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Ruling

Subject: Lump sum payment from a foreign pension scheme

Question

Is any part of the benefits transferred from your pension scheme in an overseas country to an Australian superannuation fund assessable as applicable fund earnings under section 305-75 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following period

2011-12 income year

The scheme commences on

1 July 2011

Relevant facts and circumstances

You became a resident of Australia for tax purposes during the 2005-06 income year.

You held an interest in a pension fund (the Pension Fund) in an overseas country.

You advised the value of the Pension Fund on the day you became an Australian resident. A letter from the Pension Fund to you confirmed the full transfer value on that date, although the Trustee was reducing transfer values to reflect the funding position of the Scheme and as such would have only paid a reduced transfer value if you had actually transferred.

You received a lump sum payment from the Pension Fund during the 2011-12 income year.

You transferred the Pension Fund in full to Australia.

There have been no contributions to the Pension Fund since you became a resident of Australia.

There have been no transfers into the Pension Fund from other foreign pension schemes by you since becoming a resident of Australia.

Funds cannot be accessed from the Pension Fund other than at retirement.

You paid the lump sum payment from the Pension Fund directly into a complying Australian superannuation fund.

Assumptions

Your Pension Fund advised the value of the Pension Fund on the day you became an Australian resident. The Commissioner considers it reasonable to assume that the value of the Pension Fund on the day before you became a resident of Australia was the same amount.

Relevant legislative provisions

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(1)

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 Subsection 305-75 (5)

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

Income Tax Assessment Act 1997 Section 305-80

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 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

Reasons for decision

Summary

The 'applicable fund earnings' in respect of the lump sum payment paid from the Pension Fund has been calculated and should be included in your assessable income in the 2011-12 income year.

You can elect to have all or part of the above 'applicable fund earnings' treated as assessable income of your complying Australian superannuation fund because immediately after the relevant payment is made, you will no longer have an interest in the foreign fund.

Detailed reasoning

Lump sum payments transferred 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 remainder of the lump sum payment is not assessable income and is not exempt income.

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 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 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 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.

Under the definition of Australian superannuation fund in subsection 295-95(2) of the ITAA 1997 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), which requires that the fund is a provident, benefit, superannuation or retirement fund.

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 from the overseas fund 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.

From the facts provided benefits are only paid on retirement and death and the Pension Fund would meet the definition of superannuation fund. In addition, it is clear the payer of the lump sum payment is established outside of Australia with its central management and control outside of Australia. 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 2005-06 income year and received the lump sum payment in respect of the Pension Fund during the 2011-12 income year. As this was more than six 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:

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 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).

In short, you are assessed only on the income earned (the accretion) in respect of the Pension Fund less any contributions you made since they 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 (A$). The applicable fund earnings is the result of a calculation from two other amounts and subsection 960-50(4) states that 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.

Therefore, for the purposes of section 305-70 of the ITAA 1997, the 'applicable fund earnings' should be 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 dollar equivalent of the amount vested in the fund at the exchange rate applicable just before the day you first became an Australian resident.

Amounts to be used in calculation

Subparagraph 305-75(3)(a)(i) of the ITAA 1997 requires the amount in the fund that was 'vested' in you just before the day you first became a resident to be determined.

The term 'vested' is not defined in Division 305 or in the ITAA 1997 more generally.

The Butterworths Australian Legal Dictionary has no definition for 'vested' but has definitions for related terms such as 'vest', 'vested in possession', 'vested interest' and 'vesting'.

The meaning given to the term 'vesting' relates solely to the superannuation context. It is defined as follows:

A provision within an employer-sponsored superannuation fund, entitling a fund member to part or all of the employer's contributions which have been paid in on the member's behalf, upon leaving. This vesting occurs either immediately, after a specified number of years, or progressively over the years, increasing the size of a departure benefit. However, a resignation with full vesting often remains less than the benefit received on retirement, death or disablement.

The ordinary meaning of 'vested' accords with the meaning of 'vest' in the Australian Legal Dictionary which refers to a legal right or interest accruing. The amount vested in a person represents an amount to which the person is entitled or, put another way, an amount that has accrued to the person.

It is noted that from the facts that a letter from your Pension Fund during the 2011-12 income year advised the full transfer value on the date you became an Australian resident and that due to the funding position of the Pension Fund, the Fund would only have paid you a reduced transfer value of an amount if you had actually transferred your funds on that day.

In this case it is considered that the transfer value in the Pension Fund on the date you became an Australian resident does not take into account the reduced transfer value. The full transfer value amount is the relevant amount and is the value of the best possible benefit available to you on that date. The transfer value amount is considered to be the amount 'derived' or that 'had accrued' at that point in time given that no amount was actually transferred at that time.

Therefore the benefit in the Pension Fund on the day before you became a resident of Australia is converted into Australian dollars at the exchange rate that applied on that day.

From the facts provided no contributions have been made to the Pension Fund since you migrated to Australia. There have been no transfers into the Pension Fund from other foreign pension schemes by you since becoming a resident of Australia.

During the 2011-12 income year, your benefits in the Pension Fund was paid out to you in the form of a one-off lump sum which was transferred directly into a complying Australian superannuation fund. Therefore this is the amount vested in you when the lump sum was paid. You have stated that the lump sum payment converted into Australian dollars on a specific date during the 2011-12 income year was an amount.

'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. 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.

Applying subsection 305-75(3) of the ITAA 1997 to your client's circumstances, the amounts to be used in calculating the applicable fund earnings for the Pension Fund are as follows:

· 305-75(3)(a)(i) The amount, converted to Australian dollars, vested in your client before they became a resident of Australia

· 305-75(3)(a)(ii) Nil

· 305-75(3)(a)(iii) Nil

· 305-75(3)(b) The amount of the lump sum payment received, converted to Australian dollars

· 305-75(3)(c) 1

· 305-75(3)(d) Nil

Calculation of the assessable amount of the payment from Pension 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).

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

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

An amount of the lump sum payment from the Pension Fund will be included as assessable 'applicable fund earnings' in your income tax return for the 2011-12 income year.

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 tax at 15% rather than being included in the taxpayer's assessable income and subject to tax at the taxpayer's marginal rate.

You can elect to have all or part of the above 'applicable fund earnings' treated as assessable income of their complying Australian superannuation fund because immediately after the relevant payments were made, you no longer had an interest in the foreign funds (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 Regulations (subsection 305-80(3) of the ITAA 1997).

An amount that is covered by an election under section 305-80 of the ITAA 1997 will not be treated as either a concessional contribution or a non-concessional contribution to the Australian superannuation fund. Consequently, this amount will not count towards your concessional or non-concessional contributions caps for the relevant income year.

Conclusion:

The part of the lump sum payment from the Pension Fund, which was transferred to your Australian superannuation fund, that is assessable as the applicable fund earnings relating to the payment has been calculated.

You can elect to have all or part of the 'applicable fund earnings' treated as assessable income of their complying Australian superannuation fund because immediately after the relevant payment is made, you will no longer have an interest in the foreign fund.