Edited version of your written advice

Authorisation Number: 1012759516739

Ruling

Subject: Lump sum payment from foreign fund

Question

Is any part of the lump sum payment received by your client from a foreign pension scheme assessable as applicable fund earnings in accordance with section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following period

Year ended 30 June 2014

The scheme commences on:

1 July 2013.

Relevant facts and circumstances

Your client is less than 60 years of age.

Your client was a member of an overseas pension scheme (the Scheme) prior to becoming a resident of Australia for taxation purposes.

The Scheme is a retirement fund established and managed outside Australia.

Under the terms of the Scheme, benefits are payable to members at:

• retirement; or

• early retirement due to ill health; and

• early withdrawals for non-retirement purposes are not permitted.

Your client became a resident of Australia for tax purposes in the 200X income year.

The value of your client's interests in the Scheme on the day before residency date was provided.

The daily exchange rate published on the Reserve Bank of Australia (RBA) website for the day before residency date was obtained.

The amount of your client's interests in the Scheme on day the lump sum payment was made was provided.

During the 2013-14 income year your client received a lump sum payment (the lump sum) from the Scheme.

The daily exchange rate published on the RBA website for the day the lump sum was received was obtained.

The lump sum represented a percentage of your client's interest in the Scheme and was deposited into your client's bank account in the foreign country.

In relation to the balance of your client's interest in the Scheme, your client started to receive a monthly pension from the date that the lump sum was paid.

There have been no transfers into the Scheme from other foreign pension schemes since becoming a resident of Australia.

No contributions were made to the Scheme on or after your client's residency date.

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 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 subsection 10(1).

Superannuation Industry (Supervision) Act 1993 section 19.

Superannuation Industry (Supervision) Act 1993 section 62.

Reasons for decision

Summary

The applicable fund earnings amount in respect of the lump sum payment received from the Scheme has been determined and this amount must be included in your client's assessable income in the 2013-14 income year.

Detailed reasoning

Lump sum payments transferred from foreign superannuation funds

Section 305-70 of the ITAA 1997 applies to lump sum payments from foreign superannuation funds that are received more than six months after a person has become an Australian resident.

In accordance with subsection 305-70(2) of the ITAA 1997, so much of the lump sum as equals the applicable fund earnings, as worked out under section 305-75 of the ITAA 1997 is included in the assessable income of a person.

The applicable fund earnings amount is subject to tax at the person's marginal tax rate. The remainder of the lump sum payment is not assessable income and is not exempt income.

The applicable fund earnings amount is 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.

Meaning of '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.

Meaning of 'superannuation fund'

'Superannuation fund' is defined in subsection 995-1(1) of the ITAA 1997 as having the meaning given by section 10 of the Superannuation Industry (Supervision) Act 1993 (the SISA).

Subsection 10(1) of the SISA states:

superannuation fund means:

(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 therefrom being capitalised. I do not put this forward as a definition, but rather as a general description.

Meaning of 'provident, benefit, superannuation or retirement fund'

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 SISA, 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 SISA applies only to 'regulated superannuation funds' (as defined in section 19 of the SISA), and foreign superannuation funds do not qualify as regulated superannuation funds as they are established and operate outside Australia, the Commissioner views the SISA (and its attendant 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 SISA.

In this case, it is evident that the Scheme is established outside of Australia; and its central management and control is outside of Australia. In addition, the information provided indicates your client's benefits in the Scheme are only payable upon retirement or early retirement in case of ill-health.

Therefore, on the basis of the information provided, the Commissioner considers that the Scheme is a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997 and section 305-70 of the ITAA 1997 applies to any payments from the Scheme.

Applicable fund earnings

Your client became a resident of Australia for tax purposes during the 200X income year and the lump sum payment was received more than six months after your client became an Australian resident. Accordingly, section 305-70 of the ITAA 1997 applies to include the 'applicable fund earnings' in your client's assessable income for the relevant year.

The 'applicable fund earnings' are worked out under section 305-75 of the ITAA 1997. 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).

The effect of section 305-75 of the ITAA 1997 is that your client is assessed only on the income earned on your client's benefits in the Scheme less any contributions made since your client became a resident of Australia. Any earnings made 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:

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

• then, calculate the other amounts.

Amounts to be used in calculation in relation to the lump sum payment

In relation to the lump sum payment received from the Scheme, it is noted that no contributions, or transfers from other foreign superannuation funds, were made to the Scheme after your client became a resident of Australia.

For the purposes of paragraph 305-75(3)(c) of the ITAA 1997 'the period' 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 following calculations is 1.

Further, there are no previously exempt fund earnings for the purposes of paragraph 305-75(3)(d) of the ITAA 1997 in relation to the lump sum.

Calculation of the assessable amount of the lump sum payment

The amount in the Scheme that was vested in your client on the day before your client became a resident of Australia was provided. This amount is converted into Australian dollars at the exchange rate that applied on that day.

On the date the lump sum payment was made to your client from the Scheme, this amount is converted into Australian dollars at the exchange rate that applied on that day.

Applying the formula in subsection 305-75(3) of the ITAA 1997 to your client's circumstances, it has been determined that there is an applicable earnings amount.

Further to the above, it should be noted that it is the Commissioner's view that where an individual commences a pension from a foreign superannuation fund at the same time as a superannuation lump sum is paid from that fund, subsection 305-75(3) of the ITAA 1997 is applied having regard only to the individual's lump sum entitlement. That is, regard is had only to so much of the vested amount in the fund that was payable as a lump sum. The part of the vested amount that relates to the pension is disregarded.

In this case, as your client commenced a pension from the Scheme at the same time as the lump sum payment was paid (a specified percentage of your client's interest in the Scheme), subsection 305-75(3) of the ITAA 1997 is applied on a proportionate basis to calculate the 'applicable fund earnings' amount.

Therefore, your client's assessable 'applicable fund earnings' amount to be included in your client's 2013-14 income tax return is an amount which excludes the proportion relating to the pension interest.

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