Edited version of your private ruling

Authorisation Number: 1012464963557

Ruling

Subject: Lump sum payments form foreign superannuation funds

Questions

1. Is any part of the benefits transferred from your client's foreign pension scheme (Fund 1) to an Australian superannuation fund assessable as applicable fund earnings under section 305-75 of the Income Tax Assessment Act 1997 (ITAA 1997)?

2. Is any part of the benefits transferred from your client's foreign pension accounts in Fund 2 to an Australian superannuation fund assessable as applicable fund earnings under section 305-75 of the ITAA 1997?

3. Is any part of the benefits transferred from your client's foreign pension accounts in Fund 3 to an Australian superannuation fund assessable as applicable fund earnings under section 305-75 of the ITAA 1997?

Answers

1. No.

2. No.

3. No.

This ruling applies for the following period:

Year ending 30 June 2013

The scheme commences on:

1 July 2012

Relevant facts and circumstances

Your client migrated to Australia more than five years ago as a Permanent Resident.

Your client held interests in three pension funds in an overseas country, those being, Fund 1, Fund 2 and Fund 3.

You advised the value of Funds 1 and 2 on the date before your client became a resident of Australia.

You have advised that your client could not obtain a value in Fund 3 as at the date your client became a resident of Australia.

During the relevant income year your client's benefits in the Funds were transferred to a complying Australian superannuation fund (the Australian Fund).

Since your client's benefits were transferred to the Australian fund your client has no other interest in any of the overseas Funds.

No contributions have been made to any of the overseas Funds by your client, or anyone on behalf of your client, since they became a resident of Australia.

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

From the information you have provided your client could not access the benefits in the overseas Funds other than at retirement.

Your client is under age 55.

Assumptions

Section 357-110 of Schedule 1 to the Taxation Administration Act 1953 (TAA) gives the Commissioner a power to make assumptions which he considers to be most appropriate.

You were advised that as your client could not provide the total transfer value of their benefits in Fund 3 as at the day before your client became an Australian resident, an assumption will be made.

You have agreed to an assumption being made for the rate of return in the Fund, based on cost of living increases of the overseas country between the day before your client became a resident of Australia and the date the lump sum payment was received.

Based on this rate of return, the Commissioner is prepared to assume the transfer value of your client's superannuation entitlement on the date before your client became an Australian resident.

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 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.

Income Tax Assessment Regulations 1997 Regulation 960-50.01.

Reasons for decision

Summary

No part of the payments transferred from the overseas Funds to your client's Australian superannuation fund are assessable as the applicable fund earnings relating to the payments are nil.

Detailed reasoning

Lump sum payments from foreign superannuation funds

The applicable fund earnings in relation to a lump sum payment (LSP) 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 LSP 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) 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.

Superannuation fund

'Superannuation fund' is defined in subsection 995-1(1) of the ITAA 1997 as having the meaning given by section 10 of the Superannuation Industry (Supervision) Act 1993 (SISA).

Subsection 10(1) of the SISA provides that:

superannuation fund means:

(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. Federal Commissioner of Taxation (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. Federal Commissioner of Taxation (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 SISA, 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 SISA applies only to 'regulated superannuation funds' (as defined in section 19 of the SISA), and foreign superannuation funds do not qualify as regulated superannuation funds as they are established and operate outside Australia, the Commissioner views the SISA (and its attendant 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 SISA.

Therefore, in order for a LSP 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.

The purpose of the Funds

In the present case it is evident that the Funds established in the overseas country i.e. Funds 1, 2 and 3, are not Australian superannuation funds as defined in subsection 295-95(2) of the ITAA 1997.

The information provided in relation the Funds indicate benefits are only paid on retirement and the Funds would meet the definition of superannuation fund. In addition, it is clear the payers of the lump sum payments are 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 payments your client received are from foreign superannuation funds as defined in subsection 995-1(1) of the ITAA 1997.

Applicable fund earnings

In this case, your client became a resident of Australia for tax purposes more than five years ago and the LSPs were made from the overseas Funds during the 2012-13 income year. As these payments were made more than six months after your client became an Australian resident section 305-70 of the ITAA 1997 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.

The amounts included as assessable income, and taxed at marginal rates of tax, are worked out under subsection 305-75(3) of the ITAA 1997 because your client became an Australian resident after the start of the period to which the lump sums relate.

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 overseas Funds 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 benefits are 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. 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

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 amounts in the foreign funds that were vested in your client just before he became a resident of Australia (subparagraph 305-75(3)(a)(i) of the ITAA 1997) are determined, there are no actual receipts or payments of any amount. All that occurs is a determination of the vested amounts 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 amounts received from the three foreign funds at the exchange rate applicable on the day of receipt to Australian dollars and deducting from these amounts the Australian dollar equivalent of the amount vested in the funds at the exchange rate applicable just before the day your client first became an Australian resident.

Amounts to be used in calculation

The value of your client's benefits in the overseas Funds the day before your client became a resident of Australia are converted into Australian dollars at the exchange rate that applied on that day.

From the facts provided no contributions have been made to the Funds in the overseas country since your client migrated to Australia.

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

Your client's benefits were paid from the overseas Funds to your client in the form of one-off lump sums which were transferred directly into the Australian Fund, a complying Australian superannuation fund. These amounts were vested for your client when the lump sums were paid. The amounts were converted into Australian dollars at the exchange rate that applied on the day they were transferred.

By using the exchange rates that applied on the day the benefits were transferred, the payments from each fund have been converted from overseas currency 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 and ceases on the day the lump sum is paid.

Your client was a resident of Australia for the whole of all the periods which relate to the payments from the overseas Funds. 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 payments.

Calculation of the assessable amount of each payment from the overseas Funds

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) of the ITAA 1997.

The above 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 amounts determined under paragraph 305-75(3)(d) of the ITAA 1997.

Applying the above calculation to each of the lump sum payments your client received from the overseas funds results in amount less than zero. Accordingly, no amount of the lump sum payments will be included as assessable 'applicable fund earnings' in the relevant income year.

Conclusion

As the calculations all result as being less than zero, no amount of the lump sum payments received from the overseas funds will be included as assessable 'applicable fund earnings' in your client's tax return for the relevant income year.