Edited version of your written advice

Authorisation Number: 1051218424135

Date of advice: 15 May 2017

Ruling

Subject: Lump sum transfer from foreign superannuation

Question

Is the retirement product established in Country X a 'foreign superannuation scheme' under subsection 305-55(2) of the Income Tax Assessment Act 1997?

Is any part of the lump sum payment from the Country X retirement product included in assessable income as applicable fund earnings?

Answer

Yes

This ruling applies for the following period:

The income year ended 30 June 2016

The scheme commences on:

1 July 2015

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The Taxpayer was a Country X citizen who became an Australian resident for tax purposes on the Residency Date.

While living in Country X, the Taxpayer became a member of a superannuation fund (the Fund), which was defined benefit pension plan established and controlled in Country X.

The Fund provides its members with 'portability options' which permit them to transfer their benefits out once they terminate their membership with the plan. These options specify that the funds must remain 'locked-in' and include transferring benefits to other locked in funds; being either a locked-in retirement account (LIRA), a life income fund (LIF), a locked-in retirement income fund, transfer to another registered pension plan (RPP) or benefits can also be used to purchase a deferred life annuity.

The Taxpayer exercised the portability option permitted by the Fund and transferred $XXX (foreign currency amount) from the Fund to a personal bank account in Australia, of which an amount was withheld to pay federal tax in Country X.

The Taxpayer transferred $XXXX (foreign currency amount) to a Locked-In Registered Retirement Saving Plan (Locked-in RRSP) which is a form of LIRA.

The Taxpayer transferred the entirety of their benefits from the locked-in RRSP to a personal bank account in Australia in a second transfer. The amount transferred was $XXXX (foreign currency amount), of which an amount was withheld to pay federal tax in Country X.

The exchange rate published on the Australian Taxation Office was applied to convert Country X dollars to Australian Dollar at the date of receipt.

The Taxpayer satisfied the requirements of non-residency, as determined by the Country X Revenue Agency, and was able to withdraw the funds from their locked-in RRSP.

The Taxpayer has not been able to obtain the value of their benefits on the day before Residency Date in their Fund and has asked the Australian Taxation Office for an estimate of the aforementioned value.

There were no contributions or pension amalgamations made to their locked-in RRSP made by or in respect of the Taxpayer after they became resident of Australia.

The Taxpayer's date of birth is below their preservation age.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 305-70.

Income Tax Assessment Act 1997 Subsection 305-70(2)

Income Tax Assessment Act 1997 Subsection 305-70(4)

Income Tax Assessment Act 1997 Subsection 305-75(2).

Income Tax Assessment Act 1997 Subsection 305-75(3).

Income Tax Assessment Act 1997 Section 305-80

Income Tax Assessment Act 1997 Subsection 305-80(1)

Income Tax Assessment Act 1997 Subsection 305-80(2)

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).

Subject: Lump sum transfer from foreign superannuation

Summary

The lump sum superannuation benefits first transferred by the Taxpayer from the Fund to their personal bank account in Australia is not assessable income and not exempt income as the lump sum was received within 6 months after the Taxpayer became an Australian resident.

The applicable fund earnings amount in respect of the lump sum payment made from the locked-in RRSP to the Taxpayer's bank account in Australia on the second transfer is calculated as $AUDXXXX. This is to be included in The Taxpayer's assessable income and is subject to tax at their marginal rates.

Detailed reasoning

In the event that a taxpayer transfers an amount from a foreign superannuation fund to Australia, the growth they earned on their foreign superannuation during the period when they were a resident of Australia must be included in their assessable income as 'applicable fund earnings' under section 305-70 of the ITAA 1997. If the taxpayer remains an Australian resident at all times during the period to which the lump sum relates, the amount of your applicable funds earnings is calculated under subsection 305-75(2) of the ITAA 1997, which 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 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 the period;

(b) subtract the 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) add the total of all your previously exempt fund earnings (if any) covered by subsection (5) and (6)

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

Under subsection 995-1(1) of the ITAA 1997 a foreign superannuation fund is defined as:

(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 995-1(1) of the ITAA 1997 also defines an Australian superannuation fund as having the meaning given by section 295-95, that is basically, a fund that was established in Australia and its central management and majority of active members are located in Australia.

Further, it should be noted that subsection 995-1(1) of the ITAA 1997 also defines a superannuation fund as has the meaning given by section 10 of the Superannuation Industry (Supervision) Act 1993 (SISA), that is:

(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. (emphasis added)

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 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 Commissioner of Taxation (Cth) (1967) 41 ALJR 232; (1967) 14  ATD 519 (Mahony). In that case, Justice Kitto held that a fund had to be exclusively 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:

(a) on or after retirement from gainful employment; or

(b) attaining a prescribed age; and

(c) on the member's death. (this may require the benefits being passed on to a member's dependants or legal representative).

Though section 62 of the SIS Act also allows a superannuation fund to provide benefits for 'ancillary purposes', such as, benefits paid on the termination of employment in the event of ill-health and benefits for dependants following the death of a member after retirement or attaining the prescribed age, it should be noted that they do not extend to general or non-retirement purposes such as education, home purchases or medical expenses et cetera.

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 its 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.

