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Ruling

Subject: Lump sum payment from a foreign superannuation fund

Question 1

Is there a bi-lateral agreement in place between Australia and the foreign country relating to the portability of retirement savings?

Answer

No.

Question 2

Is the transfer of funds from a foreign superannuation product to an Australian complying superannuation fund deemed to be a roll-over for the purposes of the Income Tax Assessment Act 1997?

Answer

No.

Question 3

Is any part of the transfer of funds from a foreign superannuation product to an Australian complying superannuation fund included in your assessable income as applicable fund earnings?

Answer

Yes, depending on the actual amounts at time of transfer.

Question 4

Do the transfer of funds from a foreign superannuation product to an Australian complying superannuation fund form part of the non-concessional contributions cap?

Answer

Yes, under certain circumstances.

This ruling applies for the following periods:

1 July 2011 to 30 June 2012

The scheme commences on:

1 July 2011.

Relevant facts and circumstances

You are under 55 years of age.

You resigned from a company you worked for overseas.

You returned to Australia from the foreign country and became a resident of Australia for tax purposes.

You commenced working in Australia.

You have a retirement savings account scheme (the foreign fund) in the foreign country.

No contributions were made by your employer to the foreign fund after you became a resident of Australia.

You have provided the value of your account in the foreign fund in foreign currency when you became a resident of Australia.

You made an after tax contribution to the foreign fund after becoming a resident of Australia.

You have provided the balance of your account in the foreign fund on a date after becoming a resident of Australia.

There were no amounts transferred from other foreign superannuation schemes into the foreign fund.

You anticipate transferring your retirement savings to Australia into a complying superannuation fund in the 2011-12 income year.

You will have no interest in the foreign fund after you transfer the funds to Australia.

Apart from retirement at age 65 the contributions can be only withdrawn early from the foreign fund on grounds of significant financial hardship or serious illness. You have also advised the foreign fund does not allow withdrawals for a deposit on a first owner occupier home.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 292-25.

Income Tax Assessment Act 1997 Section 292-90.

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

Income Tax Assessment Act 1997 Section 305-55.

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 307-65.

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

Income Tax Assessment Act 1997 Subsection 960-50.

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

Superannuation Industry (Supervision) Act 1993 Section 10.

Superannuation Industry (Supervision) Act 1993 Section 62.

Superannuation Industry (Supervision) Regulations 1994 Subregulation 5.01(1).

Reasons for decision

Summary

The proposed changes regarding the transfer of funds from the foreign country to Australia have not received royal assent and are not law.

As the funds in the foreign fund do not fall within the superannuation system, the transfer of funds from a the foreign fund to an Australian complying superannuation fund is not deemed to be a roll-over for the purposes of the Income Tax Assessment Act 1997.

A portion of the lump sum payment from the foreign fund may be assessable as 'applicable fund earnings'. Essentially, this assessable amount represents the earnings accrued in the foreign fund for the period of your Australian residency.

If the entire lump sum is transferred directly from the foreign fund to an Australian complying superannuation fund, you can choose to have all or part of the applicable fund earnings included in the assessable income of the Australian fund subject to meeting the necessary legislative requirements to make the choice. If you make this choice then the amount of the applicable fund earnings under the choice is not included in your assessable income.

The transfer of funds from the foreign fund to an Australian superannuation fund may form part of the non-concessional contributions cap depending on how much of the applicable fund earnings are included as income of the Australian superannuation fund.

Detailed reasoning

The Retirement Savings Portability

The Retirement Savings Portability Scheme memorandum of understanding would permit transfers of retirement savings between Australian superannuation funds regulated by the Australian Prudential Regulation Authority (APRA) and the foreign country funds. These proposed changes have not received royal assent and are not law.

Lump sum payments 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 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.

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) of the ITAA 1997 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 of the ITAA 1997 will not have any application.

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.

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), that is:

(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;

Provident, benefit, superannuation or retirement fund

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 therefrom 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 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.

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, in order for each the lump sum payment from the foreign fund to be considered a payment from a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997, it must also satisfy the requirements set out in subsection 295-95(2) of the ITAA 1997. This means that it should not be an Australian superannuation fund as defined in that subsection but must be a provident, benefit, superannuation or retirement fund as discussed above.

You have advised that early withdrawals before retirement age are allowed from the foreign fund in the case of financial hardship or serious illness. Further, you state that while some schemes allow withdrawals for a deposit on a first owner occupier home, your scheme (the foreign fund) does not. As a result, it is accepted that the foreign fund is a superannuation scheme established outside of Australia for retirement purposes.

Therefore, on the basis of the information provided, the Commissioner considers the lump sum payable by the foreign fund will be a lump sum payment from a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997.

Transfer from a foreign scheme to Australia

It has been established that the foreign fund is a foreign superannuation fund and we will now consider if benefits from the foreign superannuation fund can be rolled-over to a superannuation fund in Australia.

The term 'rolled over', as defined in subregulation 5.01(1) of the Superannuation Industry (Supervision) Regulations 1994 (SISR), means paid as a superannuation lump sum (other than by way of being transferred) within the superannuation system.

'Superannuation system' is also defined in the same regulation. The superannuation system comprises regulated superannuation funds and approved deposit funds among others and does not include foreign superannuation funds.

