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Ruling

Issue 1

Subject : Lump sum payment from a foreign fund

Question

Is any portion of the lump sum payment made from the foreign fund included in your client's assessable income as applicable fund earnings under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Issue 2

Subject : Residency of Australia

Question

Is your client a resident of Australia for taxation purposes for the entire 2009-10 income year?

Answer

Yes.

This ruling applies for the following period

For the year ended 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts and circumstances

For over 20 years, your client was employed in an overseas country by an overseas employer (the overseas company).

When that employment commenced your client became a member of a foreign plan (the Foreign Fund), an employer sponsored superannuation fund.

For over 15 years, your client was not living or working in Australia and was not a resident of Australia when your client joined the Foreign Fund.

The Foreign Fund provided an annual membership statement which shows your client was entitled to a lump sum benefit if your client commuted 100% of their pension.

Over five years ago, your client and your client's spouse arrived in Australia.

Until the 2009-10 income year, your client had an expatriate package to work with the Australian company. During this time your client was based in Australia and paid by the Australian company into your client's Australian bank account and was a member of an Australian Superannuation Fund. During this period your client's parent company still remained as the overseas company.

Your client became a full time resident of Australia for tax purposes from their arrival in Australia.

The Australian company was re-organised and your client was repatriated to the overseas company and during this time the overseas company was sold. As there was no role available for your client with the overseas company, your client was made redundant.

During the 2009-10 income year, your client and their spouse were required to return to the overseas country, having been made redundant.

Your client and your client's spouse had no intentions of staying on in the overseas country.

After a short period overseas, your client and your client's spouse returned to Australia.

Your client and your client's spouse have a permanent place to live in Australia.

Your client and your client's spouse maintain social connections in Australia.

Your client made contributions to the Foreign Fund whilst your client was an Australian resident.

Your client's contributions were converted into Australian dollars at the exchange rate that applied on each date. You have agreed with this amount.

During the 2009-10 income year, your client ceased being a member of the Foreign Fund.

The Termination Advice from the Foreign Fund shows your client was entitled to receive:

· a retrenchment benefit, or

· a deferred retirement pension benefit, or

· an early retirement pension benefit.

A lump sum payment was made to your client from the Foreign Fund in the 2009-10 income year.

After the payment, your client had no further interest in the Foreign Fund.

Under the rules of the Foreign Fund it provides benefits to be made to a member:

· after attaining age 55

· on attaining their normal retirement date at age 60,

· as a result of the member's total and permanent disablement or

· upon death.

Further, a member shall not be entitled to withdraw from membership of the Foreign Fund while employed by a Participating Company.

Your client is over the age of 55 years.

Assumptions

Your client could not provide the total value of your client's benefits in the Foreign Fund as at the day before your client became an Australian resident. However, the Foreign Fund did provide a transfer value of your client's total benefits within 12 months of becoming an Australian resident.

Therefore, in order to determine the lump sum amount as at the day before your client became an Australian resident, your client has been advised that the following assumptions are being made in respect of issuing the Notice of Private Ruling:

· by using the total transfer value provided, and

· the total transfer of benefits received in the 2009-10 income year,

· the estimated annual compound rate of growth of the transfer value has been calculated.

The Commissioner considers it reasonable to assume that this compound growth rate is the same for the period starting on the day before your client became a resident of Australia and ending on the day the payment was made.

Based on this assumption, your client's transfer value on the day before your client became an Australian resident has been estimated.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 6(1).

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.

Income Tax Assessment Regulations 1997 Regulations 960-50.01.

Reasons for decision

Issue 1

Summary

Your client is considered to be a resident of Australia for taxation purposes for the entire 2009-10 income year.

Your client received an amount from the Foreign Fund when they were an Australian resident. Part of the amount received from this foreign superannuation fund, the 'applicable fund earnings', is to be included in your client's assessable income for the 2009-10 income year and will be subject to your client's marginal rate of tax.

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 Foreign Fund) is not an Australian superannuation fund as defined in subsection 295-95(2) of the ITAA 1997 but it is established to provide benefits to members on their retirement.

Therefore, on the basis of the information provided, the Commissioner considers the Foreign 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 over five years ago and the LSP was made during the 2009-10 income year. As the payment was made more than six 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 Foreign 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, 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.

In this case, your client could not provide the vested amount in the Foreign 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.

Based on the information provided and the assumption made, your client's total vested amount in the Foreign Fund on the day before your client became an Australian resident has been estimated.

Your client made contributions to the Foreign Fund while they were an Australian resident.

These contributions have been converted into Australian dollars at the exchange rate that applied on each date the contributions were made.

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

The amount your client received in the 2009-10 income year is to be converted into Australian dollars at the exchange rate that applied on the date it 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 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.

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

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

This total is then subtracted from the amount determined under paragraph 305-75(3)(b) of the ITAA 1997.

This figure is multiplied by the proportion of the total days determined under paragraph 305-75(3)(c) of the ITAA 1997 - '1'

To this figure we add the amounts determined under paragraph 305-75(3)(d) of the ITAA 1997 - nil

Assessable amount of the payment from foreign superannuation fund

The amount assessable in accordance with subsection 305-70(3) of the ITAA 1997 is to be included in your client's assessable income for the 2009-10 income year and will be subject to your client's marginal rate of tax.

Issue 2

Reasons for decision

Australian residency

An Australian resident is defined in subsection 995-1 of the ITAA 1997 to be a person who is a resident of Australia for the purposes of the Income Tax Assessment Act 1936 (ITAA 1936).

The terms resident and resident of Australia, in regard to an individual, are defined in subsection 6(1) of the ITAA 1936. The definition provides four tests to ascertain whether a taxpayer is a resident of Australia for income tax purposes. These tests are:

1. The resides test

2. The domicile test

3. The 183 day test

4. The superannuation test

The primary test for deciding the residency status of an individual is whether the individual resides in Australia according to the ordinary meaning of the word resides. If the primary test is satisfied the remaining three tests do not need to be considered as residency for Australian tax purposes has been established.

Taxation Ruling TR 98/17 considers the residency status of individuals entering Australia and states that the period of physical presence or length of time in Australia is not, by itself, decisive when determining whether an individual resides here. However, an individual's behaviour over the time spent in Australia may reflect a degree of continuity, routine of habit that is consistent with residing here.

The following factors were taken into account in determining your client's residency status:

Your client and your client's spouse arrived in Australia over five years ago.

Your client and your client's spouse went to an overseas country for a redundancy process and returned shortly thereafter.

Your client and your client's spouse had no intentions of staying on in the overseas country.

Your client and your client's spouse have a permanent place to live in Australia.

Your client and your client's spouse maintain social connections in Australia.

Accordingly, your client is deemed to be an Australian resident for taxation purposes from the date of your client's arrival in Australia, as your client's behaviour in Australia reflects a degree of continuity, routine or habit that is consistent with residing here.