Registered Pension Plans (RRP)

The Fund is a registered pension plan (RPP) in Country X. A RPP is a plan where funds are set aside by an employer, an employee, or both to provide a pension when the employee retires. Under Country X pension laws, after a period of time (usually between two and five years after joining the plan), all money in the plan becomes fully vested in the plan member. This means that while the member owns all the money in the plan, they can only access the funds under predetermined circumstances, for example, when the member reaches retirement age.

The Taxpayer membership's with the Fund was terminated. As the plan was fully vested at the time of termination, the proceeds of the Taxpayer's RPP were considered 'locked-in'. As stated in the facts, these funds could only be transferred to other locked-in accounts.

It has also been accepted that as there is insufficient evidence to indicate that members have the option to participate in the Home Buyers Plan (HBP) or the Lifelong Leaning Plan (LLP) or other schemes requiring partial withdrawal of funds, The Taxpayer's proceeds in the Fund cannot be accessed from the fund other than at retirement.

Based on the above, the RPP would meet the definition of superannuation fund. In addition, it is clear the RPP is established outside of Australia with its central management and control outside of Australia. Therefore on this basis, together with the above, the Commissioner considers the Fund to be a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997.

As stated above, once the Taxpayer's membership with the Fund was terminated, the locked-in funds had to be transferred to another locked-in account. According to the facts, the Taxpayer transferred the entirety of their monies from Fund A to a Locked-In RRSP in Country X.

Locked in Registered Retirement Saving Plan (Locked-in RRSP)

A locked in RRSP which is governed by both Country X federal legislation being the Income Tax Act (ITA) and relevant provincial legislation being the Pension Benefits Act (PBA) and are administered by the Financial Services Commission of the relevant Province (FSCO).

The funds in a Locked-in RRSP are 'locked-in' and can only be used to accumulate retirement income. Ordinarily, the funds cannot be paid out in cash, but instead must be used to provide income when the plan member retires. Further, the funds cannot be used to participate in the HBP or the LLP. Similar to an Australian superannuation fund, there are instances where a member can gain 'special access' to their funds prior to retirement age. Withdrawals under special access are permitted where:

● The plan member has an illness or physical disability that is likely to shorten the member's life expectancy to less than two years;

● The member is age 55 years or older and the total value of the funds in the member's locked-in accounts is less than a specified amount;

● The member's locked-in assets exceed federal ITA limits. As this situation attracts penalties, members have the opportunity to withdraw excess assets in order to avoid paying the penalty in future; and

● The member is facing certain types of financial hardship which are specified under relevant provincial legislation.

These situations however, do not exclude the Locked-in RRSP from being recognised as a foreign superannuation fund.

Portability provisions set under relevant law allow for non-residents of Country X to unlock and withdraw their funds from the relevant Province locked-in accounts two years after departing Country X. From the facts, The Taxpayer satisfied the requirements of non-residency, as determined by the Country X Revenue Agency, and was able to withdraw the funds from their Locked-in RRSP.

Based on the above, the Locked-in RRSP would meet the definition of superannuation fund as funds are ordinarily only obtainable once the member reaches retirement age and early or special access provisions effectively mirror those of Australian legislation. In addition, it is clear the Locked-in RRSP, as the payer of the lump sum, is established outside of Australia with its central management and control outside of Australia. Therefore, on this basis, together with the above, the Commissioner considers that the lump sum the Taxpayer received to be from a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997.

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. The applicable fund earnings 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 of the ITAA 1997 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 considered the foreign currency translation rules in relation to lump sum transfers from foreign superannuation funds. The Commissioner, in considering Item 11A of the table in subsection 960-50(6) of the ITAA 1997, determined that the exchange rate at which it is reasonable to translate amounts used in the method statements set out in subsection 305-75(3) of the ITAA 1997 into Australian currency is the exchange rate applicable at the time of receipt of the relevant superannuation lump sum.

Transfer of a lump sum from a foreign superannuation fund to an Australian superannuation fund made within six months of residency

Section 306-60 of the ITAA 1997 provides that a lump sum payment received from a foreign superannuation fund is non-assessable, non-exempt income if:

● It is received with six months of the individual becoming an Australian resident; and

● It relates to a period when the individual was not an Australian resident.

You have advised that the Taxpayer made a lump sum transfer amounting to $XXXXX from the Fund to a personal bank account in Australia.

Because the lump sum was received within six months of their residency date, the lump sum payment will be considered to be non-assessable, non-exempt income and no tax will be payable on this amount.

Transfer of a lump sum from a foreign superannuation fund to an Australian superannuation fund made after six months of residency

In accordance with section 305-70 of the ITAA 1997, if a transfer is not completed within six months of the taxpayer's residency date, any growth they earned on their foreign superannuation in the period in which the taxpayer was a resident must be included on their income tax return as 'applicable fund earnings.'

The calculation of the applicable fund earnings for the lump sum received from the locked-in RRSP account is show in the table below with reference to the facts of the case. As discussed above, any amounts in Country X Dollars are translated into Australian dollars using the exchange rate applicable on the day of receipt.

Therefore the 'applicable fund earnings' amount in respect of the lump sum payment transferred from the locked-in RRSP that should be included in The Taxpayer's assessable income for the 2015-16 income year is $XXXX.

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