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Authorisation Number: 1011612401156

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Ruling

Subject: Lump sum payment from overseas pension scheme

Questions:

Is the overseas pension scheme a superannuation fund for the purposes of the Income Tax Assessment Act 1997 (ITAA 1997)?

Is any part of a lump sum payment from the overseas pension scheme included in assessable income as applicable fund earnings under section 305-70 of the ITAA 1997?

Advice/Answers:

Yes.

Yes.

This ruling applies for the following period:

1 July 2009 to 30 June 2010

The scheme commenced on:

1 July 2009

Relevant facts:

You are over 55 years of age.

You arrived in Australia and became a resident for tax purposes.

Before moving to Australia, while working overseas you contributed to a pension fund (the foreign fund) to which both you and your employer contributed.

You ceased to be a member of the foreign fund prior to moving to Australia.

After you moved to Australia, the foreign fund calculated and distributed surplus monies to former and current members.

As a result, a surplus amount was allocated to you.

In a letter you were advised that an amount was transferred to your bank account in the foreign country.

You have advised us of the amount of the surplus in Australian dollars that was received by you in the 2009-2010 income year.

A letter from your bank in Australia advised that the above amount had been received from your bank in the foreign country.

A bank statement from your bank in the foreign country shows a credit of the amount in foreign currency and the date it was credited.

You have provided a copy of the rules of the foreign fund. They state that the object of the fund is to provide benefits for employees of an employer on their retirement or, upon the death of such employees, for their dependants, beneficiaries and nominees.

The foreign fund provides various benefits such as:

· Withdrawal benefits;

· Retirement benefits;

· Disability benefits; and

· Death benefits.

Withdrawal benefits are paid when a member's employment is terminated before retirement age.

Retirement benefits are paid at normal retirement age, at early retirement with the consent of the employer, retirement due to ill health or even after retirement age with the consent of the employer.

Disability benefits are paid if a member becomes totally or permanently disabled.

Death benefits are paid to the beneficiaries on the death of a member occurs while in service with the employer.

No other benefits or loans are provided to members.

An email from the finance company advised that the surplus was paid out of the foreign fund's reserves.

Relevant legislative provisions:

Income Tax Assessment Act 1997 Subsection 6-5(2).

Income Tax Assessment Act 1997 Subsection 6-10(4).

Income Tax Assessment Act 1997 Section 10-5.

Income Tax Assessment Act 1997 Subsection 295-95(2).

Income Tax Assessment Act 1997 Section 305-55.

Income Tax Assessment Act 1997 Section 305-60.

Income Tax Assessment Act 1997 Section 305-70.

Income Tax Assessment Act 1997 Section 305-75.

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

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

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

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

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

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

Income Tax Assessment Act 1997 Subsection 305-75(5).

Income Tax Assessment Act 1997 Subsection 305-75(6).

Income Tax Assessment Act 1997 Section 307-5.

Income Tax Assessment Act 1997 Section 307-65.

Income Tax Assessment Act 1997 Subsection 295-95(2).

Income Tax Assessment Act 1997 Subsection 960-50.

Income Tax Assessment Act 1997 Subsection 995-1(1).

Superannuation Industry (Supervision) Act 1993 Section 10.

Superannuation Industry (Supervision) Act 1993 Section 62.

Reasons for decision

Question 1

Summary

The foreign fund is considered to be a superannuation fund as its rules are considered consistent with the purposes of a provident, benefit, superannuation or retirement fund, which are to provide retirement, death and disability benefits for members.

Detailed reasoning

The surplus payment has been made to you as a lump sum from the reserves of the foreign fund.

Subsections 6-5(2) and 6-10(4) of the Income Tax Assessment Act 1997 (ITAA 1997) provide that the assessable income of a resident taxpayer includes ordinary or statutory income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

Section 10-5 of the ITAA 1997 lists the provisions in respect of statutory income. Included in this list is section 305-70 which includes as assessable income the applicable fund earnings in relation to lump sum payments from foreign superannuation funds received more that six months after a taxpayer has become an Australian resident.

