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Ruling

Subject: Lump sum from foreign superannuation fund

Question

Is any part of the lump sum payment paid to you from a foreign superannuation fund included as assessable income under subsection 305-70(2) of the Income Tax Assessment Act 1997?

Answer:

No.

This ruling applies for the following period

2009-10 income year

The scheme commenced on

1 July 2009

Relevant facts

You are aged under age 55.

You became an Australian resident during the 20XX-XX income year.

Prior to becoming an Australian resident, you resided in an overseas country where you also held a retirement annuity policy with a foreign entity (foreign annuity policy) with an early retirement option date of July 20XX.

You commenced contributing a monthly amount to the foreign annuity policy during July 20XX and the last contribution was made prior to December 20XX.

The annual contribution statements (as provided) show the total contributions made (excluding amounts for income protection policy) during the contributory period.

Although you were not at retirement age, you requested the foreign annuity policy be paid out to you because you no longer resided in the foreign country after you became an Australian resident.

During March 20XX, the foreign annuity policy was paid out to you in the form of a once-off lump sum.

The amount was transferred into your Australian bank account.

The income tax certificate issued in the overseas country describes the amount as a lump sum withdrawal benefit and no amount was withheld for tax.

The foreign entity has advised the value of your retirement annuity policy as at the date you became a resident.

You state there were no employer contributions made to this foreign annuity policy, with interest being the only income earned on the foreign annuity policy.

Relevant legislative provisions

Subsection 295-95(2) of the Income Tax Assessment Act 1997
Subsection 305-60 of the Income Tax Assessment Act 1997

Section 305-70 of the Income Tax Assessment Act 1997
Subsection 305-70(1) of the Income Tax Assessment Act 1997
Section 305-75 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 305-75 (5) of the Income Tax Assessment Act 1997
Subsection 305-75 (6) of the Income Tax Assessment Act 1997
Subsection 306-70 of the Income Tax Assessment Act 1997
Subsection 960-50(1) of the Income Tax Assessment Act 1997
Subsection 960-50(4) of the Income Tax Assessment Act 1997
Subsection 960-50(6) of the Income Tax Assessment Act 1997
Subsection 995-1(1) of the Income Tax Assessment Act 1997
Section 10 of the Superannuation Industry (Supervision) Act 1993
Section19 of the Superannuation Industry (Supervision) Act 1993
Section 62 of the Superannuation Industry (Supervision) Act 1993

Reasons for decision

Summary

The 'applicable fund earnings' in respect of the lump sum payment paid from the foreign superannuation fund is calculated as zero.

Consequently, no amount of the lump sum payment will be included in your assessable income in the 20XX-XX income year.

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 Income Tax Assessment Act 1997 (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 under either subsection

305-75(2) or subsection 305-75(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 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 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 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 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;

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 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:

o on or after retirement from gainful employment; or

o attaining a prescribed age; and

o 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 foreign annuity policy to be considered a payment from a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997, it must also satisfy the requirements set out in subsection 295-95(2) of the ITAA 1997. This means that it should not be an Australian superannuation fund as defined in that subsection but must be a provident, benefit, superannuation or retirement fund as discussed above.

It is evident that the payer of the lump sum payment in respect of the foreign annuity policy is established outside of Australia. Similarly, the central management and control is outside of Australia. The documentation as provided in relation to the terms and conditions of the foreign annuity policy states that 'retirement' takes place on the selected retirement date or any date from which the member elects to start receiving benefits subject to the provision that payment of benefits cannot commence before attainment of age 55.

Therefore, on the basis of the information provided, the Commissioner considers the lump sum payment you received is from a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997.

Applicable fund earnings

You became a resident of Australia for tax purposes during the 20XX-XX income year and you received the lump sum payment in respect of the foreign annuity policy during March 20XX. As this was more than 6 months after you became an Australian resident, section 305-70 applies to include the 'applicable fund earnings' in your assessable income.

The 'applicable fund earnings' are 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) of the ITAA 1997 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 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).

In short, you are assessed only on the income earned (the accretion) in respect of the foreign annuity policy less any contributions you made since you became a resident of Australia. Further, any amounts representative of earnings during periods of non-residency, and transfers into the paying fund do not form part of the taxable amount when the overseas benefit is paid.

The foreign entity has advised the value of your retirement annuity policy as at the date you became a resident. This will be used as the amount for the day before you became a resident of Australia.

Statements from the fund indicate no contributions were made to the foreign annuity policy by yourself or an employer after you became an Australian resident.

No amounts were transferred into the fund from other foreign superannuation funds during the period.

During March 2010, the foreign annuity policy was paid out to you in the form of a once-off lump sum. Therefore this is the amount vested in you when the lump sum was paid.

In accordance with the Commissioner's view in ATO Interpretative Decision ATO ID 2009/124, 'the period' for the purposes of paragraph 305-75(3)(c) of the ITAA 1997 commences on the day on which the person first became an Australian resident and ceases on the day the lump sum is paid. In your case, that period is from your residency date to the date you received the lump sum payment during March 2010 and you were a resident for the whole of that 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.

Therefore, applying subsection 305-75(3) to your circumstances, the amounts to be used in calculating the applicable fund earnings are as follows:

305-75(3)(a)(i) the amount as advised by the foreign entity

305-75(3)(a)(ii) Nil

305-75(3)(a)(iii) Nil

305-75(3)(b) the lump sum payment

305-75(3)(c) 1

305-75(3)(d) Nil

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) states when applying section 960-50 to amounts that are elements in the calculation of another amount you need to:

(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

Consequently, the amount vested in the foreign superannuation fund on the day before you became an Australian resident [per sub-paragraph 305-75(3)(a)(i)] is converted into Australian dollars at the exchange rate that applied on that day.

Similarly, the payment you received [per paragraph 305-75(3)(b)] is translated into Australian dollars at the exchange rate applicable at the time of receipt.

Calculation of the assessable amount of the payment from a foreign superannuation fund

In accordance with 305-75 (3) of the ITAA 1997 the amounts determined at sub-paragraphs 305-75(3)(a)(i), (ii) and (iii) are added.

This totals $X.

This total is then subtracted from the amount determined under paragraph 305 75(3)(b), $Y.

$Y less $X is negative $Z.

This figure is multiplied by the proportion of the total days determined under paragraph 305-75(3)(c) - '1'.

-$Z x 1 = -$Z

To this figure we add the amounts determined under paragraph 305-75(3)(d) - nil

-$Z + nil = -$Z

As the amount is less than zero, no amount of the lump sum payment will be included as assessable 'applicable fund earnings' in the 2009-10 income year.