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Ruling

Subject: Lump sum payments from foreign superannuation funds

Question

Is any part of the benefits transferred from your client's 3 separate accounts in their foreign pension fund to an Australian superannuation fund assessable as applicable fund earnings under section 305-75 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2011

The scheme commenced on:

1 July 2010

Relevant facts and circumstances

Your client migrated to Australia during the 1998-99 income year as a permanent resident.

You have stated that your client returned overseas for a period between the 2001-02 and 2002-03 income years however maintained their status as an Australian resident as they were overseas solely for personal commitments and always intended to return to Australia.

Your client held an interest in a foreign pension fund (the Pension Fund).

They held three separate pension accounts within the Pension Fund.

Your client received the following lump sum payments during the 2010-11 income year:

· Pension account 1 A

· Pension account 2 G

· Pension account 3 X

You have stated your client worked briefly during the time they returned overseas and Pension 1 was opened during this time. A contribution of B was made during the 2001-02 income year and further contributions of C and D were made during the 2002-03 income year. These contributions totalled E.

You have stated the value of pension account 2 on the day of residency was H.

You have agreed that the value of pension account 3 on the day before your client became an Australian resident was Y. This figure was derived by reducing the value of your client's benefit at payment date by the Retail Price Index (RPI).

Pension account 2 received one contribution of I during the 1998-99 income year which was after your client became an Australian resident.

There have been no contributions to pension account 3 since your client migrated to Australia.

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

Your client transferred the pension fund payments in full to Australia.

The pension fund was then closed.

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

Your client paid the lump sum payments from the Pension Fund accounts to a complying Australian superannuation fund.

Assumptions

The applicant could not obtain a figure for the day before their client became an Australian resident for pension account 2. An amount for the following day was, however, obtained.

The Commissioner considers it reasonable to assume that the value of pension account 2 on residency date was the same as it was on the preceding day, i.e. H.

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 Subsection 306-70

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 payments made from the Pension Fund are calculated as zero. Consequently, no amount of the lump sum payments from the pension fund accounts will be included in your client's assessable income in the 2010-11 income year.

Detailed reasoning

Lump sum payments transferred from foreign superannuation funds

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 issue of what constitutes a provident, benefit, superannuation or retirement fund was discussed by the Full Bench of the High Court in Mahony v. Federal Commissioner of Taxation (1967) 41 ALJR 232; (1967) 14 ATD 519 (Mahony).

In that case, 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.

You have stated that the benefits are only paid to your client on their retirement and the fund would therefore 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 your client received is from a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997.

Applicable fund earnings

Your client became a resident of Australia for tax purposes during the 1998-99 income year and received the lump sum payments in respect of the Pension Fund during the 2010-11 income year. As this was more than six months after your client became an Australian resident, section 305-70 applies to include the 'applicable fund earnings' in your client's assessable income.

The 'applicable fund earnings' are worked out under section 305-75. As mentioned earlier, subsection 305-75(2) applies where the person was an Australian resident at all times during the period to which the lump sum relates, whereas subsection 305-75(3) applies where the person becomes an Australian resident after the start of the period to which the lump sum relates. Therefore, subsection 305-75(2) applies to pension account 1 and subsection 305-75(3) applies to pension accounts 2 and 3.

Subsection 305-75(2) of the ITAA 1997 states:

If you were an Australian resident at all times during 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 part of the lump sum that is attributable to contributions made by or in respect of you on or after the day when you became a member of the fund (the start day);

· the part of the lump sum (if any) that is attributable to amounts transferred into the fund from any other *foreign superannuation fund during that 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);

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

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, your client is assessed only on the income earned (the accretion) in respect of the Pension Fund less any contributions your client made when they were 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 (AU$). 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.

The table in subsection 960-50(6) of the ITAA 1997 sets out the translation rules. Only the following items are relevant to determining the issue in your case:

· item 11 which deals with a receipt or payment to which none of the other items apply, and

· item 11A which applies to amounts that are neither receipts nor payments and to which none of the other items apply.

Item 11 of the table in subsection 960-50(6) of the ITAA 1997 applies to a receipt or payment where none of the other items applies. The payment your client finally received is not included in any of the other items in the table so it will fall within item 11. Under this item, the payment is translated into Australian dollars at the exchange rate applicable at the time of receipt.

When the amount in the foreign fund that was vested in your client just before they became a resident of Australia (subparagraph 305-75(3)(a)(i) of the ITAA 1997) is determined, there is no actual receipt or payment of an amount. All that occurs is a determination of the vested amount expressed in the foreign currency.

