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Ruling

Subject: Lump sum payments from foreign superannuation funds

Question

Is any part of the lump sum payments received by the taxpayer from the X foreign pension plans (the Pension Plans) 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:

Income year ending 30 June 2015

The scheme commenced on:

1 July 2014

Relevant facts and circumstances

The Taxpayer became a resident of Australia for tax purposes a few years ago (Residency Date).

While working overseas, a person (the Taxpayer) became a member of X foreign pension plans (the Pension Plans).

The Taxpayer is unable to obtain from the trustees of the Pension Plans the exact amounts in the Pension Plans that were vested in the Taxpayer on the day before the Residency Date as specified in subsection 305-75(3) of the ITAA 1997.

The Taxpayer cannot access their benefits in the Pension Plans other than at retirement.

There have been no contributions or pension amalgamations since the Taxpayer became an Australian resident for tax purposes.

In early 20YY, X payments were made from the Pension Plans to a complying superannuation fund in Australia (the Australian Fund).

Assumptions

You have agreed that the estimated amounts in the Pension Plans that were vested in the Taxpayer on the day before Residency Date are reasonable.

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

All legislative references are to the ITAA 1997 unless otherwise indicated.

Reasons for decision

Summary

A portion of each of the lump sum payments received from the Pension Plans should be included in the Taxpayer's assessable income for the 2014-15 income year as assessable applicable fund earning.

Detailed reasoning

Section 305-70 provides that an Australian resident taxpayer who receives a lump sum from a foreign superannuation fund more than six months after becoming an Australian resident must include the 'applicable fund earnings' of the lump sum (if any) in their assessable income.

For the purposes of section 305-70, 'applicable fund earnings' are worked out under section 305-75. In particular, subsection 305-75(3) is used to calculate applicable fund earnings where the taxpayer became an Australian resident after the start of the period to which the lump sum relates.

In essence, the amount of applicable fund earnings in relation to a superannuation lump sum to which section 305-70 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.

Meaning of 'foreign superannuation fund'

A foreign superannuation fund is defined in subsection 995-1(1) as a superannuation fund that is not an Australian superannuation fund.

In accordance with subsection 295-95(2), 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 the time, the central management and control of the fund is ordinarily in Australia; and …

Therefore, a superannuation fund that is established outside of Australia and has its central management and control outside of Australia is not an Australian superannuation fund. Consequently, such a fund would be a foreign superannuation fund as defined in subsection 995-1(1).

Meaning of 'superannuation fund'

'Superannuation fund' is defined in subsection 995-1(1) 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 Pension Plan.

The High Court examined both the terms 'superannuation fund' and 'fund' in Scott v. Federal Commissioner of Taxation (No 2) (1966) 40 ALJR 265; (1966) 14 ATD 333; [1966] LB Co's Tax Serv 80; (1966) 10 AITR 290. 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 (Cth) (1967) 41 ALJR 232; (1967) 14 ATD 519. 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.

In section 62 of the SISA, a regulated superannuation fund must be 'maintained solely' for the purposes of providing benefits specified in subsection 62(1) of the SISA. The 'core purposes' specified in that subsection relate to providing retirement or death benefits for, or in relation to, fund members; and the 'ancillary purposes' relate to the provision of benefits on the cessation of a member's employment, other death benefits and other approved benefits.

Notwithstanding that 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) as providing guidance as to what 'benefit' or 'specific future purpose' a superannuation fund should provide.

In this case, it is clear that the Pension Plans were established outside of Australia and that their central management and control are outside of Australia. In addition, the Taxpayer's benefits in the Pension Plans are only payable upon retirement. As such, the Pension Plans would meet the definition of a superannuation fund.

Therefore, on the basis of the information provided, the Commissioner considers the Pension Plans to be foreign superannuation funds for the purposes of section 305-70.

Applicable fund earnings

The Taxpayer became a resident of Australia for tax purposes a few years ago and benefits were transferred from the Pension Plans in the 2014-15 income year. As this is more than six months after the Taxpayer became an Australian resident, section 305-70 applies to include the 'applicable fund earnings' (if any) in the Taxpayer's assessable income.

The 'applicable fund earnings' amount is worked out under section 305-75. 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) 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 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).

Foreign currency conversion

Subsection 960-50(1) provides that an amount in a foreign currency is to be translated into Australian dollars (A$).

In applying section 960-50, subsection 960-50(4) provides that:

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

(b) then, calculate the other amounts.

In ATO Interpretative Decision ATO ID 2015/7, the Commissioner considers what is the correct rule for translating foreign currency into Australian dollars for the purposes of working out an individual's 'applicable fund earnings' in relation to a superannuation lump sum under section 305-75 and states that each amount in a foreign currency that is an element in the calculation of 'applicable fund earnings' is to be translated to Australian dollars at the exchange rate applicable at the time of receipt of the relevant superannuation lump sum.

Therefore, for the purposes of section 305-70, the Taxpayer's 'applicable fund earnings' amount should be calculated by deducting the Australian dollar equivalent of the amounts in the Pension Plans vested in the Taxpayer on the day before the Residency Date from the amounts received from the Pension Plans during the 2014-15 income year. The amounts should be translated to Australian dollars using the exchange rate applicable on the dates the amounts were received in Australia.

Amounts to be used in calculation

You agreed to an estimated value of the Taxpayer's benefit in the Pension Plans on the day before the Residency Date. These amounts are converted into Australian dollars at the exchange rate that applied on the day of the receipt of the relevant lump sum.

From the facts provided, no contributions or transfers have been made to Pension Plans since the Taxpayer became a resident of Australia.

The benefits in the Pension Plans at the date the lump sums are paid are converted into Australian dollars at the exchange rate that applied on the day of receipt.

'The period' for the purposes of paragraph 305-75(3)(c) commences on the day on which the person first became an Australian resident for tax purposes and ceases on the day the lump sum is paid. The Taxpayer was a resident for tax purposes for the whole period. As such, the proportions to be used in the calculations are 1.

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

Calculation of the assessable amounts

In accordance with subsection 305-75(3), the amounts at subparagraphs 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 under paragraph 305-75(3)(d).

The result is the applicable fund earnings amount. This amount should be included as assessable 'applicable fund earning' in the income tax return for the 2014-15 income year.

Election

A taxpayer who is transferring their overseas superannuation benefits directly to a complying Australian superannuation fund more than six months after becoming a resident may elect under subsection 305-80(2) to have all or part of the applicable fund earnings treated as assessable income of the Australian superannuation fund.

If the election is made, the amount specified in the election notice will be included in the 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 (subsection 305-80(1)).

Consequently, if the Taxpayer will no longer have an interest in the Pension Plans after the transfer, they are eligible to make an election to have all, or part, of the applicable fund earnings amount treated as assessable incomes of the Australian Fund.

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