Edited version of your private ruling

Authorisation Number: 1012484188545

Ruling

Subject: Transfer of benefits from a foreign superannuation fund

Questions

1. Is any part of the benefit transferred between pension funds in an overseas country after your client became a resident of Australia assessable as applicable fund earnings?

2. Is any part of the benefit transferred from an overseas pension fund assessable as applicable fund earnings?

Answers

1. No.

2. Yes.

This ruling applies for the following periods:

2012-13 income year

The scheme commences on:

1 July 2012

Relevant facts and circumstances

Your client migrated to Australia several years ago as a Temporary Resident. Your client was later granted Permanent Residence which was granted several years ago.

Your client was a member of an overseas pension fund (Fund 1) and a second overseas pension fund (Fund 2).

Your client could not access benefits from Fund 1 or Fund 2 other than at retirement in the overseas country.

Your client split their Fund 1 account and transferred an amount to Australia during the 2009-10 income year. Fund 1 was then closed. The remaining amount remained in the overseas country and was transferred to Fund 2.

A previous private ruling that issued to your client determined that the 'applicable fund earnings' in respect of the lump sum payment paid from Fund 1 is calculated as zero.

Contributions were made by your client and their employer to Fund 1 after your client became a resident of Australia.

In the private ruling previously issued to your client, the Australian dollar amount transferred to Australia and the balance of those contributions transferred to Fund 2 during the 2009-10 income year were determined.

Fund 2 was opened during the 2008-09 income year with an overseas employer pension contribution. Fund 2 was used by your client's employer (who was an overseas based employer) for pension contributions. You advised the value of the Fund 2 during the 2008-09 income year.

You provided a table advising of the monthly amounts contributed by the employer for your client during the 2008-09 and 2009-10 income years. A total amount of contributions was made by the employer to Fund 2 for your client during the 2008-09 and 2009-10 income years.

It was advised that during the 2009-10 income year the employer contributed an amount to the Australian superannuation fund when it was realised that your client had become a permanent resident of Australia and they had to make contributions to an Australian superannuation fund for your client. The amount was converted to Australian dollars. The Australian superannuation fund has accepted the contribution as an employer contribution.

The employer was liaising with Fund 2 when it made the contribution into the Australian fund, with the intention of claiming back the amount that they made to the Australian superannuation fund during the 2009-10 income year. Fund 2 repaid the employer an amount as one lump sum from the contributions they made for your client during the 2008-09 and 2009-10 income years after the employer had made the contribution to the Australian superannuation fund. It was advised that Fund 2 released the monies to the employer on the grounds that it was a payment made by the employer in error.

It was advised that although the payment was repaid as a lump sum, Fund 2 actually went back to the individual contribution dates and retrospectively amended each contribution so it was as though the payment had never been made. Corrections were made on the account progressively throughout the year (even though the amount was paid as one lump sum on a specific date during the 2009-10 income year). This means that on the day before the payment was made, the balance is the same as if the refunded contributions had never been made.

It was advised that your client did not benefit from any growth in the Fund from the repaid monies. Fund 2 did not make a pension payment to your client.

During the 2009-10 income year, an amount was transferred into Fund 2 from Fund 1. The amount was converted to Australian dollars.

The lump sum was paid into the Australian superannuation fund during the 2009-10 income year as employer contributions. The amount was converted to Australian dollars.

Your client transferred their Fund 2 pension to Australia into their existing Australian superannuation fund, a complying superannuation fund, during the 2012-13 income year.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 290-160

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 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 Subsection 305-80(2)

Income Tax Assessment Act 1997 subsection 305-80(3)

Income Tax Assessment Act 1997 Subsection 960-50(1)

Income Tax Assessment Act 1997 Subsection 960-50(4)

Income Tax Assessment Act 1997 Subsection 960-50(6)

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 payment transferred between Fund 1 and Fund 2 is assessable as the applicable fund earnings relating to the payment is Nil.

