Edited version of private ruling

Authorisation Number: 1011816831774

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: Lump sum payment from a foreign fund

Question

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

Answer: Yes.

This ruling applies for the following period

For the year ended 30 June 2012

This scheme commenced on

1 July 2011

Relevant facts

Over 30 years ago, your client resided in an overseas country and became a member of an employer sponsored scheme (the Scheme) established in the overseas country.

In the second quarter of the 1986-87 income year, your client became a resident of Australia for tax purposes.

Prior to your client becoming an Australian resident the administrator of the Scheme was advised that your client would soon be leaving the overseas country to permanently reside in Australia. The benefits in the Scheme were moved to an inactive fund and transferred to a fund (the Fund) in the overseas country.

You have advised that since your client became a member of the Fund the benefits have been transferred three times whilst your client was a resident in the overseas country. Therefore your client is having difficulty obtaining the figure required to calculate tax payable (if any).

In a letter from the administrator of the Fund your client was advised of the total transfer value (Amount A) of your client's benefits in the Fund as at a specified date in 1989.

Your client intends to transfer the total benefits in the Fund to an Australian complying superannuation fund.

Your client will have no benefits in the Fund when your client transfers the benefits to the Australian fund.

The total value of your client's benefits (Amount B) in the Fund as at a specified date in 2010 has been provided.

No contributions have been made by your client or anyone on behalf of your client since your client became a resident of Australia.

There are restrictions on withdrawing monies from the Fund prior to retirement. However, the Fund allows withdrawal of benefits for medical expenses and ill health commutation.

Your client is over the age of 55 years.

Assumptions

Section 357-110 of Schedule 1 to the Taxation Administration Act 1953 (TAA) gives the Commissioner a power to make assumptions which he considers to be most appropriate.

You were advised that, as your client could not provide the total transfer value of your client's benefits in the Fund as at the day before your client became an Australian resident, an assumption will be made.

You have provided the following information:

· the total transfer value of Amount A as at a specific date during the 1988-89 income year, and

· the total transfer of benefits of Amount B as at a specific date during the 2009-10 income year.

Based on these figures and the information provided, the Commissioner considers it is reasonable to assume that the annual compound rate of return for the period from a specific date during the 1988-89 income year to a specific date during the 2009-10 income year is a specific percentage.

Your client's entitlement in the Fund on a specific date during the 2009-10 income year was Amount B. By discounting back this transfer value by the assumed rate of return of a specific percentage we have estimated that your client's accumulated entitlement in the Fund on a specific date during the 1986-87 income year (the date before your client became a resident of Australia) to be Amount C. You have agreed to this figure in a telephone conversation on a specific date during the 2010-11 income year.

In issuing this ruling, the Commissioner will make the assumption, of the transfer value of your client's total benefits on the day before your client became an Australian resident.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 515.

Income Tax Assessment Act 1936 Section 519.

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

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(3).

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 Subsection 305-80(1).

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

Income Tax Assessment Act 1997 Subsection 305-80(3).

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 995-1(1).

Superannuation Industry (Supervision) Act 1993 Section 10.

Superannuation Industry (Supervision) Act 1993 Section 19.

Superannuation Industry (Supervision) Act 1993 Section 62.

Taxation Administration Act 1953 Section 357-110 of Schedule 1.

Income Tax Assessment Regulations 1997 Regulations 960-50.01.

Reasons for decision

Summary

The applicable fund earnings is calculated by translating the amount received from the Fund at the exchange rate applicable on the day of transfer into Australian dollars (AUD), and deducting from this amount the AUD equivalent of the amount vested in the Fund on the day just before your client first became an Australian resident at the exchange rate applicable on that day.

The applicable fund earnings is the amount to be specified in the election notice made to the Australian fund and will be subject to the fund's tax rate of 15%.

Detailed reasoning

Lump sum payments from foreign superannuation funds

The applicable fund earnings in relation to a lump sum payment (LSP) from a foreign superannuation fund that is transferred or 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 LSP 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 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 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 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:

· 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 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). 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.

In the present case it is evident that the fund established in the overseas country, (the Fund) is not an Australian superannuation fund as defined in subsection 295-95(2) of the ITAA 1997.

Therefore, on the basis of the information provided, the Commissioner considers the Fund is a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997.

Calculation of Assessable Amount

In this case, your client became a resident of Australia for tax purposes in the second quarter of the 1986-87 income year and the LSP will be made at a future date. As this will be more than 6 months after your client became an Australian resident section 305-70 of the ITAA 1997 applies to include the 'applicable fund earnings' in your client's assessable income.

The 'applicable fund earnings' are 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.

