Edited version of your private ruling

Authorisation Number: 1012491219944

Ruling

Subject: Lump sum payment transfer from a foreign superannuation fund

Question

Is any part of the benefits transferred from an overseas pension scheme to an Australian superannuation fund assessable as 'applicable fund earnings' under subsection 305-70(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following period

2012-13 income year

The scheme commenced on

1 July 2012

Relevant facts and circumstances

You became a member of an overseas pension scheme in 19XX.

With effect from 19YY the 'holdings' in that pension scheme were transferred to a another pension plan (Pension Plan 1).

You became a member of another overseas pension plan (Pension Plan 2) in 19ZZ.

You became a resident of Australia for tax purposes towards the end of 19VV (the residency date).

You wish to transfer the value of each pension plan to an Australian superannuation fund and make the choice for the Australian fund to pay the tax on the growth portion of each of the overseas pension plans (Pension Plan 1 and Pension Plan 2) for the period since you became an Australian resident.

You will not maintain an interest in the two pension plans once you make the transfers to Australia.

However you have had difficulty in obtaining the transfer value of each pension plan as at the residency date and request to use the transfer value given to you previously for a period that was close to the residency date.

The documentation provided in your private ruling application included the following details:

Pension Plan 1

Transfer value as at 19VV

Transfer value as at 20XX

Pension Plan 2

Transfer value as at 19XX

Transfer value as at 20XX

There were no contributions made by, or in respect of you, to each pension plan after the residency date.

No amounts were transferred from any other foreign superannuation fund to each pension plan after the residency date.

The pension plans do not permit early withdrawal of benefits for non-retirement purposes.

Early withdrawals before retirement age are restricted to transfers to qualifying recognised overseas pension schemes.

Relevant facts and circumstances

Subsection 295-95(2) of the Income Tax Assessment Act 1997

Subsection 295-200(3) of the Income Tax Assessment Act 1997

Subsection 305-60 of the Income Tax Assessment Act 1997

Section 305-70 of the Income Tax Assessment Act 1997

Subsection 305-70(1) of the Income Tax Assessment Act 1997

Section 305-75 of the Income Tax Assessment Act 1997

Subsection 305-75(2) of the Income Tax Assessment Act 1997

Subsection 305-75 (3) of the Income Tax Assessment Act 1997

Subsection 305-75 (5) of the Income Tax Assessment Act 1997

Subsection 305-75 (6) of the Income Tax Assessment Act 1997

Subsection 305-80 of the Income Tax Assessment Act 1997

Subsection 306-70 of the Income Tax Assessment Act 1997

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

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

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

Subsection 995-1(1) of the Income Tax Assessment Act 1997

Section 10 of the Superannuation Industry (Supervision) Act 1993

Section19 of the Superannuation Industry (Supervision) Act 1993

Section 62 of the Superannuation Industry (Supervision) Act 1993

Reasons for decision

Summary

The amount to be treated as 'applicable fund earnings' in relation to the transfer of your benefits from Pension Plan 1 to the Australian fund in the relevant income year will be $X.

This amount is based on the transfer value on x in the relevant year.

The amount to be treated as 'applicable fund earnings' in relation to the transfer of your benefits from Pension Plan 2 in the relevant income year will be $Y.

The 'applicable fund earnings' represent the growth (the income earned) in respect of your interest in each pension plan since you became a resident of Australia.

This amount is based on the transfer value in x of the relevant 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 are 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 are 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) 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 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

(i) 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 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 amount that was transferred from the two pension plans (Pension Plan 1 and Pension Plan 2) to be considered a payment from a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997, each pension plan must also satisfy the requirements set out in subsection 295-95(2) of the ITAA 1997.

This means that the two pension plans 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.

Looking at the two pension plans, it is evident each is established outside of Australia; and the central management and control is outside of Australia. Retirement benefits are payable to members at retirement age and overseas transfers prior to retirement age are permitted only if the receiving scheme is a Qualifying Recognised Overseas Pension Scheme.

Therefore, on the basis of the information provided, the Commissioner considers each pension plan (Pension Plan 1 and Pension Plan 2) is a foreign superannuation fund as defined in subsection 9951(1) of the ITAA 1997 and any transfers from each pension plan to an Australian superannuation fund needs to be considered under section 305-70 of the ITAA 1997.