Subdivision 305-B of the ITAA 1997 sets out the tax treatment of superannuation benefits from foreign superannuation funds. Subsection 305-55(1) of the ITAA 1997 specifies that the Subdivision applies if:

· you receive a superannuation lump sum from a foreign superannuation fund; and

· the fund is an entity mentioned in item 4 of the table in subsection 295-490(1) (which deals with deductions for superannuation entities).

Superannuation lump sum

Section 307-65 defines a superannuation lump sum as a 'superannuation benefit' that is not a 'superannuation income stream benefit'.

Under section 307-5, a superannuation benefit includes 'a payment to you from a superannuation fund because you are a fund member'.

The meaning of 'superannuation fund' is therefore integral to the meaning of superannuation lump sum.

Foreign superannuation fund

The phrases 'Foreign superannuation fund' and 'Australian superannuation fund' are defined in subsection 995-1(1) of the ITAA 1997 as follows:

foreign superannuation fund:

a superannuation fund is a foreign superannuation fund at a time if the fund is not an Australian superannuation fund at that time; and

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.

Australian superannuation fund has the meaning given by section 295-95.

Subsection 295-95(2) of the ITAA 1997 states:

A superannuation fund is an Australian superannuation fund at a time, and for the income year in which that time occurs, if:

the fund was established in Australia, or any asset of the fund is situated in Australia at that time; and

at that time, the central management and control of the fund is ordinarily in Australia; and

at that time either the fund had no member covered by subsection (3) (an active member) or at least 50% of:

the total market value of the fund's assets attributable to superannuation interests held by active members; or

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.

Accordingly, the definitions of a 'foreign superannuation fund' and Australian superannuation fund both incorporate the requirement of being a 'superannuation fund'.

The effect of these definitions is that if the foreign fund is not a 'superannuation fund', it will not be an Australian superannuation fund or a foreign superannuation fund. Nor can the amount paid to you be a 'superannuation lump sum' and Subdivision 305-B will not apply.

Therefore, we are first required to determine if the foreign fund is a superannuation fund under the ITAA 1997.

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 (SISA).

Subsection 10(1) of the SISA provides that:

superannuation fund means:

· a fund that:

· is an indefinitely continuing fund; and

· is a provident, benefit, superannuation or retirement fund; or

· a public sector superannuation scheme.

Provident, benefit, superannuation or retirement fund

Thus, to be a superannuation fund, a fund must satisfy one of four descriptors, namely that it is a 'provident, benefit, superannuation or retirement fund'. The SISA does not define these descriptors. Their meaning must be derived from ordinary usage.

A provident, benefit, superannuation or retirement fund is commonly understood as a fund which provides its members with the secured right to be paid future benefits out of the moneys set aside.

Referring to the phrase, 'a provident, benefit or superannuation fund established for the benefit of employees', Justice Kitto in Mahoney v. FC of T (1967) 41 ALJR 232; (1967) 14 ATD 519 (Mahoney)said:

There was no definition in the Act of "a provident, benefit or superannuation fund", and the meaning of the several expressions must therefore be arrived at in the light of ordinary usage and with only one piece of assistance to be gathered from the immediate context. Since a fund, if its income was to be exempt under the provision, was separately required to be one established for the benefit of employees, each of the three descriptive words "provident", "benefit" and "superannuation" must be taken to have connoted a purpose narrower than the purpose of conferring benefits in a completely general sense, upon employees…[J]ust as "provident" and "superannuation" both referred to the provision of a particular kind of benefit-in the one case a provision against contemplated contingencies, and in the other case a provision, to arise on an employee's retirement or death or other cessation of employment, of a subvention for him or his estate or persons towards whom he may have stood in some kind of relation commonly giving rise to a legal or moral responsibility-so "benefit" must have meant a benefit, not in a general sense, but characterized by some specific future purpose. A funeral benefit is a familiar example.

