provide benefits for ancillary purposes, such as, benefits paid on the termination of employment in the event of ill-health and benefits for dependants following the death of a member after retirement or attaining the prescribed age, it should be noted that they do not extend to general or non-retirement purposes such as buying a home, starting ones own business or immigration to another country.

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 its regulations) as providing guidance as to what benefit or specific future purpose a superannuation fund should provide.

In view of the legislation and the decisions made in Scott and Mahony, the Commissioner's view is that for a fund to be classified as a superannuation fund, it must exclusively provide a narrow range of benefits that are characterised by some specific future purpose. That is, the payment of superannuation benefits upon retirement, invalidity or death of the individual or as specified under the SIS Act.

Therefore, notwithstanding the fact that a foreign superannuation fund may possess some features for the provision of funds in retirement, the Commissioner considers such a fund as not being a superannuation fund for Australian tax purposes if the fund contains provisions for pre-retirement withdrawals for general non-retirement purposes such as healthcare and housing, et cetera.

Whether the Company A Superannuation Fund is a foreign superannuation fund

Your client is a member of the Company A Superannuation Fund, a fund established in a tax haven country. As its central management and control would ordinarily be outside of Australia, it is not an Australian superannuation fund as defined in subsection 295-95(2) of the ITAA 1997.

As noted above, a superannuation fund by definition is an indefinitely continuing fund and is a provident, benefit, superannuation or retirement fund.

It is provided in the trust deed that the Trust Period will expire at the earlier of:

(a) a date towards the end of 2084 (that is, 80 years from the date of the declaration of trust); and

(b) such day as the Trustee may declare to be the date of expiration of the Trust Period.

It is noted that under section 14 of the SIS Act, a provision for the purpose of avoiding a breach of a rule of law relating to perpetuities does not prevent a superannuation fund from being treated as an indefinitely continuing fund.

Given the other relevant provisions in the trust deed that reflect the overall intent and operation of the fund, inclusion of the Trust Period in the trust deed could be looked upon as a provision to avoid breaching a rule of law relating to perpetuities. Similarly, inclusion of the power of the trustee to declare a date of expiration of the Trust Period in the trust deed could also be looked upon as a provision to enable the Company A Superannuation Fund to be wound up when, for example, all benefits have been transferred to another fund. On this basis, it is accepted that for the purpose of this private ruling the Company A Superannuation Fund is an indefinitely continuing fund.

The Company A Superannuation Fund was established for the provision of benefits by way of pension, lump sum, gratuity or other like benefit given or to be given on retirement or on death of members. There is nothing contained in the Company A Superannuation Fund's trust deed to suggest that benefits could be paid in circumstances other than those relating to retirement.

Accordingly, it is accepted that the Company A Superannuation Fund is a provident, benefit, superannuation or retirement fund. As such, the Company A Superannuation Fund is a superannuation fund for the purposes of the ITAA 1997.

As the Company A Superannuation Fund is a superannuation fund that is not an Australian superannuation fund, it is a foreign superannuation fund.

Calculation of Assessable Amount

Where a lump sum amount or benefit is received or transferred within six months of a person becoming a resident of Australia, that amount will be exempt from tax under either section 305-60 or 305-65 of the ITAA 1997 if the amount of benefit meets the requirements of either of those sections. Your client became a resident of Australia for tax purposes at the end of the 2004 calendar year and your client expects to receive the lump sum payment from the Company A Superannuation Fund in the 2009-10 income year or a later income year. Therefore, this exemption will not apply in your client's case.

Where a person receives a lump sum payment from a foreign superannuation fund, and the exemptions in sections 305-60 and 305-65 of the ITAA 1997 do not apply, then the applicable fund earnings in relation to that lump sum payment will be an assessable amount under section 305-70. Applicable fund earnings are 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.

In other words, the 'applicable fund earnings' in relation to any lump sum payment that your client may receive from the Company A Superannuation Fund will be assessable under section 305-70 of the ITAA 1997.

As your client became an Australian resident after the start of the period to which any lump sum relates (that is, the period after the date your client joined the Company A Superannuation Fund), applicable fund earnings are worked out under subsection 305-75(3) of the ITAA 1997.

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 (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 income 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).

This calculation effectively means that your client will be assessed only on the growth in the Company A Superannuation Fund while your client was a resident of Australia. That is, you client will only be assessed on the increase in the Company A Superannuation Fund less any contributions made to the Company A Superannuation Fund since your client became a resident of Australia.

