Edited version of your private ruling

Authorisation Number: 1012480258624

Ruling

Subject: Lump sum payment from a foreign superannuation fund

Question

Is any part of the benefits transferred from a pension scheme in the overseas country to an Australian superannuation fund 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 ending 30 June 2013

The scheme commences on:

1 July 2012

Relevant facts and circumstances

You migrated to Australia as a Permanent Resident during 19XX (residency date).

You were a member of a Pension Scheme in the overseas country (the overseas fund). The value of your benefits in the overseas fund during 19XX in foreign dollars was A1.

Your benefits of B1 will be transferred during 20YY from the overseas fund to a complying superannuation fund in Australia.

You no longer have an interest in the overseas fund.

Since you migrated to Australia there have been no contributions to the overseas fund.

Funds cannot be accessed from the overseas fund other than at retirement.

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 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 of decision

Using a payment date of 20YY as an example, the 'applicable fund earnings' in respect of the lump sum payment paid from the overseas fund is calculated as C1.

Consequently, the amount of C1 would be included in your assessable income in the relevant income year.

From the facts provided, you have not yet received a lump sum payment from the overseas fund. You will need to recalculate the assessable amount of the lump sum payment using the formula in the Detailed Reasoning of the private ruling when you receive the actual payment from the overseas fund.

You can elect to have all or part of your 'applicable fund earnings' treated as assessable income of your complying Australian superannuation fund because immediately after the relevant payment is made, you will no longer have an interest in the foreign fund.

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.

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 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. Federal Commissioner of Taxation (1967) 41 ALJR 232; (1967) 14 ATD 519 (Mahony).

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 in respect of your fund, benefits are only paid on retirement and so each fund would meet the definition of a superannuation fund. In addition, it is clear the payers of the lump sum payments are all 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 is from a foreign superannuation funds as defined in subsection 995-1(1) of the ITAA 1997

Applicable fund earnings

You became a resident of Australia for tax purposes during October 1998 and have asked that the lump sum payment receipt date to be sometime in May 2013. As this was more than six months after you became an Australian resident, section 305-70 of the ITAA 1997 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:

(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 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 overseas fund less any contributions you made since you became a resident of Australia. Further, any amounts representative of earnings during the 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 (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.

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 you 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 just before you 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 of 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 you first became an Australian resident.

Amounts to be used in calculation

The benefit in the overseas on the day before you became a resident of Australia was A1. This is converted into Australian dollars at the exchange rate that applied on that day. As per the exchange rates published by the Reserve Bank of Australia, the prevailing rate was X1 which converts the amount of A1 to A2.

From the facts provided no contributions have been made to the overseas fund since you migrated to Australia.

You have stated that you have not yet received a lump sum payment from the overseas fund. Consequently, the calculation below is an example of how your applicable fund earnings would have been calculated had a payment of B1 been made during 20YY.

When the payment is ultimately made you will need to recalculate the assessable amount by substituting the actual payment received from the overseas fund and converting to Australian dollars using the relevant exchange rate applicable on the actual payment date.

Using a payment date of 20YY as requested, you state that your benefits in the overseas fund would be paid out to you in the form of a one-off lump sum of B1. You further state that this amount, converted to Australian dollars, will be transferred directly into a complying Australian superannuation fund.

On the above basis, this is the amount vested in you had the lump sum been paid on that date. This amount is converted into Australian dollars at the exchange rate that applied on that day. As per the exchange rates published by the Reserve Bank of Australia, the prevailing rate was X2. This converts the amount of B1 to B2.

'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 that period. Therefore, the Australian resident days and the total days are the same, and so that 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 circumstances had the payment been made during 20YY, the amounts that would be used in calculating the applicable fund earnings are as follows:

subparagraph 305-75(3)(a)(i) A2

subparagraph 305-75(3)(a)(ii) Nil

subparagraph 305-75(3)(a)(iii) Nil

paragraph 305-75(3)(b) B2

paragraph 305-75(3)(c) 1

paragraph 305-75(3)(d) Nil

Calculation of the assessable amount of the payment

As noted above the following calculation is an example of how your applicable fund earnings would have been calculated had a payment of B2 been made during 20YY.

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:

A2 + nil + nil = A2

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

B2 less A2 is C1

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

C1 x 1 = C1

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

C1+ nil = C1

Therefore, had a payment of B2 been made during 20YY, your applicable fund earnings for this lump sum would be C1 in accordance with subsection 305-75(3) of the ITAA 1997. This would have been the amount to be included as assessable 'applicable fund earnings' in your tax return for the relevant income year.

Election

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.

As a result, the amount specified in the election notice will be included as assessable income of the superannuation fund and subject to tax at 15% rather than being included in the taxpayer's assessable income and subject to tax at the taxpayer's marginal rate.

You can elect to have all or part of the 'applicable fund earnings' from the overseas fund treated as assessable income of your complying Australian superannuation fund because immediately after the relevant payments were made, you no longer had an interest in the foreign funds (subsection 305-80(1) of the ITAA 1997).

The election must be in writing, specify the amount to be covered by the election and comply with any requirements specified in the Income Tax Regulations (subsection 305-80(3) of the ITAA 1997).

An amount that is covered by an election under section 305-80 of the ITAA 1997 will not be treated as either a concessional contribution or a non-concessional contribution to the Australian superannuation fund. Consequently, this amount will not count towards your concessional or non-concessional contributions caps for the relevant income year.

Conclusion:

From the facts provided you have not yet received a lump sum payment from the overseas fund. You will need to recalculate the assessable amount of the lump sum payment using the methodology provided above when you receive the actual payment from the overseas fund. The assessable amount that is subsequently calculated should be included in your income tax return in the income year the payment is received.

You can elect to have all or part of your 'applicable fund earnings' treated as assessable income of your complying Australian superannuation fund because immediately after the relevant payment is made, you will no longer have an interest in the foreign fund.