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Ruling

Subject: Lump sum payment from a foreign pension fund

Question

Is any part of the benefits transferred from your foreign pension scheme 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 periods:

Year ended 30 June 2012

The scheme commences on:

1 July 2011

Relevant facts and circumstances

You migrated to Australia over twenty years ago as a permanent resident.

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

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

You have stated there have been no contributions to the Pension Fund since you migrated to Australia.

You have stated that there have been no transfers into the Pension Fund from other foreign pension schemes since you became a resident of Australia.

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

The value of the Pension Fund on your last day of service was Y.

Assumptions

The applicant could not obtain the value of their Pension Fund account as at the day preceding Australian residency. The closest date to residency they could obtain was their last service day and the value of the fund on that date was Y.

As this is just over a month before the residency date, the Commissioner considers that the difference in the value of the account between these dates to be immaterial. As such, it is assumed that the value on the day before you became an Australian resident was Y.

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 amount calculated as the applicable fund earnings in respect of the lump sum payment made from the Pension Fund has been determined to be Z. This amount is subject to tax at your marginal rate and to be included as 'applicable fund earnings' in your income tax return for the 2011-12 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) 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.

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.

Based on the rules of the fund, benefits are only paid to you on retirement and therefore the fund would meet the abovementioned requirements. In addition, it is clear the payer of the lump sum payment is established outside of Australia with their central management and control outside of Australia. Therefore, on the basis of the information provided, the Commissioner considers the lump sum payment you received to be made 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 1989-90 income year and received a 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:

a) work out the total of the following amounts:

a. 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;

b. 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;

c. 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 pension fund less any contributions you made since becoming 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.

Amounts to be used in calculation

It is accepted that the value of the benefits in the Pension Fund on the day before you became a resident of Australia was Y. This is converted into Australian dollars at the exchange rate that applied on that day which converts the amount of Y to Y (cents ignored).

During the 2011-12 income year, you received a one-off lump sum of X which was deposited into your foreign bank account. 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 case, you 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.

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) 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 Pension Fund 1

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.

Y + nil + nil = Y.

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

X - Y = 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.

The applicable fund earnings of Z is subject to tax at your marginal rate and is required to be included as 'applicable fund earnings' in your income tax return for the 2011-12 income year. The remainder of the lump sum payment is not assessable income and is not exempt income.