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Ruling

Subject: Foreign superannuation fund payment

Is any portion of a lump sum payment transferred from a foreign fund to an Australian complying superannuation fund, assessable as applicable fund earnings under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes.

This ruling applies for the following periods:

2008-09 income year

The scheme commences on:

1 July 2008

Relevant facts and circumstances

Your client has always been an Australian resident for tax purposes.

Your client commenced employment for an overseas company over ten years ago.

The overseas company paid superannuation for your client to an overseas fund (the Fund).

Over ten years ago, the Fund was cancelled and your client's cash balance with the fund was Amount A. The retirement fund was frozen by the overseas company. During this time your client was employed by an Australian registered company, which is still under the parent overseas company. Your client's superannuation contributions were then made to a complying Australian fund.

A statement from the Fund stated that the opening balance in the Fund as at a specified date during the 1996-97 income year is Amount A. It also stated that your client's opening account balance consists of the amount of money required as of a specified date to pay your client's accrued benefit when your client reachs age 65. Instead of setting that money aside, it was credited to your client's current Retirement Plan account as the opening balance.

Over five years ago, the Fund applied for fund termination with the taxation service in the overseas country. At this time your client's fund balance was Amount B.

A letter from the Fund to your client, during the 2008-09 income year, stated that Amount C was payable to your client. This represents the Lump Sum Cashout of your client's annuity benefit.

During the 2008-09 income year a full and final payment of Amount C was paid to your client as a Lump Sum Cashout of your client's annuity benefit from the Fund.

Your client did not make any personal contributions to the Fund.

An e-mail to your client from the Fund stated that during the 2010-11 income year the retirement fund, (the Fund), was a pension plan program similar to the Australian Superannuation fund. Your client's benefit was not available for distribution prior to your client's normal retirement date. Your client's benefit was not available for medical expenses. The taxation service in the overseas country determined that the plan met their requirements as a defined benefit retirement plan.

Your client advised that the employer's contribution to the Fund was equal to Amount A. The company's contribution was based on your client's years of service at the time.

Your client is over 60 years of age.

Relevant legislative provisions

Subsection 295-95(2) of the Income Tax Assessment Act 1997e

Section 305-60 of the Income Tax Assessment Act 1997

Section 305-65 of the Income Tax Assessment Act 1997

Section 305-70 of the Income Tax Assessment Act 1997

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

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

Subsection 960-50(6) of the Income Tax Assessment Act 1997

Subsection 995-1(1) of the of the Income Tax Assessment Act 1997

Section 10 of the Superannuation Industry (Supervision) Act 1993

Subsection 10(1) of the Superannuation Industry (Supervision) Act 1993

Section 19 of the Superannuation Industry (Supervision) Act 1993

Section 62 of the Superannuation Industry (Supervision) Act 1993

Reasons for decision

Summary of decision

A portion of the lump sum payment your client received from a Fund in an overseas country is assessable as 'applicable fund earnings'. The applicable fund earnings represents the growth in the fund during the period your client was a resident of Australia.

The applicable fund earnings is calculated by translating the amount received from the Fund in an overseas country at the exchange rate applicable on the day of receipt into Australian dollars, and deducting from this amount the contributions made by or in respect of your client on or after the day your client became a member of the fund, also converted into Australian dollars.

This amount is to be included in their assessable income for the 2008-09 income year.

Lump sum payments made from a foreign superannuation fund

From 1 July 2007 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 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 a payment is being made from a foreign superannuation fund. If the entity making the payment is not a superannuation fund, then section 305-70 will not apply to the payment received.

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 funds 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.

Superannuation fund

The term 'superannuation fund' is defined in subsection 995-1(1) of the ITAA 1997 having the same meaning given by section 10 of the Superannuation Industry (Supervision) Act 1993 (SIS Act).

Subsection 10(1) of the SIS Act defines 'superannuation fund' as follows:

(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 (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 there from 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. FC of T (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 following events occur:

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

(ii) attaining a prescribed age; and

(iii) on the members death. (This may require the benefits being passed on to a members 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 buying a home, starting ones own business or immigration to another country.

