Edited version of your written advice

Authorisation Number: 1012818348504

Ruling

Subject: Lump sum payment from a foreign superannuation fund

Question

Is any part of the benefits transferred from your client's overseas pension scheme (the Pension Scheme) to a complying Australian superannuation fund 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 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Your client migrated to Australia during the 20XX-XX income year as a permanent resident.

Your client held an interest in an overseas pension scheme (Pension Scheme).

The agreed value of your client's interest in the Pension Scheme during the 20XX-XX income year is an amount.

During the 20XX-XX income year, your client received a lump sum payment from the Pension Scheme.

The payment from the Pension Scheme was transferred to a complying Australian superannuation fund (the Australian Fund).

The daily exchange rate for a specific date in the 20XX-XX income year published on the ATO website was a specific rate.

The transferred lump sum represented all of your client's interest in the Pension Scheme.

There have been no contributions or pension amalgamations to the Pension Scheme since your client migrated to Australia.

Funds cannot be accessed from the Pension Scheme other than at retirement in the overseas country.

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' in respect of the lump sum payment paid from an overseas pension scheme (the Pension Scheme) is calculated as an amount.

Consequently, an amount of the lump sum payment from the Pension Scheme will be included in your client's assessable income in the 2014-15 income year.

Your client can elect to have all or part of the 'applicable fund earnings' from the Pension Scheme treated as assessable income of their complying Australian superannuation fund because immediately after the relevant payment was made, your client no longer had an interest in the foreign 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 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 (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 an 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.

Subsection 995-1(1) of the ITAA 1997 defines a superannuation fund as having the same meaning given by section 10 of the Superannuation Industry (Supervision) Act 1993 (SIS Act), that is:

(a) a Pension Scheme that:

(i) is an indefinitely continuing Pension Scheme; and

(ii) is a provident, benefit, superannuation or retirement Pension Scheme; or

(b) a public sector superannuation scheme;

Provident, benefit, superannuation or retirement fund

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 Pension Scheme established for the benefit of employees except that it must be a Pension Scheme 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 "Pension Scheme", 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 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 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 Pension Scheme to be considered a payment from a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997, it must be a provident, benefit, superannuation or retirement fund as discussed above.

The documentation provided indicates that in the case of your client's Pension Scheme, benefits are only paid on retirement and the Pension Scheme would meet the definition of a superannuation fund. In addition, it is clear the payer of the lump sum payment is established outside of Australia with its central management and control outside of Australia. Therefore, on the basis of the information provided, the Commissioner considers the lump sum payment your client received is from a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997.

Applicable fund earnings

Your client became a resident of Australia for tax purposes during the 2010-11 income year and received the lump sum payment in respect of his entitlements in the Pension Scheme on during the 2014-15 income year. As this was more than six months after your client became an Australian resident for tax purposes, section 305-70 of the ITAA 1997 applies to include any 'applicable fund earnings' in his assessable income.

The 'applicable fund earnings' amount is 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) 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 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).

This means that your client is assessed only on the income your client earned on the benefits in the Pension Scheme less any contributions your client made since your client became a resident of Australia. Any earnings made during periods of non-residency, and transfers into the Pension Scheme do not form part of the taxable amount when the overseas benefit is paid.

Foreign currency conversion

Subsection 960-50(1) 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) 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.

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' under section 305-75 of the ITAA 1997 and states that each amount in a foreign currency that is an element in the calculation 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 of the ITAA 1997, the 'applicable fund earnings' amount should be calculated by deducting the Australian dollar equivalent of the amount in the Pension Scheme vested in your client just before the day your client became an Australian resident, from the amount received from the Pension Scheme. The amount should be translated using the exchange rate applicable on the day of receipt of the relevant lump sum.

Amounts to be used in calculation

The agreed value of the amount in the Pension Scheme vested in your client on the day before your client became an Australian resident for tax purposes is an amount.

The amount is converted into Australian dollars at the exchange rate that applied on the day of receipt of the relevant lump sum. The exchange rate that applied on that day was a specific rate.

From the facts provided, nothing had been contributed to the Pension Scheme since your client became a resident of Australia.

During the 2014-15 income year, your client's benefit was transferred from the Pension Scheme to the Australian Fund. This 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) 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. Your client was a resident for tax purposes for the whole of this 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.

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

Applying subsection 305-75(3) of the ITAA 1997 to you circumstances, the amounts to be used in calculating the applicable fund earnings for the Pension Scheme is as follows:

Subparagraph 305-75(3)(a)(i)	The amount, converted to Australian dollars, vested in your client before they became a resident of Australia
Subparagraph 305-75(3)(a)(ii)	Nil
Subparagraph 305-75(3)(a)(iii)	Nil
Paragraph 305-75(3)(b)	The amount of the lump sum payment received, converted to Australian dollars
Paragraph 305-75(3)(c)	1
Paragraph 305-75(3)(d)	Nil

Calculation of the assessable amount of the payment from the Pension Scheme

In accordance with subsection 305-75(3)of the ITAA 1997 the amounts determined 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) 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:

Therefore, an amount should be included in your client's income tax return for the 2014-15 income year as the 'applicable fund earnings' amount in respect of the lump sum received from the Pension Scheme.

However, as your client no longer has an interest in the Pension Scheme and your client's interest in that fund was made as a lump sum directly to a complying Australian superannuation fund, your client is eligible, provided the other requirements in section 305-80 of the ITAA 1997 are met, to make an election to have all or part of the applicable fund earnings treated as assessable income of the Australian superannuation fund.

As a result, the amount of the applicable fund earnings specified in the election notice is included as assessable income of the Australian 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.

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