This calculation effectively means that your client will be assessed only on the income earned in the fund while your client was a resident of Australia. That is, your client will only be assessed on the accretion in the fund less any contributions made since your client 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 your client 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:

(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 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, your client is assessed only on the income earned (the accretion) in respect of the Fund less any contributions your client made since your client 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.

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

Amounts to be used in calculation

In some circumstances, if the vested amount, which includes the entitlement to a lump sum and pension on the day before a taxpayer became a resident of Australia, cannot be obtained from the fund, it may be appropriate to engage the services of an actuary, especially where the amount is substantial and an incorrect estimate could result in more tax than is required being payable.

Generally, it is our practice when ascertaining an amount to rely on documentation that reasonably allows us to arrive at an average rate of growth. The transfer value is then discounted by the average rate to determine the vested amount.

If the amount is insignificant, the cost of engaging the services of an actuary may outweigh any benefit. However, assumptions can be made to estimate the annual compound rate of growth of the transfer value at the date of the Australian residency.

In this case, your client could not provide the vested amount in the Fund, which includes both your client's entitlement to a lump sum and pension, on the day before your client became a resident of Australia. In order to determine the vested amount at the date of residency it is proposed to use information shown in the documentation provided by the Fund as follows:

· by using the total transfer value as at a specified date in 1989; and

· the total transfer of benefits as at a specified date in 2010.

Based on the above information we have estimated the annual compound rate of growth of transfer value. By using this rate, your client's total vested amount in the Fund on the day before your client became an Australian resident has been estimated as Amount C.

You have agreed to the estimated value as the amount of your client's benefit on the day before your client became a resident of Australia.

The estimated Amount C is converted into Australian dollars at the exchange rate that applied as at the specified date in 1986.

You have advised that no contributions were made to the Fund by your client or an employer after the specified date in 1986.

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

You have advised an amount (Amount B) your client was to receive as at a specified date in 2010. Amount B was to be converted into Australian dollars at the exchange rate that applied on that day.

Please note, in order to find out the correct amount assessable, your client will need to substitute the amount as at the specified date in 2010 with the actual amount transferred on the payment date, converting that amount into Australian dollars at the exchange rate applicable on that day.

'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 client's case, 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 client's circumstances, the amounts to be used in calculating the applicable fund earnings are as follows:

305-75(3)(a)(i) Amount C

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

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

305-75(3)(b) Amount B

305-75(3)(c) 1

305-75(3)(d) Nil

Calculation of the assessable amount of the payment from 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.

Amount C + nil + nil = Amount C.

This total is then subtracted from the amount determined under paragraph 305-75(3)(b), Amount B.

Amount B less Amount C is Amount D.

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

Amount D x 1 = Amount D

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

Amount D + nil = Amount D

In accordance with section 305-70 of the ITAA 1997 the assessable 'applicable fund earnings' as at a specified date in 2010 is calculated to be Amount D.

When the payment is transferred your client will need to substitute Amount B with the actual amount transferred on the payment date, converting that amount into Australian dollars at the exchange rate applicable on that day.

Assessable amount of the payment from foreign superannuation fund

The amount assessable in accordance with subsection 305-70(3) of the ITAA 1997 as at a specified date in 2010 is Amount D.

It should be noted that section 305-75 of the ITAA 1997 may apply even where the lump sum payment is paid into a bank account in the overseas country.

Please note that the calculation of the assessable amount of Amount D is based on the information provided, of your client's total transfer value of Amount B, which was current as at a specified date in 2010.

In order to find out the correct amount assessable, your client will need to substitute Amount B with the actual amount transferred on the payment date and convert to AUD, using the daily rate of exchange on the day the payment is received.

Election

A taxpayer transferring their overseas superannuation directly to an Australian complying superannuation fund more than six months after becoming a resident, may be able to elect under subsection 305-80(2) of the ITAA 1997 to have all or part of the payment treated as assessable income of the Australian superannuation fund.

As a result, the amount specified in the election notice will be included as assessable income of the superannuation fund and subject to the fund's tax rate (generally 15%) rather than being included in the taxpayer's assessable income and subject to tax at the taxpayer's marginal rate.

To qualify your client must, immediately after the relevant payment is made, no longer have an interest in the paying fund (subsection 305-80(1) of the ITAA 1997). The election must be in writing, specify the amount to be covered by the election and comply with any requirements specified in the Income Tax Assessment Regulations 1997 (subsection 305-80(3) of the ITAA 1997).

Taxation consequences of subsequent withdrawal from an Australian superannuation fund

From 1 July 2007, the amount of the payment transferred from a foreign superannuation fund to an Australian superannuation fund that is subsequently withdrawn, subject to meeting the preservation rules and conditions of release under the SIS Act, will be a tax-free component. A tax-free component is not assessable income and is not exempt income.