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Edited version of your written advice

Authorisation Number: 1012806532645

Ruling

Subject: Lump sum payment from foreign pension fund

Question

Is any part of the benefit transferred from a foreign pension fund to a superannuation fund in Australia assessable as applicable fund earnings under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 2015

The scheme commenced on:

1 July 2014.

Relevant facts and circumstances

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

Prior to becoming an Australian resident for tax purposes, your client held an interest in a foreign pension fund (the Scheme).

You were unable to provide the total value of your client's interest in the Scheme as at the day before they became an Australian resident.

You have agreed to the method used to determine the value of your client's benefits as at the day before they became an Australian resident, which was calculated to be X.

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

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

During the 2014-15 income year, your client's total benefits of Y were transferred from the Scheme to an Australian complying superannuation fund.

The daily exchange rate for the relevant payment date was that published on the ATO website.

Your client no longer holds an interest in the Scheme.

Your client is below 60 years of age.

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 section 305-75.

Income Tax Assessment Act 1997 section 305-80.

Income Tax Assessment Act 1997 section 960-50.

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

The applicable fund earnings amount in respect of the lump sum payment received from the Scheme is $Z.

Detailed reasoning

Lump sum payments transferred from foreign superannuation funds

Section 305-70 of the Income Tax Assessment Act 1997 (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, the amount of the lump sum that 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 or their superannuation fund if an election is made.

The applicable fund earnings amount is subject to either tax at the person's marginal tax rate or 15% if the person has elected for the receiving superannuation fund to include the amount as assessable income of the fund. 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 subsections 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:

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 facts indicate your client's benefits in the Scheme are only payable upon retirement, ill health or death.

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

Applicable fund earnings

Your client became a resident of Australia for tax purposes during the 2011-12 income year and the lump sum payment was received during the 2014-15 income year. As this was more than six months after your client became an Australian resident, section 305-70 of the ITAA 1997 applies. Accordingly, the 'applicable fund earnings' represent assessable income in your client's own name or, if your client is eligible, they can elect to have all or part of the applicable fund earnings treated as assessable income of the Australian superannuation fund.

In your client's case, the 'applicable fund earnings' are worked out under section 305-75 of the ITAA 1997 as this 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 earnings accrued on their benefits in the Scheme less any contributions they made since becoming 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

The amount in the Scheme that was vested in your client on the day before they became an Australian resident was calculated to be X. This is translated into Australian dollars at the exchange rate that applied on the day the superannuation lump sum payment was made which converts the amount of X to A$X.

You have advised that no contributions or amalgamations were made to the Scheme after your client became an Australian resident.

The value of your client's benefits on payment date was Y. The exchange rate used above converts this amount to A$Y.

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.

As your client was a resident for the whole of that period, the Australian resident days and the total days are the same. Therefore the proportion to be used in the following calculation is 1.

Applying subsection 305-75(3) of the ITAA 1997 to your client's circumstances, the amounts to be used in calculating the applicable fund earnings are as follows:

Calculation of the assessable amount of the lump sum payment

In accordance with subsection 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).

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

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

Therefore, your client's applicable fund earnings in accordance with subsection 305-75(3) of the ITAA 1997 is $Z. The remainder of the lump sum payment is non-assessable, non-exempt income.

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 applicable fund earnings treated as assessable income of the Australian superannuation fund.

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