Edited version of your private ruling

Authorisation Number: 1012514968913

Ruling

Subject: Lump sum payment from a foreign superannuation fund

Question 1

Can the taxpayer elect to have applicable fund earnings taxed in a complying Australian superannuation fund?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 2014

The scheme commences on:

1 July 2013

Relevant facts and circumstances

Your client ceased employment in an overseas country.

In the 200X income year your client became a resident of Australia for tax purposes.

Your client is a permanent Australian resident.

Your client is a member of a regulated pension fund (the Overseas Fund) in the overseas country.

The Overseas Fund is maintained for the purpose of providing benefits to its citizens at retirement and does not allow for the release of benefits for the purpose of housing, medical expenses, etc

The transfer value of your client's benefits in the Overseas Fund as at a date in the 200X income year has been provided.

No contributions have been made by your client to the Overseas Fund since your client became a resident of Australia.

During the relevant income year your client intends to transfer the balance of your client's benefits in the Overseas Fund to a complying Australian superannuation fund (the Fund).

The transfer of your client's balance benefits in the Overseas Fund to the Fund will result in your client no longer having any interests left in the Overseas Fund.

You have provided details of your client's total benefits in the Overseas Fund as at a date in the relevant income year.

Documentation has been provided which shows the conditions and requirements that must be satisfied for a transfer of a member's benefits from the Overseas Fund to a fund held in another country.

Your client has been making contributions to the Fund for many years.

Your client intends, subject to the private ruling, to lodge an election with the Fund to have all your client's benefits in the Overseas Fund transferred to it.

Your client is less than 55 years of age.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 292-85(2).

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(2).

Income Tax Assessment Act 1997 Subsection 305-70(3).

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 305-80(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 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

The facts show that your client can make an election in relation to the applicable fund earnings on the lump sum payment your client receives from a foreign superannuation fund.

The amount of the applicable fund earnings (if any) specified in the election notice is included in the assessable income of your client's complying Australian superannuation fund and subject to tax at 15% rather than being included in your client's assessable income and subject to tax at your client's marginal rate of tax.

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 is 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) of the ITAA 1997 applies where the person was an Australian resident at all times during the period to which the LSP relates. Subsection 305-75(3) applies where the person becomes an Australian resident after the start of the period to which the LSP 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

(a) 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 lump sum payment to be considered a payment from a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997, the paying fund must be a provident, benefit, superannuation or retirement fund established and administered overseas.

In the present case it is evident that the fund established in an overseas country (the Overseas Fund) is not an Australian superannuation fund as defined in subsection 295-95(2) of the ITAA 1997.

Further, the documentation provided in relation to the terms and conditions of the Overseas Fund indicate benefits are only paid on retirement and the fund would meet the definition of superannuation fund. Therefore, on the basis of the information provided, the Commissioner considers the LSP the client will receive is from a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997.

Calculation of Assessable Amount

Your client became a resident of Australia for tax purposes in the 200X income year and intends to receive a lump sum payment from the Overseas Fund during the relevant income year. As this is more than 6 months after your client became an Australian resident, and the Overseas Fund is a foreign superannuation fund, 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 your client became an Australian resident after the start of the period to which the lump sum relates, the calculation of applicable fund earnings will be in accordance with subsection 305-75(3) and the formula therein.

In short, the amount of the transferred lump sum benefit which is assessed is the income earned (the accretion) in respect of the Overseas Fund less any contributions your client made since becoming a resident of Australia, i.e. the 'applicable fund earnings'. 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.

In this case it is noted that your client intends to make an election for the transfer of all of your client's benefits in the Overseas Fund to a complying Australian superannuation fund (the Fund).

Election under section 305-80 of the ITAA 1997

A person transferring their overseas superannuation directly to an Australian complying superannuation fund more than six months after becoming a resident, can elect under subsection 305-80(1) of the ITAA 1997 to have part of the payment otherwise assessable under section 305-70 of the ITAA 1997 treated as assessable income of the Australian superannuation fund.