Further, any amounts representative of earnings/growth during periods of non-residency and certain capital amounts previously transferred into the Company A Superannuation Fund do not form part of the applicable fund earnings when a lump sum is paid.

It should be noted that section 305-70 of the ITAA 1997 applies even where a lump sum is paid into an overseas bank account.

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 currency. Item 11 of the table in subsection 960-50(6) of the ITAA 1997 and item 11A added by subregulation 960-50.01(1) of the Income Tax Assessment Regulations 1997 provide that:

The rule in item 11A applies to the translation from US Dollars into Australian Dollars of the amount vested in your client in the Company A Superannuation Fund just before the day your client became an Australian resident. The rule in item 11 applies to the translation of value when a lump sum is paid.

Choice

From 1 July 2007 a taxpayer, who transfers their overseas superannuation benefits directly to an Australian complying superannuation fund more than six months after becoming a resident, may be able to choose under subsection 305-80(2) of the ITAA 1997 to have all or part of the applicable fund earnings treated as assessable income of the complying superannuation fund.

As a result, the amount specified in the written notice of choice will be included as assessable income of the complying 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, your client must, immediately after all of the lump sum is paid from the Company A Superannuation Fund into an Australian complying superannuation fund, no longer have a superannuation interest in the Company A Superannuation Fund, pursuant to subsection 305-80(1) of the ITAA 1997. The choice must be in writing, specify the amount to be covered by the choice and comply with any requirements specified in the Income Tax Assessment Regulations 1997, pursuant to subsection 305-80(3) of the ITAA 1997.

Further issues for you to consider

Concessional contributions

From 1 July 2007, concessional contributions made to superannuation funds are subject to an annual cap. For the 2009-10 income year, as a result of changes announced in the May 2009 Budget, the annual cap is $25,000.

The concessional contributions cap will be indexed to upward movements of average weekly ordinary time earnings (AWOTE) in $5,000 increments (subsection 292-20(2) of the ITAA 1997).

Concessional contributions include employer contributions and personal contributions claimed as a tax deduction by a self-employed person.

A person will be taxed on concessional contributions over the cap at a rate of 31.5% (section 292-15 of the ITAA 1997 and sections 4 and 5 of the Superannuation (Excess Concessional Contributions Tax) Act 2006).

Between 1 July 2007 and 30 June 2012, a transitional concessional contributions cap will apply for people aged 50 or over. For the 2009-10 to the 2011-12 income years, as a result of changes announced in the May 2009 Budget, the annual cap is $50,000 (subsection 292-20(2) of the Income Tax (Transitional Provisions) Act 1997).

If a person has more than one fund, all concessional contributions made to all their funds are added together and count towards the cap.

Amounts in excess of the concessional contributions cap are also counted towards the non-concessional contributions cap.

Section 292-25 of the ITAA 1997 determines what amounts are concessional contributions for a financial year. Under paragraph 292-25(2)(c) the following amounts are excluded from being concessional contributions:

(i) so much of an amount that is transferred to a superannuation fund from a foreign superannuation fund and is included in the assessable income of the fund as a result of a choice made under section 305-80;

(ii) an amount that is a roll-over superannuation benefit to the extent that it contains an untaxed element that is not an excess untaxed roll-over amount;

(iii) a contribution made to a constitutionally protected fund (CPF).

As noted earlier, the amount of the applicable fund earnings in relation to the transfer of benefits from a foreign superannuation fund to an Australian superannuation fund that is covered by a choice made under section 305-80 of the ITAA 1997 is treated as assessable income of the Australian superannuation fund. The amount covered by the choice will not be treated as a concessional contribution to the Australian superannuation fund. Consequently, this amount will not count towards the concessional contributions cap for the relevant year.

Non-concessional contributions

From 1 July 2007, non-concessional contributions made to a complying superannuation fund will be subject to an annual cap (subsection 292-85(2) of the ITAA 1997). For the 2009-10 income year onwards the annual cap is always six times the concessional contributions cap. Therefore, for the 2009-10 income year the annual cap is $150,000.

Non-concessional contributions include:

· personal contributions for which an income tax deduction is not claimed;

· contributions a person's spouse makes to the person's superannuation fund account (spouse contributions); and

· transfers from foreign superannuation funds (excluding amounts included in the fund's assessable income).

As noted above, the amount of the applicable fund earnings in relation to the transfer of benefits from a foreign superannuation fund to an Australian superannuation fund that is covered by a choice made under subsection 305-80(2) of the ITAA 1997 is treated as assessable income of the Australian superannuation fund. Therefore, this amount will not be treated as a non-concessional contribution to the Australian superannuation fund and will not count towards the taxpayer's non-concessional contributions cap for the relevant year.

