Edited version of your private ruling

Authorisation Number: 1012575087951

Ruling

Subject: Lump sum payment from a foreign superannuation fund

Question

Is any part of the benefits transferred from a foreign pension scheme to an Australian superannuation fund assessable as 'applicable fund earnings' under subsection 305-70(3) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following period:

2012-13 income year

The scheme commences on:

1 July 2012.

Relevant facts and circumstances

You were a member of the foreign superannuation fund (foreign fund) while you were employed overseas.

You became a resident of Australia for income tax purposes during the 2011-12 income year.

You made a request for the foreign fund to transfer your benefits to your Australian superannuation fund and the foreign fund provided documentation which stated a transfer quotation and included calculation details.

You lodged the foreign fund benefits transfer application during the 2012-13 income year.

Your Australian fund confirmed in writing that the transfer payment of X had been completed and confirmed in writing that the amount that had been transferred from the foreign fund and allocated to your Australian fund account was $Y.

There were no contributions made by, or in respect of you, to the foreign fund after the residency date.

No amounts were transferred from any other foreign superannuation fund to the foreign fund after the residency date.

The foreign fund does not permit early withdrawal of benefits for non-retirement purposes.

The value of benefits in the foreign fund increase by indexation changes.

Assumptions:

Section 357-110 of Schedule 1 to the Taxation Administration Act 1953 (TAA) gives the

Commissioner a power to make assumptions which he considers to be most appropriate.

As you cannot provide us with the value of your benefits in the foreign fund on or around the day

you became a resident, you agreed that an assumption will be made of the values by using a

calculation based on the information provided.

On that basis and in issuing this ruling, the Commissioner will make the assumption of the value of

your benefits in the foreign fund on the day before you became a resident

Relevant legislative provisions

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

Subsection 295-200(3) of the Income Tax Assessment Act 1997

Subsection 305-60 of the Income Tax Assessment Act 1997

Section 305-70 of the Income Tax Assessment Act 1997

Subsection 305-70(1) of the Income Tax Assessment Act 1997

Section 305-75 of the Income Tax Assessment Act 1997

Subsection 305-75(2) of the Income Tax Assessment Act 1997

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

Subsection 305-75 (5) of the Income Tax Assessment Act 1997

Subsection 305-75 (6) of the Income Tax Assessment Act 1997

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

Subsection 960-50(4) of the Income Tax Assessment Act 1997

Subsection 960-50(6) of the Income Tax Assessment Act 1997

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

Section 10 of the Superannuation Industry (Supervision) Act 1993

Section19 of the Superannuation Industry (Supervision) Act 1993

Section 62 of the Superannuation Industry (Supervision) Act 1993

Reasons for decision

Summary

The amount to be treated as 'applicable fund earnings' in relation to the transfer of your benefits from the foreign fund to your Australian fund in the 2012-13 income year is $Z.

Detailed reasoning

Lump sum payments from foreign superannuation funds

The applicable fund earnings in relation to a lump sum payment from a foreign superannuation fund that are 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 subsection 305-75(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 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 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:

o on or after retirement from gainful employment; or

o attaining a prescribed age; and

o 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 amount that was transferred 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, the foreign fund must also satisfy the requirements set out in subsection 295-95(2) of the ITAA 1997.

This means that the foreign fund 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.

Looking at the foreign fund, it is evident each is established outside of Australia; and the central management and control is outside of Australia. Retirement benefits are payable to members at retirement age and early withdrawals for non-retirement purposes are not permitted.

Therefore, on the basis of the information provided, the Commissioner considers the foreign fund is a foreign superannuation fund as defined in subsection 9951(1) of the ITAA 1997 and any transfers from the foreign fund to an Australian superannuation fund needs to be considered under section 305-70 of the ITAA 1997.

Applicable fund earnings

You became a resident of Australia for tax purposes during the 2011-12 income year and from the information provided the foreign fund transfer to the Australian fund occurred during the 2012-13 income year.

As this was more than 6 months after you became an Australian resident, section 305-70 of the ITAA 1997 applies to include the 'applicable fund earnings' in your assessable income for the 2012-13 income year.

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).

In short, you are assessed only on the income earned (the accretion) in respect of the foreign fund transfer less any contributions made since you 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. The applicable fund earnings is the result of a calculation from two other amounts and subsection 960-50(4) states 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

Amounts to be used in calculation

The foreign fund advised the transfer value as X. You were advised previously by the foreign fund that your deferred benefits in the foreign fund would be increased during the period of deferment by reference to the relevant indexation changes from the date you left the foreign fund to the date of payment.

From this information, we calculated the value of your benefits on the day before you became a resident as A. This amount will be used as the amount that was vested in you on the day before you became a resident of Australia. This is converted into Australian dollars at the exchange rate that applied on that day which converts the amount of A to $B.

You have advised there were no contributions made to the foreign fund on or after the residency date. No amounts were transferred into the foreign fund from other foreign superannuation funds during the period of membership.

The foreign fund advised you the transfer value of X was allocated to your Australian fund account as $Y. The amount vested in you on the day before the transfer occurred is $Y.

In accordance with the Commissioner's view '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, 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 transfer.

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) $B

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

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

305-75(3)(b) $Y

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.

$B+ nil + nil = $B.

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

$Y less $B is $Z.

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

$Z x 1 = $Z

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

$Z + nil = $Z

Therefore, $Z will be included as 'applicable fund earnings' under section 305-70 of the ITAA 1997 in the 2012-13 income year.

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