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Ruling

Subject: Lump sum payment from a foreign pension scheme

Question 1:

Is any part of the benefits transferred from your client's pension scheme (Pension Fund 1) in an overseas country to an Australian superannuation fund assessable as applicable fund earnings under section 305-75 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer:

Yes.

Question 2:

Is any part of the benefits transferred from your client's pension scheme (Pension Fund 2) in an overseas country to an Australian superannuation fund assessable as applicable fund earnings under section 305-75 of the ITAA 1997?

Answer:

Yes.

Question 3:

Is any part of the benefits transferred from your client's pension scheme (Pension Fund 3) in an overseas country to an Australian superannuation fund assessable as applicable fund earnings under section 305-75 of the ITAA 1997?

Answer:

Yes.

Question 4:

Is any part of the benefits transferred from your client's Pension Fund 4 (Pension Account 1) in an overseas country to an Australian superannuation fund assessable as applicable fund earnings under section 305-75 of the ITAA 1997?

Answer:

No.

Question 5:

Is any part of the benefits transferred from your client's Pension Fund 4 (Pension Account 2) in an overseas country to an Australian superannuation fund assessable as applicable fund earnings under section 305-75 of the ITAA 1997?

Answer:

Yes.

This ruling applies for the following periods:

2011-12 income year

2012-13 income year

The scheme commences on:

1 July 2011

Relevant facts and circumstances

Your client migrated to Australia during the 2011-12 income year as a Temporary Resident on a visa which was granted during the 2009-10 income year.

Your client was recently granted Permanent Residence, which was granted during the 2011-12 income year.

Your client held an interest in four pension funds in an overseas country, including two pension accounts in one of the pension funds. The pension funds are as follows:

Pension Fund 1;

Pension Fund 2;

Pension Fund 3;

Pension Fund 4 (Account 1); and

Pension Fund 4 (Account 2).

You advised the value of Pension Fund 1, Pension Fund 3 and Pension Fund 4 on the day before your client became a resident of Australia.

You were not able to ascertain the value of Pension Fund 2 on the day before your client became a resident of Australia.

During the 2011-12 income year your client received a lump sum payment from Pension Fund 1 and Pension Fund 2:

· after becoming a permanent resident of Australia, and

· more than six months after becoming a resident of Australia for tax purposes.

During the 2012-13 income year and more than six months after becoming a resident of Australia for tax purposes, your client received a lump sum payment from Pension Fund 3 and Pension Fund 4.

Your client transferred the four Pension Funds in full to Australia.

The four Pension Funds were then closed in the overseas country.

There have been no contributions to the four Pension Funds since your client migrated to Australia.

There have been no transfers into the four Pension Funds from other foreign pension schemes by your client since becoming a resident of Australia.

Funds cannot be accessed from the four Pension Funds other than at retirement.

Your client paid the lump sum payment from the four Pension Funds to a complying Australian superannuation fund.

Assumptions

The applicant could not obtain a figure from Pension Fund 2 for the day before their client became an Australian resident. The applicant advised that the pension scheme is a UK fund that calculates increases to member benefits based primarily on the UK Consumer Price Index (CPI).

A value was calculated using the increase in CPI between the day before their client became an Australian resident and the day the lump sum payment was received, and the amount paid to your client.

The Commissioner considers it is reasonable to assume that your client's benefit from Pension Fund 2 on the day before they became a resident of Australia) was the result of this calculation.

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 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 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 received by your client from Pension Fund 1 and Pension Fund 2 is to be included in their assessable income in the 2011-12 income year.

The 'applicable fund earnings' in respect of the lump sum payments received by your client from Pension Fund 3 and Pension Fund 4 (Account 2) is to be included in their assessable income in the 2011-12 income year.

The 'applicable fund earnings' in respect of the lump sum payment paid from Pension Fund 4, (Account 1) is calculated as zero.

Consequently, no amount of the lump sum payment from Pension Fund 4 (Account 1) will be included in your client's assessable income in the 2012-13 income year.

Your client can elect to have all or part of the assessable 'applicable fund earnings' treated as assessable income of their complying Australian superannuation fund because immediately after the relevant payments were made, your client no longer had an interest in the foreign funds.

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.

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 an 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 fund that:

· is an indefinitely continuing fund; and

· is a provident, benefit, superannuation or retirement fund; or

· 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. Federal Commissioner of Taxation (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 the lump sum payment from the overseas 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.

The documentation provided indicates that in respect of all your client's funds, benefits are only paid on retirement and so each fund would meet the definition of a superannuation fund. In addition, it is clear the payers of the lump sum payments are all established outside of Australia with their central management and control outside of Australia. Therefore, on the basis of the information provided, the Commissioner considers the lump sum payments your client received are from foreign superannuation funds as defined in subsection 995-1(1) of the ITAA 1997.

