Edited version of your private ruling

Authorisation Number: 1012454183872

Ruling

Subject: Lump sum payment from foreign superannuation fund

Question 1

Is your client able to choose for all or part of their applicable fund earnings worked out under section 305-75 of the Income Tax Assessment Act 1997 (ITAA 1997) to be included in the assessable income of a complying superannuation plan as per section 305-80 of the ITAA 1997?

Answer

No.

This ruling applies for the following period:

2011-12 income year

The scheme commences on:

1 July 2011

Relevant facts and circumstances

Your client was employed in Australia for several years by a company based in the country X.

Your client was permanently located in Australia but was paid by company X.

Your client has always been an Australian resident.

Your client was a member of a country X Pension Plan (the Plan).

The Plan was established under section 401(a) of the country X revenue code.

The Plan is a retirement savings plan that allows funds to accumulate for a member's retirement. Contributions may be made by the employer, the member, or both.

Generally, members are eligible to withdraw funds from the Plan on retirement, or when employment with the current employer ceases.

The Plan does not allow members to borrow money secured by the benefits held in the Plan.

Your client did not transfer into the Plan any amounts from a foreign superannuation fund during the relevant period.

Upon reaching the age of 65, your client was required to withdraw their benefits in the Plan. You state that the rules of the Plan prevented your client from rolling-over their entitlement into an Australian superannuation fund and that the funds had to be paid directly to the member.

In late 20ZZ, your client received a lump sum payment from the Plan which was converted into Australian dollars at the prevailing exchange rate on the day.

The lump sum was paid directly to your client.

You advised that contributions to the Plan during your client's membership were $X.

You also advised that the Plan has calculated the earnings in relation to the lump sum to be A$Y.

On receipt of the lump sum, your client made a contribution to their 'Australian superannuation fund'. Your client's spouse also made a contribution to the fund.

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 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 payment paid from the Plan to your client is calculated as $Y.

As the lump sum was paid directly to your client and not into a complying superannuation plan, your client cannot choose to have some, or all, of the applicable fund earnings included in the assessable income of their Australian superannuation fund. The applicable fund earnings must be included in your client's assessable income in the relevant income year.

Detailed Reasoning

Lump sum payments paid from foreign superannuation funds

The applicable fund earnings in relation to a lump sum payment received by an Australian resident from a foreign superannuation fund, 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 (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

(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 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.

The documentation provided indicates that the Plan is a retirement savings plan, established under section 401(a) of the country X revenue code. The Plan allows for contributions by the employee, employer, or both. Benefits in the Plan are only payable upon retirement and on cessation of employment. The Plan 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 from the Plan was from a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997.

Applicable fund earnings

Your client has always been a resident of Australia for tax purposes. As your client received a lump sum from the Plan more than six months after your client became an Australian resident, section 305-70 applies to include any '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.

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:

(a) work out the total of the following amounts:

(i) 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);

(ii) the part of the lump sum (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 income tax);

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

In short, superannuation lump sum benefits paid from foreign superannuation funds continue to be taxed on the earnings while the person was an Australian resident.

In your client's case, no amounts were transferred into the Plan from any other foreign superannuation fund during the period and there are no previously exempt fund earnings.

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.

In your client's case, having regard to the circumstances, the figures you have provided (already at a converted Australian dollar exchange rate) relating to contributions made and lump sum payment received, will be accepted for the purposes of the applicable fund earnings calculation.

Amounts to be used in calculation

Based on the information provided, the calculated earnings of $Y are in accordance with the calculation under subsection 305-75(2) of the ITAA 1997.

Therefore, the amount of the lump sum payment from the Plan that will be included as assessable 'applicable fund earnings' for your client in the relevant income year is $Y.

Lump sums paid into complying superannuation plans - choice

Under section 305-80 of the ITAA 1997 an individual can choose to have all or part of their 'applicable fund earnings' (as worked out under section 305-75 of the ITAA 1997) included in the assessable income of a complying superannuation fund.

The choice can only be made if all the conditions in subsection 305-80(1) of the ITAA 1997 are satisfied.

Subsection 305-80(1) of the ITAA 1997 states:

This section applies if:

(a) section 305-70 applies to a *superannuation lump sum that is paid from a *foreign superannuation fund; and

(b) you are taken to receive the lump sum under section 307-15; and

(c) all of the lump sum is paid into a *complying superannuation fund; and

(d) immediately after the lump sum is paid into the complying superannuation fund, you no longer have a *superannuation interest in the foreign superannuation fund.

In summary, the whole of the lump sum (that the individual is taken to receive under section 307-15 of the ITAA 1997) must be paid directly from the foreign superannuation fund into the complying superannuation fund and the individual can no longer have an interest in the foreign superannuation fund immediately after it is paid.

In your client's case, the lump sum payment from the Plan was paid directly to them and not into an Australian superannuation fund. Subsection 305-80(1) of the ITAA 1997 invokes section 307-15, which covers payments from a foreign fund that are not received by the individual directly. As your client received the payment directly, your client has not received the lump sum under section 307-15 and therefore does not satisfy paragraph 307-15(1)(b) of the ITAA 1997.

As your client has not satisfied the conditions of subsection 305-80(1) of the ITAA 1997, they cannot choose to have any part of the applicable fund earnings worked out under section 305-75 included in the assessable income of the Australian complying superannuation fund.

Conclusion:

The applicable fund earnings in relation to the lump sum your client received from the Plan are $Y. This amount is to be included in your client's assessable income for the relevant income year and will be taxed at their marginal rate of tax.

As the whole lump sum was paid directly to your client and not into a complying superannuation fund, your client cannot choose to have some or all the applicable fund earnings excluded from their assessable income.