Consequently, no amount of the payment transferred between Fund 1 and Fund 2 will be included in your client's assessable income in the 2012-13 income year.

An amount of the lump sum payment transferred from Fund 2 to an Australian superannuation fund, is assessable as applicable fund earnings.

Consequently, an amount of the lump sum payment transferred from Fund 2 to an Australian superannuation fund will be included in your client's assessable income in the 2012-13 income year.

Your client can elect to have all or part of the assessable 'applicable fund earnings' treated as assessable income of their complying Australian superannuation fund because immediately after the relevant payments were made, your client no longer had 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 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.

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) (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 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 be a provident, benefit, superannuation or retirement fund as discussed above.

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

From the information provided, both Fund 1 and Fund 2 are considered to meet the definition of superannuation fund.

Therefore, 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 several years ago and, at that time, your client was a member of Fund 1.

During the 2009-10 income year your client's entitlements in Fund 1 were transferred to Fund 2. Subsequently, during the 2012-13 income year, the benefits in Fund 2 were transferred to an Australian complying superannuation fund.

As your client was a resident at all times during the period when their entitlement to a benefit with Fund 2 existed, the portion of the payment representing applicable fund earnings will be calculated under subsection 305-75(2) of the ITAA 1997, which 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 you previously exempt fund earnings (if any) covered by subsections (5) and (6).

Subsection 305-75(5) defines previously exempt fund earnings as follows:

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 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.

Subsection 305-75(6) states:

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).

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) (a) first, translate any amounts that are elements in the calculation of other amounts (except special accrual amounts); and

(b) (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 amount in the foreign fund that was vested in your client just before they 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 to 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 your client first became an Australian resident, adding any previously exempt fund earnings amounts that may apply, translated using the same principles.

Transfer of payment from Fund 1 to Fund 2

In this case, as the benefits in Fund 1 were transferred to Fund 2 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.

You advised that your client transferred an amount from Fund 1 to Fund 2 during the 2009-10 income year.

Amounts to be used in calculation

Your client was a resident of Australia at the time they transferred the amount from Fund 1 to Fund 2 on a specific date during the 2009-10 income year.

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).

The value of the benefit in Fund 1 on the day before your client became a resident of Australia was determined. This is converted into Australian dollars at the exchange rate that applied on that day.

Contributions were made by your client and their employer to Fund 1 after your client became a resident of Australia.

Each contribution is converted into Australian dollars at the exchange rate that applied on the day it was made. In an ATO fact sheet titled 'Foreign exchange rates Translation (conversion) to Australian dollars - foreign currency exchange rates to use', the exchange rate applicable on a weekend or public holiday is the rate for the next closest day.

As previously noted the amount transferred to Australia during the 2009-10 income year was advised. The balance was transferred from Fund 1 to Fund 2 on a specific date during the 2009-10 income year.

The remaining amount was transferred to Fund 2 during the 2009-10 income year and converted to Australian dollars.

Therefore the total amount in the fund that was vested in your client when the lump sum was paid has been determined.

'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 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.

Calculation of the assessable amount of the payment transferred from Fund 1 to Fund 2

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 Fund 1 are as follows:

305-75(3)(a)(i) The amount, converted to Australian dollars, vested in your client before they became a resident of Australia

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

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

305-75(3)(b) The amount of the lump sum payment received, converted to Australian dollars

305-75(3)(c) 1

305-75(3)(d) Nil

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).

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

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

As the result is less than zero, there is no previously exempt amount of the payment transferred from Fund 1 to Fund 2.

Thus, the previously exempt fund earnings is calculated as nil.

Transfer of payment from Fund 2 to an Australian superannuation fund

Amounts to be used in calculation

You advised that your client transferred their Fund 2 pension to Australia into their existing Australian superannuation fund, a complying superannuation fund, during the 2012-13 income year.

Your client became a resident of Australia of Australia for tax purposes several years ago, a few years before your client's account with Fund 2 was opened. Consequently, your client was a resident of Australia for tax purposes at all times during the period to which the lump sum from Fund 2 relates. 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.

