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Ruling

Subject: Lump sum payment from a foreign superannuation fund

Questions

1. Is any part of the benefit transferred between overseas pension schemes after the taxpayer became a resident of Australia assessable as applicable fund earnings?

2. Is any part of the partial benefit transferred from a pension scheme to an Australian superannuation fund assessable as applicable fund earnings?

Answers

1. No

2. Yes

This ruling applies for the following period

For the year ended 30 June 2013

This scheme commenced on

1 July 2012

Relevant facts

Your client migrated to Australia a number of years ago (the residency date).

Your client held an interest in a pension scheme (the Pension Scheme) established in the overseas country.

In a letter dated during the 2011-12 income year the trustee of the Pension Scheme advised the amount of your client's transfer value on that date. The letter also provided the value of the pension and the lump sum as at the date of leaving and as at the date of the letter.

Based on the information provided, the per annum value of the pension and value of the lump sum on date of leaving both increased by a specific percentage. Accordingly, by discounting back the value of the transfer value as at the date of the letter, the value of your client's entitlement in the Pension Scheme on the day before your client became an Australian Resident has been estimated to be a particular amount.

The rules of the Pension Scheme does not allow partial transfers.

Several months later your client transferred the entire amount of the transfer value (as specified in the letter) from the Pension Scheme to a personal pension fund (the Pension Fund) in the overseas country.

You advise that the value of the total benefit in the Pension Fund had not changed prior to your client transferring a lesser amount to an Australian complying superannuation fund. The Pension Fund currently holds the remaining balance.

Under the overseas country's legislation benefits generally cannot be accessed from pension funds other than at retirement. An exception applies where the benefit is transferred to an overseas pension scheme recognised under the overseas country's legislation.

There have been no contributions to either the Pension Scheme or the Pension Fund since your client migrated to Australia.

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 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 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.

Reasons for decision

Summary

No part of the payment transferred between the Pension Scheme to the Pension Fund is assessable at the time of transfer as the applicable fund earnings relating to the payment is Nil. However, an amount has been determined to be previously exempt fund earnings which will be applied in determining the applicable fund earnings in relation to future amounts withdrawn from the Pension Fund.

The 'applicable fund earnings' in respect of the partial lump sum payment transferred from Pension Fund to an Australian superannuation fund has been determined. This amount includes the previously exempt fund earnings amount.

Consequently, an amount determined to be the applicable fund earnings will be included in your client's assessable income in the 2012-13 income year.

Detailed reasoning

Lump sum payments from foreign superannuation funds

The applicable fund earnings in relation to a lump sum payment 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 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 subsection 305-75(3) of the ITAA 1997.

Subsection 305-75(2) of the ITAA 1997 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)¹ (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 there from 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)² (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, your client was a member of the Pension Scheme. Subsequently, your client transferred the benefits from the Pension Scheme to the Pension Fund. Both the Pension Scheme and the Pension Fund are established outside of Australia, each with its central management and control outside of Australia. Therefore neither the Pension Scheme and the Pension Fund are an Australian superannuation fund as defined in subsection 295-95(2) of the ITAA 1997

From the information provided, the benefits in the Pension Scheme and the Pension Fund can only be paid on retirement. As the benefits are paid in circumstances solely relating to retirement purposes, both the Pension Scheme and the Pension Fund would meet the definition of superannuation fund.

Therefore, on the basis of the information provided, the Commissioner considers the benefits transferred on your client's behalf are from foreign superannuation funds as defined in subsection 995-1(1) of the ITAA 1997.

Applicable fund earnings

Your client became a resident of Australia for tax purposes a number of years ago and, at that time, your client was a member of the Pension Scheme. In the 2011-12 income year your client's entitlements in the Pension Scheme were transferred to the Pension Fund. Subsequently, during the 2012-13 income year, a portion of the benefits in the Pension Fund were transferred to an Australian complying superannuation fund.

As this partial transfer was more than six months after your client became an Australian resident, section 305-70 applies to include the 'applicable fund earnings' (if any) 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.

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 Pension Scheme and/or the Pension 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.

In this case, as the benefits in the Pension Scheme were transferred to the Pension Fund after your client became a resident of Australia for tax purposes it is necessary to determine whether or not there will be any 'previously exempt fund earnings' before determining the applicable fund earnings under subsection 305-75(3) of the ITAA 1997.

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.

Previously exempt fund earnings

Subsections 305-75(5) and (6) of the ITAA 1997, which relate to previously exempt fund earnings, state:

Previously exempt fund earnings

(5) You have an amount of previously exempt fund earnings in respect of the lump sum if:

(a) part or all of the amount in the fund that was vested in you when the lump sum was paid (before any deduction for *foreign income tax) is attributable to the amount; and

(b) the amount is attributable to a payment received from a *foreign superannuation fund; and

(c) the amount would have been included in your assessable income under subsection 305-70(2) by the application of this section, but for the payment having been received by another foreign superannuation fund.

(6) The amount of your previously exempt fund earnings is the amount mentioned in paragraph (5)(c) (disregarding the addition of previously exempt fund earnings under subsection (2) or (3) of this section).

As already noted, your client was a member of the Pension Scheme at the date your client became an Australian resident. The value of your client's entitlement in the Pension Scheme on the day before your client became an Australian resident has been determined. This amount is converted into Australian dollars at the exchange rate that applied on that day.

The value of your client's entitlement in the Pension Scheme on the day the transfer to the Pension Fund took place has been determined. This amount is converted into Australian dollars at the daily exchange rate for that date.

Therefore, the amount that would otherwise have been included in your client's assessable income under subsection 305-70(2) of the ITAA 1997 is the difference between the two amounts. This amount represents the previously exempt fund earnings.

Amounts to be used in calculation

From the information provided, as your client's benefits in the Pension Scheme were transferred into the Pension Fund towards the end of the 2011-12 income year, the value of the benefit for the purposes of subparagraph 305-75(3)(a)(i) of the ITAA 1997 will be nil. Similarly, the value of the benefit for the purposes of subparagraph 305-75(3)(a)(ii) will also be nil as no contributions were made into the Pension Fund after it was established.

However, the value of the benefit for the purposes of subparagraph 305-75(3)(a)(iii) of the ITAA 1997 will be amount transferred in.

The value of the benefit for the purposes of paragraph 305-75(3)(b) of the ITAA 1997 is the total amount in the Pension Fund that was vested in your client when the lump sum was paid converted to Australian dollars.

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 or becomes a member of the overseas superannuation fund (whichever is the latest) and ceases on the day the lump sum is paid. In your client's case, in relation to the Pension Fund, that period is from the date the transfer in occurred to the date the lump payment was made and your client was 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.

As noted earlier, an amount representing previously exempt fund earnings has been determined.

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

subparagraph 305-75(3)(a)(i) Nil

subparagraph 305-75(3)(a)(ii) Nil

subparagraph 305-75(3)(a)(iii) Amount

paragraph 305-75(3)(b) Amount

paragraph 305-75(3)(c) 1

paragraph 305-75(3)(d) Amount

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 subparagraph 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.

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

Accordingly, the resultant amount will included as assessable 'applicable fund earnings' in the 2012-13 income year.

Election

Generally, 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. Provided the taxpayer no longer had an interest in the foreign funds ((subsection 305-80(1)).

However in this case, your client still has an interest in the Pension Fund. Therefore the election is not available to your client in the 2012-13 income year. However, the election may be available in the 2013-14 income year when the remaining balance in the Pension Fund 2 is proposed to be transferred to the Australian superannuation fund.