Applicable fund earnings

Your client became a resident of Australia for tax purposes during the 2011-12 income year and received the lump sum payments in respect Pension Fund 1 and Pension Fund 2 during the 2011-12 income year, and received the lump sum payments in respect of Pension Fund 3 and Pension Fund 4 (Account 1 and Account 2) during the 2012-13 income year. As this was more than six months after your client became an Australian resident, in respect of each payment, 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 Pension Fund 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.

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 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 they 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 your client first became an Australian resident.

Amounts to be used in calculation

You advised the benefit in the Pension Fund 1 on the day before your client became a resident of Australia. This is converted into Australian dollars at the exchange rate that applied on that day.

Similarly the value of the benefits in Pension Fund 2, Pension Fund 3, Pension Fund 4 (Account 1 and Account 2) on the day before your client became a resident of Australia are converted into Australian dollars at the exchange rate that applied on that day.

From the facts provided no contributions have been made to the four Pension Funds since your client migrated to Australia. There have been no transfers into the four Pension Funds from other foreign pension schemes by your client since becoming a resident of Australia.

During the 2011-12 income year, your client's benefits in Pension Fund 1 and Pension Fund 2 was paid out to your client in the form of one-off lump sums which was transferred directly into a complying Australian superannuation fund. Therefore these are the amounts vested in your client when the lump sums were paid. They are converted into Australian dollars at the exchange rate that applied on that day.

During the 2012-13 income year, your client's benefits in Pension Fund 3 and Pension Fund 4 (Account 1 and Account 2) was paid out to your client in the form of one-off lump sums transferred directly into a complying Australian superannuation fund. The lump sums are converted into Australian dollars at the exchange rate that applied on that day.

'The period' for the purposes of paragraph 305-75(3)(c) of the ITAA 1997 commences on the day on which the person first became an Australian resident and ceases on the day the lump sum is paid. Your client was 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.

Pension Fund 1

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 Pension Fund 1 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, converted to Australian dollars

305-75(3)(c) 1

305-75(3)(d) Nil

Calculation of the assessable amount of the payment from Pension Fund 1

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).

An amount of the lump sum payment from Pension Fund 1 will be included as assessable 'applicable fund earnings' in your client's tax return for the 2011-12 income year.

Pension Fund 2, Pension Fund 3, Pension Fund 4 (Account 1 and Account 2)

Similarly, the amounts to be used in calculating the applicable fund earnings for Pension Fund 2, Pension Fund 3 and Pension Fund 4 (Account 1 and Account 2) include the amounts advised above for both the lump sum received (paragraph 305-75(b) of the ITAA 1997) and the value of the fund on the day before your client became a resident of Australia (subparagraph 305-75(a)(i)). Further, for 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 Pension Fund 2, Pension Fund 3 and Pension Fund 4 (Account 1 and Account 2) are as follows:

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

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

305-75(3)(c) 1

305-75(3)(d) Nil

This results in assessable 'applicable fund earnings' for Pension Fund 2, Pension Fund 3 and Pension Fund 4 (Account 2), and a negative amount for Pension Fund 4 Account 1.

Election

A taxpayer transferring their overseas superannuation directly to an Australian complying superannuation fund more than six months after becoming a resident, may be able to elect under subsection 305-80(2) of the ITAA 1997 to have all or part of the payment treated as assessable income of the Australian superannuation fund.

As a result, the amount specified in the election notice will be included as assessable income of the superannuation fund and subject to tax at 15% rather than being included in the taxpayer's assessable income and subject to tax at the taxpayer's marginal rate.

Your client can elect to have all or part of the 'applicable fund earnings' from Pension Fund 1, Pension Fund 2, Pension Fund 3, and Pension Fund 4 (Account 2) treated as assessable income of their complying Australian superannuation fund because immediately after the relevant payments were made, your client no longer had an interest in the foreign funds (subsection 305-80(1) of the ITAA 1997).

The election must be in writing, specify the amount to be covered by the election and comply with any requirements specified in the Income Tax Regulations (subsection 305-80(3) of the ITAA 1997).

An amount that is covered by an election under section 305-80 of the ITAA 1997 will not be treated as either a concessional contribution or a non-concessional contribution to the Australian superannuation fund. Consequently, this amount will not count towards your concessional or non-concessional contributions caps for the relevant income year.

Conclusion:

The part of the lump sum payment from the following Pension Funds which was transferred to your client's Australian superannuation fund, that is assessable as the applicable fund earnings relating to the payment is as follows:

· An amount of Pension Fund 1 is assessable.

· An amount of Pension Fund 2 is assessable.

· An amount of Pension Fund 3 is assessable.

· An amount of Pension Fund 4 (Account 2) is assessable.

No part of the lump sum payment from the Pension Fund 4 (Account 1) which was transferred to your client's Australian superannuation fund, is assessable as the applicable fund earnings relating to the payment is nil.

Your client can elect to have all or part of the 'applicable fund earnings' from Pension Fund 1, Pension Fund 2, Pension Fund 3, and Pension Fund 4 (Account 2) treated as assessable income of their complying Australian superannuation fund because immediately after the relevant payments were made, your client will no longer have an interest in the foreign funds.

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