Justice Kitto's description in Mahoney, indicates that these funds have the following attributes:

· 'Provident' refers to the making of provision against possible or expected future events.

· 'Superannuation' refers to the making of provision for financial support for an employee, or for the employee's estate or dependants, to arise on the employee's retirement, death or other cessation of employment.

· 'Benefit' refers to the making of provision for benefits of some specific future kind such as a funeral benefit, as distinct from benefits in a general sense.

Sub paragraph 10(1)(a)(ii) of the SISA adds to this, 'Retirement' which, in line with Justice Kitto's description and dictionary definitions, would presumably refer to the making of provision for benefits to arise on the employee permanently ceasing regular work or withdrawing from the active workforce.

The purpose of being a provident, benefit, superannuation or retirement fund must be the fund's exclusive purpose.

The sole purpose test in section 62 of the SISA extends this exclusivity further by requiring that a regulated superannuation fund must be maintained for the sole purpose of providing superannuation and related benefits (core purposes), and for any ancillary purposes which the Regulator may approve. However section 62 only applies to regulated funds.

The foreign fund is not a regulated fund as it is a fund overseas. However, it is necessary to consider the purpose or purposes of the foreign fund.

The purpose of the foreign fund

As described in the facts of this case, the benefits provided by the foreign fund are, withdrawal, retirement, death and disability benefits.

Regarding a 'Withdrawal Benefit' the rules of the Fund state that on withdrawal, retrenchment or dismissal from an employer's service before retirement a member may take in cash the member's accumulated credit

Regarding 'Retirement benefits' the rules of the Fund state that an annual pension will become payable in the following circumstances:

A member retires at the normal retirement date;

A member may retire early i.e. retirement before the normal retirement date;

With the consent of the employer, a member may retire on the last day of any month that is within a specified period immediately before their normal retirement date if a certain period of contributory service has been completed;

A member may retire early at any age due to ill health if the member becomes incapacitated for further work due to ill health or disability; and

With the consent of the employer a member can retire after the normal retirement date.

Normal Retirement Date is the last day of the month in which the member reaches the normal retirement age.

Normal Retirement Age is over the age of 60 years with certain exceptions.

Disability benefits are paid when a member is classified as totally and permanently disabled.

Death benefits are payable to a member's beneficiaries if the member dies in service with the employer.

The benefits are paid on the member's retirement or death except for the disability and withdrawal benefits.

The withdrawal benefit, though payable to the member when the member is younger than the defined normal retirement age is payable when the member has separated due to a termination of employment on account of resignation, retrenchment or dismissal. The withdrawal benefit is the member's accumulated credit in the case of resignation. In the case of retrenchment it is a refund of more than the member's own contributions.

The payments of benefits prior to retirement age is not an additional purpose of the foreign fund. Rather the availability of funds is complementary to the provision of the other benefits, enabling the foreign fund administratively to manage those occasions where employees have separated prior to becoming eligible for other benefits.

A member cannot access funds in the foreign fund except by qualifying for one of the benefits listed above. There are no provisions for making loans or advance payments in anticipation of separation benefits, or for withdrawal of funds contributed except as provided for in the listed fund benefits.

The purposes of providing retirement, death and disability benefits for members are established superannuation fund purposes corresponding to the requirements for a provident, benefit, superannuation or retirement fund similar to those required in SISA.

The foreign fund does not provide any other benefits.

Accordingly, it is considered that the availability of benefits on early retirement i.e. on termination of employment before normal retirement age is consistent with the exclusive purpose of the foreign fund being a provident, benefit, superannuation or retirement fund within the meaning of subparagraph 10(1)(a)(ii) of the SISA.

Therefore the foreign fund is considered to be a superannuation fund under the ITAA 1997.

Question 2

Summary

A portion of the lump sum payment is assessable in Australia. You are assessable on your 'applicable fund earnings' in the foreign fund.

Detailed reasoning

Lump sum payments from foreign superannuation funds

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 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.