The remainder of the superannuation benefit transferred from the foreign superannuation fund will be treated as a non-concessional contribution to the Australian superannuation fund and will count towards the taxpayer's non-concessional contributions cap for the relevant year. This will include the amount, if any, of the applicable fund earnings not covered by the choice made under subsection 305-80(2) of the ITAA 1997.

A person will be taxed on non-concessional contributions over the cap at the rate of 46.5% (section 292-80 of the ITAA 1997 and sections 4 and 5 of the Superannuation (Excess Non-concessional Contributions Tax) Act 2006). The person will be required to ask their superannuation fund to release an amount that is equal to the tax liability (section 292-410 of the ITAA 1997).

As a concession, to accommodate larger contributions, persons under age 65 in an income year are able to bring forward future entitlements to two years worth of non-concessional contributions. This means a person under age 65 will be able to contribute non-concessional contributions totalling $450,000 over three income years without exceeding their non-concessional contributions cap (subsections 292-85(3) and (4) of the ITAA 1997).

The bring forward will be triggered automatically when contributions in excess of the annual non-concessional contributions cap are made in an income year by a person who is under age 65 at any time in the year where a bring forward has not already commenced (subsection 292-85(3) of the ITAA 1997).

Where a bring forward has been triggered, the two future years' entitlements are not indexed.

Fund-capped contributions

Under paragraph 7.04(3)(a) of the Superannuation Industry (Supervision) Regulations 1994 (SISR), a regulated superannuation fund must not accept any fund-capped contributions in a financial year in respect of a member that exceed:

(a) if the member is 64 or less on 1 July of the financial year - three times the amount of the non-concessional contributions cap; or

(b) if the member is 65 but less than 75 on 1 July of the financial year - the non-concessional contributions cap.

Fund-capped contributions are member contributions other than:

· contributions to which a valid and acknowledged notice under section 290-170 of the ITAA 1997 relates;

· contributions arising from a structured settlement or an order for personal injury;

· contributions relating to some capital gains tax (CGT) small business concessions to the extent that it does not exceed the CGT cap amount ($1,000,000 indexed annually) when it is made;

· a payment made by the Commissioner of Taxation under section 65 of the Superannuation Guarantee (Administration) Act 1992;

· a payment made by the Commissioner of Taxation under section 61 or 61A of the Small Superannuation Accounts Act 1995;

· a Government co-contribution made under the Superannuation (Government Co-contribution for Low Income Earners) Act 2003;

· a contribution that is a directed termination payment within the meaning of section 82-10F of the Income Tax (Transitional Provisions) Act 1997.

Becoming an Australian superannuation fund

You advised that your client has considered taking steps to turn the Company A Superannuation Fund into an Australian superannuation fund. If this course of action eventuates, it should be noted that item 3 of the table in section 295-320 of the ITAA 1997 will apply to the assessable income of the Company A Superannuation Fund.

Item 3 of the table in section 295-320 of the ITAA 1997 applies where a complying superannuation fund (CSF) or non-complying superannuation fund (N-CSF) is an Australian superannuation fund for an income year but was a foreign superannuation fund for the previous income year. If that is the case then the assessable income of the CSF or N-CSF for the income year includes the ordinary and statutory income from previous years worked out under section 295-330.

Under section 295-330 of the ITAA 1997, the amount of ordinary and statutory income from previous years to be included in the assessable income of a superannuation fund for an income year is calculated using the following formula:

Taxation of non-complying superannuation fund

Subsection 42(1) of the SIS Act states, among other things, that a superannuation fund is a CSF in relation to an income year if:

(a) the fund is a resident regulated superannuation fund at all times during the income year when the fund is in existence; and

(b) in respect of the income year the trustee of the fund either did not contravene any of the regulatory provisions in relation to the fund or did contravene certain regulatory provision(s) in relation to the fund but did not fail the culpability test set out in subsection 42(1A).

Section 45 of the SIS Act provides, among other things, that a superannuation fund is a CSF for the purposes of the Income Tax Assessment Act in relation to an income year if, and only if, the Regulator has given a notice to a trustee of the fund under section 40 of the SIS Act stating that the fund is a CSF in relation to the income year.

Under subsection 26(2) of the Income Tax Rates Act 1986, the rate of tax that applies to the taxable income of a N-CSF is 45%.

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