Applicable fund earnings

You became a resident of Australia for tax purposes towards the end of 19XX and from the information provided the foreign fund transfers for Pension Plan 1 and Pension Plan 2 would occur during the relevant income year using the transfer values in the relevant year for Pension Plan 1 and also in the relevant year for Pension Plan 2.

As this date was more than 6 months after you became an Australian resident, section 305-70 applies to include the 'applicable fund earnings' in your assessable income for the relevant income year.

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 foreign fund transfer less any contributions made since you 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.

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

Amounts to be used in calculation

Pension Plan 1

The transfer value was advised to you as Amount A in the relevant year.

A previous transfer value was advised to you on a statement in 19XX as Amount B.

From this information provided, we calculated that the value of your benefits on the day before you became a resident in 19XX as Amount C. This amount will be used as the amount that was vested in you on the day before you became a resident of Australia. This is converted into Australian dollars at the exchange rate that applied on that day which converts the amount of C to AU $D (cents ignored).

You have advised there were no contributions made to the pension plan on or after the residency date. No amounts were transferred into the pension plan from other foreign superannuation funds during the period of membership.

The total transfer value on a date in the relevant year was advised as Amount A.

Therefore this is the amount vested in you if the transfer occurred on a date in the relevant year. This is converted into Australian dollars at the exchange rate that applied on that day which converts the amount of A to AU $E (cents ignored).

In accordance with the Commissioner's view '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, that period is your residency date to the transfer date in the relevant year and you were 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.

There are no previously exempt fund earnings in relation to the lump sum transfer.

Therefore, applying subsection 305-75(3) to your circumstances, the amounts to be used in calculating the applicable fund earnings are as follows:

305-75(3)(a)(i) $D

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

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

305-75(3)(b) $E

305-75(3)(c) 1

305-75(3)(d) Nil

Calculation of the assessable amount of the payment from foreign superannuation fund

In accordance with 305-75 (3) of the ITAA 1997 the amounts determined at sub-paragraphs 305-75(3)(a)(i), (ii) and (iii) are added.

$D + nil + nil = $D.

This total is then subtracted from the amount determined under paragraph 305-75(3)(b), $E.

$E less $D is $X.

This figure is multiplied by the proportion of the total days determined under paragraph 305-75(3)(c) - '1'

$X x 1 = $X

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

$X + nil = $X

Therefore, $X will be included as 'applicable fund earnings' under section 305-70 of the ITAA 1997 in the 2012-13 income year.

Pension Plan 2

You were advised the transfer value of Amount F as at a date in the relevant year.

You were also advised the transfer value of Amount G on a statement for on a date in 19XY.

From this information provided, we calculated the value of your benefits on the day before you became a resident as Amount H. This amount will be used as the amount that was vested in you on the day before you became a resident of Australia. This is converted into Australian dollars at the exchange rate that applied on that day which converts the amount of G to AU $J (cents ignored).

You have advised there were no contributions made to the pension plan on or after the residency date. No amounts were transferred into the pension plan from other foreign superannuation funds during the period of membership.

The total transfer value in the relevant year was advised as Amount F.

Therefore this is the amount vested in you if the transfer occurred on a date in the relevant year. This is converted into Australian dollars at the exchange rate that applied on that day which converts the amount of F to AU $K (cents ignored).

In accordance with the Commissioner's view '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, that period is from your residency date to the transfer date in the relevant year and you were 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.

There are no previously exempt fund earnings in relation to the lump sum transfer.

Therefore, applying subsection 305-75(3) to your circumstances, the amounts to be used in calculating the applicable fund earnings are as follows:

305-75(3)(a)(i) $J

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

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

305-75(3)(b) $K

305-75(3)(c) 1

305-75(3)(d) Nil

Calculation of the assessable amount of the payment from foreign superannuation fund

In accordance with 305-75 (3) of the ITAA 1997 the amounts determined at sub-paragraphs 305-75(3)(a)(i), (ii) and (iii) are added.

$J + nil + nil = $J.

This total is then subtracted from the amount determined under paragraph 305-75(3)(b), $K.

$K less $J is $Y.

This figure is multiplied by the proportion of the total days determined under paragraph 305-75(3)(c) - '1'

$Y x 1 = $Y

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

$Y+ nil = $Y

Therefore, $Y will be included as 'applicable fund earnings' under section 305-70 of the ITAA 1997 in the relevant income year.