In this case, the part of the lump sum that is attributable to contributions made by or in respect of your client on or after the day when your client became a member of the fund has been determined (subparagraph 305-75(2)(a)(i)of the ITAA 1997). However, an amount was refunded to the employer. The net contributions ultimately credited to the fund for the benefit of your client has also been determined. As noted, these contributions are converted to Australian dollars.

The part of the lump sum that is attributable to amounts transferred into the fund from any other foreign superannuation fund during the period is an amount (subparagraph 305-75(2)(a)(ii)of the ITAA 1997). The amount was converted to Australian dollars.

The total amount in Fund 2 that was vested in your client when the lump sum was paid on a specific date during the 2012-13 income year is an amount (paragraph 305-75(2)(a)(ii)of the ITAA 1997). This is converted into Australian dollars at the exchange rate that applied on that day.

Calculation of the assessable amount of the payment from Fund 2

Applying subsection 305-75(2) of the ITAA 1997 to your client's circumstances, the amounts to be used in calculating the applicable fund earnings for Fund 2 are as follows:

305-75(2)(a)(i) The amount, converted to Australian dollars of the contributions made by or in respect of your client on or after the day your client became a member of the fund.

305-75(2)(a)(ii) The part of the lump sum that is attributable to amounts transferred into the fund from any other foreign superannuation fund.

305-75(2)(b) The amount of the lump sum payment received, converted to Australian dollars

305-75(2)(c) NIL

In accordance with subsection 305-75(2) of the ITAA 1997 the amounts determined at sub-paragraphs 305-75(2)(a)(i), and (ii) are added.

This total is then subtracted from the amount determined under paragraph 305-75(2)(b).

This total is added to your client's previously exempt fund earnings (if any). The previously exempt fund earnings have been calculated as nil.

Therefore the applicable fund earnings has been determined. Your client should include this amount in their 2012-13 income tax return.

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.

Your client can elect to have all or part of the 'applicable fund earnings' from the Pension Fund treated as assessable income of their complying Australian superannuation fund because immediately after the relevant payments were made, your client 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:

No part of the payment transferred from Fund 1 to Fund 2 is assessable as the applicable fund earnings relating to the payment is nil.

An amount from Fund 2 which was transferred to your client's Australian superannuation fund, is assessable as applicable fund earnings.

Other matters for you to consider

Repayment of contributions from Fund 2 to your client's employer

The contributions that were repaid from Fund 2 to your client's employer is not considered to be a payment of a benefit as that amount was refunded to the employer as it was made by mistake to that fund.

The amount was contributed by the employer to the Australian superannuation fund on a specific date during the 2009-2010 income year when the employer realised that your client had become a permanent resident of Australia and they knew they had to make contributions to an Australian superannuation fund for your client.

The employer was liaising with Fund 2 when it made the contribution into the Australian fund, with the intention of claiming back the amount that they made to the Australian superannuation fund during the 2009 10 income year.

The amount was subsequently repaid to your client's employer as one lump sum during the 2009-10 income year. The contributions were made to Fund 2 by mistake as the payment should have been made to an Australian superannuation fund.

It was also advised that although the payment was made as a lump sum during the 2009-10 income year, Fund 2 actually went back to the individual contribution dates and retrospectively amended each date as though the payment had never been made.

Further, as the payment to the Australian superannuation fund occurred before the contributions were refunded by Fund 2, it is not considered that these transactions amounted to a transfer between the two funds.

Therefore there are no taxation implications on this transaction as Fund 2 did not make a payment to your client and they did not benefit from any growth in the Fund.

Contributions made by an overseas employer to an Australian superannuation fund for an employee

A contribution made to an Australian superannuation fund for an employee is assessable income of the superannuation fund.

The contribution of an amount by the overseas employer (which was converted to Australian dollars) during the 2009-10 income year and transferred to the Australian superannuation fund was correctly treated by the Australian Fund as an employer contribution.