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This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4.

Edited version of private advice

Authorisation Number: 1012627997806

Ruling

Subject: Superannuation lump sum

Question 1

Is any part of the payment from an overseas fund assessable as applicable fund earnings?

Answer

Yes.

Question 2

Is any part of the payment from an overseas fund assessable as an employment termination payment?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 2013.

The scheme commences on:

1 July 2012.

Relevant facts and circumstances

Your client was employed by an international organization. They ceased their employment with this organization prior to the 2013 income year.

Your client holds an interest in a Pension Fund which is a contributory defined benefit plan.

At separation from employment, the Pension Fund provides members with a lifetime pension annuity, a lump sum benefit or a combination of both. Lifetime pensions are payable starting at age 50 with a minimum three years of service.

Your client has been an Australian resident at all times when being employed by the organization and being a member of the Pension Fund.

During the 2013 income year your client commuted one third of the value of the Pension Fund and received a lump sum payment. Your client also commenced an annuity on this day.

You advised us of the total benefit in the Pension Fund on the day they received the lump sum payment.

You advised us that your client has made personal contributions to the Pension Fund.

You advised us of the interest accumulated on the amount of personal contributions made to the Pension Fund.

You advised us that the organization contribute their required liability into the pension scheme upon separation from the organization and the liability is raised on retirement.

Due to the difficulty in quantifying each individual personal contribution on specific date's and amount's made by your client, you have agreed to use an average exchange rate.

Assumptions

You advised that the organization contribute their required amount of contributions once the liability has been raised upon retirement. It is known what the total value of the benefits in the Pension Fund was at the date which the lump sum payment was made, which is inclusive of personal contributions and accumulated interest which is also known. Therefore, the Commissioner considers it reasonable to assume that the amount of benefits contributed by the organization into the Pension Fund is calculated as the total amount of the benefit, minus your client's personal contributions and interest accumulated on their personal contributions.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 82-130

Income Tax Assessment Act 1997 Section 82-135

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 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

A portion of the lump sum payment transferred from the Pension Fund to your client must be included as assessable 'applicable fund earnings' in your client's tax return for the 2012-13 income year.

As the lump sum payment received by your client is considered to be a superannuation benefit, it cannot be classified as an employment termination payment.

Detailed reasoning

Lump sum payments transferred from foreign superannuation funds

The applicable fund earnings in relation to a lump sum payment from a foreign superannuation fund, that is received more than six months after a person has become an Australian resident, will be assessable under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997).

The 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.

An amount is only assessable under section 305-70 of the ITAA 1997 if the entity making the payment is a foreign superannuation fund.

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:

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.

In this case, the lump sum payment was transferred from a Pension Fund. It is evident that the Pension Fund is a pension scheme established and managed by an international organization and is not an Australian superannuation fund as defined in subsection 295-95(2) of the ITAA 1997. Based on the information provided, the Commissioner considers that the Pension Fund satisfies the definition of a foreign superannuation fund under subsection 995-1(1).

Provident, benefit, superannuation or retirement fund

The High Court examined both the terms superannuation fund and fund in Scott v. Federal Commissioner of Taxation (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:

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 information provided indicates your client's benefits in the Pension Fund are only payable upon retirement at a minimum age of 50 and the fund would meet the definition of a superannuation fund. In addition, it is clear that the Pension Fund who made the lump sum payment to your client is 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 payment to be received will be from a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997.

Applicable fund earnings

As your client maintained his Australian residency status, section 305-70 applies to include the 'applicable fund earnings' in their assessable income.

The 'applicable fund earnings' are worked out under section 305-75. As mentioned earlier, subsection 305-75(2) applies where the person was an Australian resident at all times during the period to which the lump sum relates, whereas subsection 305-75(3) applies where the person becomes an Australian resident after the start of the period to which the lump sum relates. Therefore, subsection 305-75(2) applies to your client.

Subsection 305-75(2) of the ITAA 1997 states:

If you were an Australian resident at all times during 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 part of the lump sum that is attributable to contributions made by or in respect of you on or after the day when you became a member of the fund (the start day);

(ii) the part of the lump sum (if any) that is attributable to amounts transferred into the fund from any other *foreign superannuation fund during that 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) add the total of all previously exempt fund earnings (if any) covered by subsections (5) and (6).

This means that your client is only assessed on the income earned (the accretion) in respect of the Pension fund less any contributions that were made during Australian residency. Further, any amounts representative of 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. For the purposes of section 305-70 of the ITAA, the 'applicable fund earnings' should be calculated by:

Amounts to be used in calculation

You have provided documentation which shows the total amount of personal contributions made into the Pension fund on or after the start date of the fund. The part of the lump sum which is attributable to your client's personal contributions is one third of the total amount of personal contributions given your client commuted one third of the total value in the Pension fund. This is converted into Australian dollars at the agreed average exchange rate. On conversion this amount equals $A.

The organization is taken to have paid contributions totalling a certain amount. The part of the lump sum which is attributable to your client's employer contributions is one third of the total amount of employer contributions given your client commuted one third of the total value in the Pension fund. This is converted into Australian dollars at the exchange rate that applied on that day. On conversion this amount equals $B.

Your client commuted one third of the value of the Pension Fund and received a lump sum amount. This is converted into Australian dollars at the exchange rate that applied on that day. On conversion this amount equals $C.

There are no previously exempt fund earnings in relation to the lump sum.

The Pension Fund

Applying subsection 305-75(2) of the ITAA 1997 to your client's circumstances the amounts to be used in calculating the applicable fund earnings for the Pension Fund are as follows:

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

In accordance with subsection 305-75 (2) of the ITAA 1997 the amounts determined at sub-paragraphs 305-75(2)(a)(i) and (ii) are added:

This total is then subtracted from the amount determined under paragraph 305-75(2)(b):

To this figure we add the amounts determined under paragraph 305-75(2)(c):

Therefore $D, being a portion of the lump sum payment transferred from the Pension Fund to your client will be included as assessable 'applicable fund earnings' in your client's tax return for the 2012-13 income year.

Election

A taxpayer who is 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 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.

To qualify, the taxpayer must, immediately after the relevant payment is made, no longer have an interest in the paying fund under subsection 305-80(1) of the ITAA 1997.

As your client received the lump sum payment directly and they continue to have an interest in the Pension Fund after the lump sum payment is made they will not be eligible to make the election.

Employment termination payment

Section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) states that:

employment termination payment has the meaning given by section 82-130 of the ITAA 1997.

Subsection 82-130(1) of the ITAA 1997 states that:

A payment is an employment termination payment if:

(a) it is received by you:

(b) it is received no later than 12 months after that termination (but see subsection (4)); and

(c) it is not a payment mentioned in section 82-135.

Section 82-135 of the ITAA 1997 provides that certain payments are not employment termination payments, including superannuation benefits.

Accordingly, as the lump sum payment received by your client is a superannuation benefit, it cannot be an employment termination payment.

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