Edited version of your written advice

Authorisation Number: 1012800353171

Ruling

Subject: Lump sum payment from a foreign fund

Question 1

Is any part of the benefits transferred from a foreign superannuation fund to an Australian superannuation fund applicable fund earnings under section 305-75 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Is the Taxpayer able to choose under section 305-80 of the ITAA 1997 to include all or part of the applicable fund earnings (if any) in the assessable income of the Australian fund?

Answer

Yes.

This ruling applies for the following periods:

The year ending 30 June 2015.

The scheme commences on:

1 July 2014.

Relevant facts and circumstances

The Taxpayer is, and has always been, a resident of Australia for taxation purposes.

Prior to the 2014-15 income year, two Australian resident discretionary trusts applied for admission to participate in a foreign superannuation fund. Their application was accepted and initial contributions were made.

No other contributions have been made to the foreign fund. None of the initial contributions made into the foreign fund were vested in the Taxpayer.

The Taxpayer is currently, and when the contributions were made, a member of the foreign fund. No amounts of the foreign fund have been allocated to any member of the foreign fund. The allocation to any particular member of all or part of the foreign fund account balance is at the discretion of the Trustee of the foreign fund.

The balance of the funds in the foreign fund has been provided in Australian Dollars.

It is proposed to transfer the assets of the foreign fund to an Australian complying superannuation fund of which the Taxpayer is a member and wind up the foreign fund in a manner consistent with its terms.

The transfer will comply with foreign fund's superannuation laws. The transfer will occur pursuant to clause a in the Trust Deed as a fund to fund transfer.

A clause of the Trust Deed and Rules of the foreign fund refers to benefit entitlements. It states that a qualified member who leaves service is only entitled to a benefit after the normal retirement date, or if they are still in service after they turn 65. An Employer General Member who leaves service is entitled to a benefit after the normal retirement date.

It is proposed the funds would be treated in the Australian complying superannuation fund as a transfer received in respect of the Taxpayer. Accordingly, the proceeds would be allocated to a member account in respect of the Taxpayer only. No amount would be held in a suspense account

Immediately after the lump sum is paid into the complying superannuation fund, the taxpayer will no longer have an interest in the foreign fund as the foreign fund will be wound up by a transfer of all its assets to the Australian fund.

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 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 each of the lump sum payments transferred from the foreign superannuation fund needs to be included as assessable 'applicable fund earnings' in the Taxpayer's tax return for the income year in which the transfer is made.

However, as the Taxpayer will no longer have an interest in the foreign fund they are eligible to elect to have all of part of the payments' applicable fund earnings treated as assessable income of their complying Australian superannuation fund.

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 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 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 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.

In this case, the lump sum benefits were transferred from the foreign fund. It is evident that both of these pension schemes where established in a foreign country and is not an Australian superannuation fund as defined in subsection 295-95(2) of the ITAA 1997.

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 judgment 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 Superannuation Industry (Supervision) Act 1993 (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 a Qualified Member's benefits in the foreign fund are only payable upon retirement, or reaching the prescribed age of 65. An Employer General Member's benefits are only payable upon retirement. In addition, it is clear the payers of the lump sum payments were 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 the Taxpayer has been an Australian resident at all times, 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 the Taxpayer.

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 the Taxpayer is only assessed on the income earned (the accretion) in respect of the foreign 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 (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 the Taxpayer'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 the Taxpayer will receive 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 Foreign Fund that was vested in the Taxpayer 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 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 using the exchange rate applicable on the day of receipt of the relevant lump sum.

Amounts to be used in calculation

The Taxpayer is yet to transfer his benefits from the foreign fund. Until that transfer takes place, we are unable to advise you of the actual figure to be included as assessable 'applicable fund earnings' in the Taxpayer's tax return for the 2014-15 income year. However, we will show you how the applicable fund earnings are calculated using the figures you provided. Please note that should the relevant amounts change then the applicable fund earnings will need to be recalculated.

We also note that as the figures you provided where in Australian dollars, no foreign currency conversion is required for the purpose of this example.

None of the initial contributions made into the foreign fund were vested in the Taxpayer. No additional contributions have been made.

The total value of the foreign fund totalled AUD$X. It is proposed the funds would be treated in the Australian complying superannuation fund as a transfer received in respect of the Taxpayer.

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

The foreign fund

Applying subsection 305-75(2) of the ITAA 1997 to the Taxpayer's circumstances and using 26 December 2014 as the transfer date as an example only, the amounts to be used in calculating the applicable fund earnings for the NZ Fund are as follows:

305-75(2)(a)(i) Nil

305-75(2)(a)(ii) Nil

305-75(2)(b) $X

305-75(2)(c) Nil

Calculation of the assessable amount of the payment from the foreign 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:

nil + nil = nil

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

$X less nil is $X.

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

$X + nil = $X

Therefore in this example $X will be included as assessable 'applicable fund earnings'.

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 all or part of the payment's applicable fund earnings 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 the Taxpayer will no longer have an interest in the foreign fund after the transfer is made the Taxpayer will be eligible to make the election.

Conclusion

A portion of the lump sum payment your client intends to transfer from the foreign fund to a complying Australian superannuation fund will be included as assessable 'applicable fund earnings' in the Taxpayer's tax return for the 2014-15 income year, if the transfer is made during that financial year.

The exact amount will be dependent upon the value of the lump sum payment received and the date that it is made.

As the Taxpayer will no longer have an interest in the foreign fund after the transfer is made they are eligible to make an election to have the applicable fund earnings treated as assessable income of their Australian superannuation fund.

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