Edited version of your private ruling

Authorisation Number: 1012502551293

Ruling

Subject: Lump sum payment from a foreign superannuation fund

Question

Is any part of the benefits transferred from a foreign pension fund 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:

2013-14 income year

The scheme commences on:

1 July 2013

Relevant facts and circumstances

You are aged over 55.

You are an employee of an entity (the employer entity) and some years ago you became a member of a foreign superannuation fund (the foreign fund) located in an overseas country.

You commenced accrual of a retirement pension under the relevant pension scheme.

You became a resident of Australia for tax purposes towards the end of 199X (the residency date).

You continue to be an employee of the employer entity in Australia but for the purposes of your membership in the foreign fund you will be treated as if you have left the employment of the employer entity in the event that you do not remain in this pension scheme.

You ceased to be an active defined benefit member of the pension scheme when the foreign fund closed towards the end of the relevant year.

In the memorandum from the employer entity in the subsequent year, you were advised that they had reviewed the concerns you raised on the treatment of your pensionable base salary and confirmed the following:

· You ceased to be an active defined benefit (DB) member of the relevant pension scheme on the fund closure date.

· From this date you are an inactive DB member and no further increment can be made to your inactive DB benefit on account of future service with the employer entity, or on account of changes to your pensionable salary.

· As a result, your future benefits from the foreign fund will be based on data held by the fund administrator as at the time of closure.

· The actuary to the fund has calculated the difference in the value of your fund benefits that would result if your benefits were adjusted in accordance with the revised pensionable base salary (Foreign currency amount $A).

· In addition to this, the transition payment made to you on account of closure of the fund would increase to (Foreign currency amount $B) which has been calculated using the revised pensionable salary.

· The total amount Foreign currency amount $C ($A plus $B) can be done through a cash payment via payroll or through an extra contribution to your superannuation.

You have a current superannuation balance in the employer entity superannuation fund in Australia (the Australian fund).

You would like to transfer the entire amount of $C to your Australian fund and elect for the Australian fund to pay tax on any applicable fund earnings calculated on the transfer value.

As the foreign fund cannot provide you with the vested amount of your benefit on the day before your residency date your agent has calculated that the amount $C at the fund closure date in the relevant year would have been equal to a particular inflation- adjusted amount at your residency date in 199X using the CPI figures that are available on the ATO website.

The amount of $C is a fixed amount and will not change prior to the planned transfer date in the subsequent.

The foreign fund does not allow any partial benefit withdrawals prior to retirement however, there is the option to opt for an early retirement from age 55 onwards.

No funds were transferred to the foreign fund from other foreign superannuation funds after the residency date.

No contributions were made by or in respect of you, to the foreign fund after the residency date.

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.

As you cannot provide us with the value of your benefits in the foreign fund on or around the day you became a resident, we advised your agent that an assumption will be made of the value by using a calculation based on the information you have provided in your private ruling request using the inflation data from the overseas country where the foreign fund is located as this is where the benefits in the foreign fund accrued from the residency date.

On that basis and in issuing this ruling, the Commissioner made an assumption of the value of your benefits in the foreign fund on the day before you became a resident.

Relevant legislative provisions

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 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 the foreign fund to the Australian fund in the 20XX income year is $Z.

This amount is based on the fixed amount of the transfer value notified to you by the foreign fund for the transfer date in the subsequent year.

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

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

(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 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 foreign fund be considered a payment from a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997, the pension fund must also satisfy the requirements set out in subsection 295-95(2) of the ITAA 1997.

This means that the foreign fund 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 foreign fund, it is evident it is established outside of Australia and the central management and control is outside of Australia.

The foreign fund does not allow any partial benefit withdrawals prior to retirement age for non-retirement purposes.

Retirement benefits are payable to members at retirement age with an option for early retirement for members aged 55 or over.

Therefore, on the basis of the information provided, the Commissioner considers the foreign fund is a foreign superannuation fund as defined in subsection 9951(1) of the ITAA 1997 and any transfers from the foreign fund to the Australian 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 on the residency date and from the information provided the foreign fund transfer to the Australian fund will have occurred using the fixed transfer value of Foreign currency amount $C as advised to you by the foreign fund.

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 20XX 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

Foreign fund transfer to the Australian fund

You were advised of the fixed amount of the transfer value of $C in the memorandum from the employer entity. You have advised that this is the transfer value for the subsequent year.

As you cannot provide us with the value of your benefits in the foreign fund on or around the day you became a resident, we calculated an estimate of the value based on the information you have provided in your private ruling request and by using the inflation data from the overseas country in which the foreign fund is located as this is where the benefits in the foreign fund accrued from the residency date.

On that basis we calculated the value of your benefits in the foreign fund on the day before your residency date to be foreign currency amount $D.

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 $D to AU $X(cents ignored).

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

The total transfer value in the subsequent year was advised as $C.

Therefore this is the amount vested in you if the transfer occurred in the subsequent year. This is converted into Australian dollars at the exchange rate that applied on that day which converts the amount of $C to AU $Y (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 the residency date to the transfer date 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) $X

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

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

305-75(3)(b) $Y

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.

$X + nil + nil = $X.

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

$Y less $X is $Z

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

$Z x 1 = $Z

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

$Z + nil = $Z

Therefore, $Z will be included as 'applicable fund earnings' under section 305-70 of the ITAA 1997 in the 20XX income year.