Edited version of your written advice

Authorisation Number: 1012778732482

Ruling

Subject: Lump sum payment from a foreign pension fund

Questions

1. Does section 305-55 of Subdivision 305-B of the Income Tax Assessment Act 1997 (ITAA 1997) apply to the lump sum payment received by your client from a foreign retirement plan (the Foreign Plan)?

2. If the answer to Question 1 is yes, will any part of the lump sum payment be assessable under section 305-70 of Subdivision 305-B of the ITAA 1997?

3. Will the amount of the lump sum payment which is not treated as assessable income under section 305-70 of Subdivision 305-B of the ITAA 1997 be treated as not assessable income and not exempt income under subsection 305-70(3) of Subdivision 305-B of the ITAA 1997?

Answers

1. Yes

2. No

3. Yes

This ruling applies for the following period

Income year ended 30 June 2013

The scheme commenced on

1 July 2012

Relevant facts and circumstances

Your Client migrated to Australia several years ago, and has been an Australian resident since that time.

Prior to migrating to Australia, Your Client joined the Foreign Plan.

The Foreign Plan was established overseas and is an unfunded defined benefit plan.

Under the rules of the Foreign Plan, a participant is entitled to receive benefits under the following conditions:

• when they retire at or after their 62nd birthday.

• when they retire or terminate employment with the employer on or after their 55th birthday and prior to their 62nd birthday, or when employment is involuntarily terminated on or after their 52nd birthday and prior to their 62nd birthday.

• when employment with the employer is involuntarily terminated by the employer prior to their 52nd birthday, payment of benefit is at the sole discretion of the Plan Administrator.

• in the event of Total Disability of the participant after the effective date of participation in the Plan and prior to retirement or other termination of employment with the employer.

In the 2012-13 income year, it was resolved that the Foreign Plan be terminated and those who commenced periodic payments under the plan receive an actuarial equivalent lump sum payment.

Consequently, in the 2012-13 income year, Your Client received a lump sum payment from the Foreign Plan.

You have provided an actuarial report which shows the actuarial present value of Your Client's benefit in the Plan on the day just before Your Client became an Australian resident.

No contributions have been made to the Foreign Plan since Your Client became a resident of Australia.

No amounts have been transferred into the Foreign Plan from any other foreign superannuation fund since Your Client became a resident of Australia.

Relevant legislative provisions

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

Income Tax Assessment Act 1997 Subdivision 305-B

Income Tax Assessment Act 1997 section 305-55

Income Tax Assessment Act 1997 section 305-60

Income Tax Assessment Act 1997 section 305-70.

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 section 960-50

Income Tax Assessment Act 1997 subsection 960-50(1)

Income Tax Assessment Act 1997 subsection 960-50(4)

Income Tax Assessment Act 1997 subsection 960-50(6)

Income Tax Assessment Act 1997 subsection 995-1(1)

Superannuation Industry (Supervision) Act 1993 subsection 10(1)

Superannuation Industry (Supervision) Act 1993 section 19

Superannuation Industry (Supervision) Act 1993 section 62

Superannuation Industry (Supervision) Act 1993 subsection 62(1)

Superannuation Industry (Supervision) Act 1993 paragraph 62(1)(b)

Income Tax Assessment Regulations 1997 regulation 960-50.01

Further issues for you to consider

Not applicable.

Anti-avoidance rules

Not applicable.

Reasons for decision

Summary

Subdivision 305-B of the ITAA 1997 applies to the lump sum received by Your Client from the Foreign Plan because the plan is considered to be a superannuation fund for the purposes of that Subdivision.

The applicable fund earnings amount as calculated in accordance with subsection 305-75(3) of the ITAA 1997 is less than zero therefore, no part of the lump sum is included in Your Client's assessable income for the 2012-13 income year.

The amount of the lump sum that is not included in Your Client's assessable income as applicable fund earnings amount (in this case, the entire lump sum amount) is not assessable income and is not exempt income.

Detailed Reasoning

Application of Subdivision 305-B of the ITAA 1997

Subdivision 305-B of the ITAA 1997 deals with superannuation benefits paid from certain foreign superannuation funds.

Section 305-55 of the ITAA 1997 restricts the application of Subdivision 305-B of the ITAA 1997 to lump sums received from certain foreign superannuation funds, or schemes that pay benefits in the nature of superannuation upon retirement or death.

Generally, where a lump sum is received within six months after Australian residency, in accordance with section 305-60 of the ITAA 1997, the lump sum is tax-free. It is not assessable income and is not exempt income. Where a lump sum is received more than six months after Australian residency, section 305-70 of the ITAA 1997 applies to include applicable fund earnings (if any) in the assessable income of the recipient.

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 or a scheme that pays benefits in the nature of superannuation upon retirement or death. If the entity making the payment is not such a fund or scheme, then subdivision 305-B of the ITAA 1997 will not apply.