Regulation 960-50.01 of the Income Tax Assessment Regulations 1997 (ITAR) modifies the table in subsection 960-50(6) of the ITAA 1997 to include item 11A that applies to amounts other than receipts and payments, and for which none of the other items apply. Consequently the vested amount is translated into Australian dollars at an exchange rate that is reasonable having regard to the circumstances.

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 your client first became an Australian resident.

Amounts to be used in calculation

As stated previously, subsection 305-75(2) applies to pension account 1. The value of the benefit in this pension account, on or after the start date, is equal to the contributions made to the fund. These are converted into Australian dollars at the exchange rate that applied on the day each contribution was made which converts the amount of B to B (cents ignored) and converts the amounts of C and D to C and D (cents ignored) respectfully. These amounts total E.

The value of pension account 2 on the day before your client became an Australian resident was H. This is converted into Australian dollars at the exchange rate that applied on that day which converts the amount of H to H (cents ignored).

Pension account 2 received one contribution of I during the 1998-99 income year which was after your client became an Australian resident. Again, this is converted into Australian dollars at the exchange rate that applied on that day which converts the amount of I to I (cents ignored).

You have agreed that the value of pension account 3 on the day before your client became an Australian resident was Y. As above, this converts the amount of Y to Y (cents ignored).

Apart from the abovementioned contribution, there have been no further contributions made to the Pension Fund accounts since your client migrated to Australia. There have also been no transfers into the Pension Fund accounts from other foreign pension schemes by your client since becoming a resident of Australia.

During the 2010-11 income year, your client's benefits in pension account 1 were paid out to your client in the form of a one-off lump sum of A which was transferred directly into their complying Australian superannuation fund. Therefore this is the amount vested in your client when the lump sum was paid. This is converted into Australian dollars at the exchange rate that applied on that day which converts the amount of A to A (cents ignored).

During the 2010-11 income year, your client's benefits in pension account 2 were paid out to your client in the form of a one-off lump sum of G which was transferred directly into their complying Australian superannuation fund. As above, this is converted into Australian dollars at the exchange rate that applied on that day which converts the amount of G to G (cents ignored).

During the 2010-11 income year, your client's benefits in pension account 3 were paid out to your client in the form of a one-off lump sum of X which was transferred directly into their complying Australian superannuation fund. Again, this is converted into Australian dollars at the exchange rate that applied on that day which converts the amount of X to X (cents ignored).

'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, they were a resident for the whole of the relevant periods. 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.

Pension fund account 1

Applying subsection 305-75(2) of the ITAA 1997 to your client's circumstances, the amounts to be used in calculating the applicable fund earnings for pension fund account 1 are as follows:

· 305-75(2)(a)(i) E

· 305-75(2)(a)(ii) Nil

· 305-75(2)(b) A

· 305-75(2)(c) Nil

Calculation of the assessable amount of the payment from account 1

In accordance with 305-75 (2) of the ITAA 1997 the amounts determined at sub-paragraphs 305-75(3)(a)(i) and (ii) are added.

E + nil + nil = E.

This total is then subtracted from the amount determined under paragraph 305-75(2)(b), A

A - E = -F.

To this figure we add the amounts determined under paragraph 305-75(2)(c) - nil

-F + nil = -F.

As the amount is less than zero, no amount of the lump sum payment from pension fund account 1 will be included as 'applicable fund earnings' in your client's tax return for the 2010-11 income year.

Pension fund accounts 2 & 3

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 pension accounts 2 and 3 are as follows:

Account 2

· 305-75(3)(a)(i) H

· 305-75(3)(a)(ii) I

· 305-75(3)(a)(iii) Nil

· 305-75(3)(b) G

· 305-75(3)(c) 1

· 305-75(3)(d) Nil

Account 3

· 305-75(3)(a)(i) Y

· 305-75(3)(a)(ii) Nil

· 305-75(3)(a)(iii) Nil

· 305-75(3)(b) X

· 305-75(3)(c) 1

· 305-75(3)(d) Nil

Calculation of the assessable amount of the payment from accounts 2 and 3

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.

Account 1 H + I + nil = J

Account 2 Y + nil + nil = Y

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

Account 1 G - J = -K

Account 2 X - Y = -Z

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

Account 1 -K x 1 = -K

Account 2 -Z x 1 = -Z

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

Account 1 -K + nil = -K

Account 2 -Z+ nil = -Z

As all the amounts are than zero, no amount of the lump sum payments from accounts 2 and 3 will be included as 'applicable fund earnings' in your client's tax return for the 2011-12 income year.