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) of the ITAA 1997 applies where the person was an Australian resident at all times during the period to which the lump sum relates. Subsection 305-75(3) of the ITAA 1997 applies where the person becomes an Australian resident after the start of 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 of the ITAA 1997 will not have any application.

If the lump sum payment is received within six months of a person becoming an Australian resident it is not assessable income and is not exempt income under section 305-60 of the ITAA 1997.

In your case, the payment was made from a fund overseas to your bank account in Australia.

Foreign superannuation fund

A foreign superannuation fund is defined in subsection 995-1(1) of the ITAA 1997.

As discussed above, the foreign fund is considered to be a superannuation fund

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.

In this case it is evident that the foreign fund which is a pension scheme established in a foreign country, is not an Australian superannuation fund as defined in subsection 295-95(2) of the ITAA 1997.

Therefore, the foreign fund is a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997.

Assessable Amount

The lump sum payment was made more than six months after you became an Australian resident. Therefore the exemption under section 305-60 of the ITAA 1997 will not apply.

A portion of your lump sum payment will be assessable under subsection 305-70(3) of the ITAA 1997.

This calculation effectively means that you will be assessed only on the increase in value in the fund less any contributions made since you became a resident of Australia.

Further, any amounts representative of earnings during periods of non-residency and certain capital amounts previously transferred into the paying fund do not form part of the taxable amount when the overseas benefit is paid.

The amount included as assessable income, and taxed at marginal rates of tax, is worked out under subsection 305-75(3) of the ITAA 1997 because you became 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 (but before you received it) 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 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;

· 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;

· 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;

· 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);

· multiply the resulting amount by the proportion of the total days during the period when you were an Australian resident;

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

Subsection 305-75(5) defines previously exempt fund earnings as follows:

You have an amount of previously exempt fund earnings in respect of the lump sum if:

· part or all of the amount in the fund that was vested in you when the lump sum was paid (before any deduction for foreign tax) is attributable to the amount; and

· the amount is attributable to a payment received from a foreign superannuation fund; and

· the amount would have been included in your assessable income under subsection 305-70(2) by the application of this section, but for the payment having been received by another foreign superannuation fund.

Subsection 305-75(6) states:

The amount of your previously exempt fund earnings is the amount mentioned in paragraph (5)(c) (disregarding the addition of previously exempt fund earnings under subsection (2) or (3) of this section).

Foreign currency conversion

The date the amount was transferred from the foreign fund to your bank account with the finance company overseas is the date the lump sum was paid to you.

In your case, that amount is converted to Australian dollars, based on an exchange rate on that date.

This conversion into Australian dollars is in accordance with section 960-50 of the ITAA 1997.

For the purposes of section 305-70 of the ITAA 1997, the 'applicable fund earnings' are calculated by translating the amount received from the foreign fund at the exchange rate applicable on the day of receipt to Australian dollars and deducting from this amount the Australian dollars equivalent of the amount vested in the foreign fund at the exchange rate on the day just before the day you became an Australian resident for tax purposes.

Calculation of Assessable Amount

No contributions were made to the foreign fund by or for you after the date you became an Australian resident. Rather, the surplus allocation was made out of the reserves of the fund.

In your case, the assessable amount is calculated as follows:

The sum of:

· the lump sum vested in you on the date you became an Australian resident (the residency date);

· contributions made to the foreign fund for or by you after the residency date; and

· any amount transferred into the foreign fund from any other foreign superannuation fund;

This is the sum of the amounts in paragraph 305-75(3)(a) of the ITAA 1997.

The amount calculated above is subtracted from the total amount of the lump sum paid by the foreign fund, (paragraph 305-75(3)(b) of the ITAA 1997).

The result above is multiplied by proportion of days you were a resident to the total number of days from when you were a resident until the date the payment was made (paragraph 305-75(3)(c) of the ITAA 1997).

Under paragraph 305-75(3)(d) of the ITAA 1997 any previously exempt fund earnings are added to the amount at (c) above.