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.

Therefore, notwithstanding the fact that a foreign superannuation fund may possess some features for the provision of funds in retirement, the Commissioner considers such a fund as not being a superannuation fund for Australian tax purposes if the fund contains provisions for pre-retirement withdrawals for general non-retirement purposes such as healthcare and housing.

Whether the Fund is a foreign superannuation fund

Your client is a member of the Fund, which was established in an overseas country. As its central management and control would ordinarily be outside of Australia, it is not an Australian superannuation fund as defined in subsection 295-95(2) of the ITAA 1997.

The Fund was established for the provision of benefits by way of pension, lump sum, gratuity or other like benefit given or to be given on retirement or on death of members. The Fund rules limit the payment of benefits to those relating to retirement.

Accordingly, it is accepted that the Fund is a provident, benefit, superannuation or retirement fund. As such, the Fund is a superannuation fund for the purposes of the ITAA 1997.

As the Fund is a superannuation fund that is not an Australian superannuation fund, it is a foreign superannuation fund.

Calculation of Assessable Amount

Where a lump sum amount or benefit is received or transferred within six months of a person becoming a resident of Australia, that amount will be exempt from tax under either section 305-60 or 305-65 of the ITAA 1997 if the amount of benefit meets the requirements of either of those sections. From the facts provided your client was always a resident of Australia and your client received the lump sum payment during the 2008-09 income year. Therefore, this exemption will not apply in your client's case.

Where a person receives a lump sum payment from a foreign superannuation fund, and the exemptions in sections 305-60 and 305-65 of the ITAA 1997 do not apply, then the applicable fund earnings in relation to that lump sum payment will be an assessable amount under section 305-70. Applicable fund earnings are 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.

In other words, the 'applicable fund earnings' in relation to the lump sum payment that your client received from the Fund Plan will be assessable under section 305-70 of the ITAA 1997.

Accordingly, as your client was an Australian resident at all times during the period to which the payment relates, a portion of the lump sum payment paid to your client during the 2008-09 income year is to be included as assessable income and is calculated under subsection 305-75(2) of the ITAA 1997.

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:

· work out the total of the following amounts:

· the part of the lump sum payment that is attributable to the contributions made by or in respect of you on or after the day when you became a member of the fund (the start day)

· the part of the lump sum payment (if any) that is attributable to the amounts transferred into the fund from any other *foreign superannuation fund during the period

· 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)

· add the total of all your previously exempt fund earnings (if any) covered by sections (5) and (6).

As your client was always a resident of Australia, this calculation effectively means that they are only assessed on the amount in the Fund less any contributions made.

In this case, after applying the above formula, the assessable amount is calculated as follows:

· the part of the lump sum payment that is attributable to the contributions made by or in respect of your client on or after the day your client became a member of the fund - Amount A

· the part of the lump sum payment (if any) that is attributable to the amounts transferred into the fund from any other foreign superannuation fund during the period - Nil

· the total amount of the of the above amounts subtracted from the amount in the fund that was vested in you when the lump sum was paid - Amount C

· the total of all your client's previously exempt fund earnings covered by sections (5) and (6) not applicable.

For the purposes of section 305-70 of the ITAA 1997, both the contributions and the lump sum received should be calculated by translating the amount received from the foreign fund at the exchange rate applicable on the day of receipt to Australian currency (item 11 of the table to subsection 960-50(6)).

The lump sum payment of Amount C was converted to Australian currency during the 2008-09 income year at a foreign exchange rate of the overseas country, your client receiving an amount in Australian dollars, Amount D.

The foreign currency conversion of Amount A (the contributions made by or in respect of your client on or after the day your client became a member of the fund) to Australian currency on during the 1996-97 income year using the foreign exchange rate of the overseas country is an amount in Australian dollars, Amount E.

Therefore, the applicable fund earnings in respect of the lump sum payment of Amount C in the overseas currency is an amount in Australian dollars, Amount F (that is, Amount D minus Amount E).

Amount F should be included in your client's income tax return for the 2008-09 income year as assessable income under section 305-70 of the ITAA 1997.