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 (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 accordance with section 62 of the SISA, a regulated superannuation fund must be maintained solely for one or more of the 'core purposes'; or for one or more of the core purposes and for one or more of the 'ancillary purposes'.

For the purposes of section 62 of the SISA, 'core purposes' means the provision of benefits:

• on or after retirement from gainful employment; or

• on attaining a prescribed age; or

• on the member's death if the death occurred before the member's retirement or attaining the prescribed age.

In accordance with paragraph 62(1)(b) of the SISA, 'ancillary purposes' means:

• the provision of benefits on or after termination of member's employment with an employer who had at any time contributed to the fund in relation to the member; or

• provision of benefits on or after cessation of work on account of ill-health; or

• provision of benefits on member's death if the death of the member occurred after member's retirement.

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 the Superannuation Industry (Supervision) Regulations 1994 (SISR)) 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 and the SISR.

In this case, it is evident that the Foreign Plan was established outside of Australia and its central management and control was outside of Australia. In addition, information available indicates that benefits paid by the Foreign Plan are similar to benefits specified under the SISA and the SISR, namely benefits are paid on retirement, invalidity, termination of employment or death. As such, the Foreign Plan is a superannuation fund for the purposes of Subdivision 305-B of the ITAA 1997.

Applicable fund earnings

Your Client became a resident of Australia for tax purposes several years ago and received the lump sum payment in respect of their entitlements in the Foreign Plan in the 2012-13 income year. As this payment occurred more than six months after Your Client became an Australian resident, section 305-70 of the ITAA 1997 applies to include the 'applicable fund earnings' amount (if any) in Your Client's assessable income for the 2012-13 income year.

The 'applicable fund earnings' is the amount worked out under either subsections 305-75(2) or 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.

In this case, the applicable earning amount is calculated under subsection 305-75(3) of the ITAA 1997 because Your Client became 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 (but before you received it) 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 remainder of 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 income 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 calculation of this portion effectively means that Your Client will be assessed only on the income earned while they were a resident of Australia. That is, Your Client will only be assessed on the accretion in their benefits less any contributions made since they became a resident of Australia.

Furthermore, any amounts representative of earnings during periods of non-residency and certain capital amounts previously transferred 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 amount is the result of a calculation from two other amounts and subsection 960-50(4) of the ITAA 1997 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.

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 Client's 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.

The payment that Your Client 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 date of receipt.

When the amount in the Plan that was vested in Your Client just before they became a resident of Australia 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 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.

The Commissioner considers that, in the circumstances of this case, the exchange rate at which it is reasonable to translate amounts used in the method statements set out in subsections 305-75(2) and (3) of the ITAA 1997 into Australian currency is the exchange rate applicable at the time of receipt of the relevant superannuation lump sum given that:

• in essence, the amount of applicable fund earnings in relation to a superannuation lump sum to which section 305-70 of the ITAA 1997 applies is the part of the lump sum that is attributable to earnings that have accrued to the individual in the foreign superannuation fund during the period the individual is an Australian resident;

• a comparison must be made between the amount of a superannuation lump sum to which section 305-70 of the ITAA 1997 applies and the amount of the individual's applicable fund earnings in relation to that lump sum to determine the amount included in the assessable income of the individual under subsection 305-70(2) of the ITAA 1997; and

• the amount of a superannuation lump sum to which section 305-70 of the ITAA 1997 applies is to be translated to Australian currency at the exchange rate applicable at the time of its receipt.

Therefore, for the purposes of section 305-70 of the ITAA 1997, the 'applicable fund earnings' amount should be calculated by deducting the Australian dollar equivalent of the amounts vested in the Foreign Plan just before the day Your Client became an Australian resident, from the amounts received from the Foreign Plan. Both amounts should be translated using the exchange rate applicable on the day of receipt of the relevant lump sum.

Calculation of the assessable amount of the lump sum

The value of Your Client's benefit in the Foreign Plan on the day just before they became an Australian resident for tax purposes is stated in the Actuarial Report. This is converted into Australian dollars at the exchange rate that applied on the day of receipt of the relevant lump sum.

The amount in the Foreign Plan that was vested in Your Client when the lump sum was paid in the 2012-13 income year is 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. In Your Client's case, they were a resident for the whole 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.

From the facts provided, no contributions or transfers have been made to the Foreign Plan since Your Client became a resident of Australia.

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

Calculation of the assessable amount of the payment from the Plan

In accordance with section 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) of the ITAA 1997.

This figure is multiplied by the proportion of the total days determined under paragraph 305-75(3)(c) of the ITAA 1997.

To this figure we add the amounts determined under paragraph 305-75(3)(d) of the ITAA 1997.

The final amount worked out above represents Your Client's assessable 'applicable fund earnings' amount. Because, in this case, this amount is less than zero, no part of the lump sum received by Your Client from the Foreign Plan is included in their assessable income in the 2012-13 income year. That is, the lump sum amount is not assessable income and is not exempt income.

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