As a result a transfer from an overseas superannuation fund is a transfer from outside the superannuation system and therefore cannot be treated as a roll-over. Such transfers will therefore be considered contributions rather than roll-overs.

As your fund overseas is a foreign superannuation fund, monies transferred from there to an Australian complying fund will not be a roll-over.

Applicable fund earnings

You anticipate receiving the lump sum payment from the foreign fund during the 2011-12 income year. As this will be more than 6 months after you became an Australian resident, section 305-70 of the ITAA 1997 applies to include the 'applicable fund earnings' (if any) in your assessable income in your 2011-12 income tax return.

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:

(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 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).

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 (AUD). The applicable fund earnings is the result of a calculation from two other amounts, and subsection 960-50(4) requires that when applying section 960-50 to amounts that are elements in the calculation of another amount, one needs to:

· first, translate any amounts that are elements in the calculation of other amounts (except special accrual amounts); and

· then, calculate the other amounts.

For the purposes of section 305-70 of the ITAA 1997, the applicable fund earnings should be calculated by:

· translating the lump sum payment received from the relevant pension plan at the exchange rate applicable on the day of receipt to AUD; and

· deducting from this amount the AUD equivalent of the payment vested in the relevant pension plan at the exchange rate applicable on the day just before the residency date.

Amounts to be used in calculation

The following paragraphs show how the 'applicable fund earnings' are calculated. The calculations are based on the estimates you have provided with your application. When the actual figures are known at the time of transfer, you must substitute those figures into the formula.

The value of your account in the foreign fund when you became a resident of Australia will be used as the amount for the day before you became a resident of Australia. This is converted into Australian dollars at the exchange rate that applied on that day. We will use AU $A for this calculation.

You made a contribution of to the foreign fund after you became a resident of Australia. This amount is converted to Australian dollars at the exchange rate on the date it was contributed to the foreign fund. We will use AU $B for this calculation.

No amounts were transferred into the fund from other foreign superannuation funds during the period.

The policy will be paid out to you in the form of a once-off as a lump sum. Therefore this is the amount vested in you when the lump sum will be paid. This is converted into Australian dollars at the exchange rate that will apply on the day it will be paid. For these calculations we will use AU $X.

'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. In your case, that period is from the date you became a resident of Australia to the date the payment will be made and you were a resident for the whole of that 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.

Therefore, applying subsection 305-75(3) to your circumstances, the amounts to be used in calculating the applicable fund earnings are as follows:

305-75(3)(a)(i) $A

305-75(3)(a)(ii) $B

305-75(3)(a)(iii) Nil

305-75(3)(b) $X

305-75(3)(c) 1

305-75(3)(d) Nil

Calculation of the assessable amount of the payment from foreign superannuation fund

In accordance with 305-75 (3) of the ITAA 1997 the amounts determined at sub-paragraphs 305-75(3)(a)(i), (ii) and (iii) are added.

$A + $B + nil = $C.

This total is then subtracted from the amount determined under paragraph 305-75(3)(b), $X.

$X less $C = $Y.

This figure is multiplied by the proportion of the total days determined under paragraph 305-75(3)(c) - '1'

$Y x 1 = $Y

To this figure we add the amounts determined under paragraph 305-75(3)(d) - nil

$Y + nil = $Y

Therefore $Y is the amount to be include in your tax return. If the value of $Y is less than zero, no amount of the lump sum payment will be included as assessable 'applicable fund earnings' in the 2011-12 income year.

As advised previously, you will be required to substitute the exact figures in the above calculation once you have received the lump sum payment.

Taxation of transfers from foreign superannuation funds

Generally, the 'applicable fund earnings' (as calculated above) are included in the individual's assessable income. However, where the lump sum transfer represents payment of the individual's entire benefits in the foreign fund and those total benefits are paid directly into an Australian complying superannuation fund, the individual can choose to have all or part of the applicable fund earnings included in the assessable income of the Australian fund. An individual makes this choice by specifying an amount in the taxpayer's choice form (NAT 11724).

Where the individual chooses to have all or part of the applicable fund earnings included in the fund's assessable income, that amount is no longer included in the individual's assessable income.

Where a payment from a foreign superannuation fund exceeds the 'amount vested' in the member at the time of transfer, that excess is assessable income to the fund pursuant to subsection 295-200(1) of the ITAA 1997. The 'amounts vested' in the member are amounts that the member is legally entitled to on leaving the fund. The excess amount is known as the 'Assessable foreign fund amount'.

Whether transferred amounts included in non-concessional contributions cap

Concessional contributions (defined in section 292-25 of the ITAA 1997) do not include certain amounts transferred from foreign superannuation funds.

Non-concessional contributions (defined in section 292-90 of the ITAA 1997).are contributions in respect of a taxpayer which are not included in the assessable income of a superannuation fund.

Therefore any amount covered by the choice form and included in the assessable income of the Australian fund will not be treated as either a concessional contribution or a non-concessional contribution. In most cases, the amount will be included in the taxable component of the member's superannuation interest when eventually paid from the Australian fund.

The part of the payment not covered by the choice form and therefore not included in the assessable income of the Australian fund (whether or not the amount is included in the individual's assessable income) is a non-concessional contribution and will count towards the non-concessional contributions cap. In most cases, the amount will be included in the tax free component of the superannuation interest when eventually paid from the Australian fund.

If there is any 'Assessable foreign fund amount', it counts towards the concessional contributions cap.

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