Section 305-80 of the ITAA 1997 states as follows:

1. This section applies if:

(a) section 305-70 applies to a superannuation lump sum that is paid from a foreign superannuation fund; and

(b) you are taken to receive the lump sum under section 307-15; and

(c) all of the lump sum is paid into a complying superannuation fund; and

(d) immediately after the lump sum is paid the complying superannuation fund, you no longer have a superannuation interest in the foreign superannuation fund.

2. You may choose for all or part of your applicable fund earnings worked out under section 305-75 (but not exceeding the amount of the lump sum) to be included in the assessable income of the complying superannuation plan.

3. Your choice:

(a) must be in writing; and

(b) must comply with the requirements (if any) specified in the regulations.

The amount of the applicable fund earnings (if any) specified in the election notice is included in the assessable income of the superannuation fund and subject to tax at 15% rather than being included in the person's assessable income and subject to tax at the person's marginal rate.

To qualify, the person must, immediately after the relevant payment is made, no longer have an interest in the paying fund. Therefore section 305-80 of the ITAA 1997 will not apply unless the person transfers their total superannuation interest in the foreign superannuation fund to a complying superannuation fund in Australia.

The election must be made in writing and comply with the requirements specified in the Income Tax Assessment Regulations 1997. A person will be precluded from making an election if they make a part transfer from the relevant overseas fund.

In your client's case, the facts show that there is nothing, provided the election is made as discussed above, to preclude your client from making an election to have the applicable fund earnings, as your client specifies in the election, to be treated as assessable income of the Fund.

Limits on concessional contributions

Concessional contributions made to superannuation funds are subject to an annual cap. The concessional contributions cap are indexed to upward movements of average weekly ordinary time earnings (AWOTE) in $5,000 increments. The annual cap for the 2013-14 income year is $25,000 (paragraph 291-20(2)(a) of the ITAA 1997).

Concessional contributions include employer contributions and personal contributions claimed as a tax deduction by a self-employed person.

A person will be taxed on concessional contributions over the $25,000 cap at a rate of 31.5%.

If a person has more than one fund, all concessional contributions made to all their funds are added together and count towards the cap.

Amounts in excess of the concessional contributions cap are also counted towards the non-concessional contributions cap.

Paragraph 291-25(2)(c) of the ITAA 1997 states amounts which are excluded from being concessional contributions. One of the exclusions from being a concessional contribution is an amount mentioned in subsection 295-200(2) of the ITAA 1997 which relates to:

The assessable income of a fund that is a complying superannuation fund for the income year includes so much of an amount transferred to the fund from a fund that was a foreign superannuation fund for the income year as is specified in a choice made by a former member of the foreign fund under section 305-80.

As noted earlier, the amount of the applicable fund earnings in relation to the transfer of benefits from a foreign superannuation fund to an Australian superannuation fund that is covered by an election under section 305-80 of the ITAA 1997 is treated as assessable income of the Australian superannuation fund. Therefore, in view of paragraph 291-25(2)(c) of the ITAA 1997, the amount covered by the election will not be treated as a concessional contribution to the Australian superannuation fund. Consequently, this amount will not count towards the concessional contributions cap for the relevant year.

Thus, when full entitlements are transferred from one or more funds in an overseas country to an Australian superannuation fund, the amount of the applicable fund earnings relating to each transfer which a person elects to be assessable income of the Australian fund under subsection 305-80(2) of the ITAA 1997 will not be treated as a concessional contribution to the Australian superannuation fund.

Limits on non-concessional contributions

Non-concessional contributions made to a complying superannuation fund will be subject to an annual cap (subsection 292-85(2) of the ITAA 1997). The annual cap for the 2013-14 income year is $150,000.

Non-concessional contributions include:

· personal contributions for which an income tax deduction is not claimed;

· contributions a persons' spouse makes to their superannuation fund account; and

· transfers from foreign superannuation funds (excluding amounts included in the funds assessable income).

As noted above, the amount of the applicable fund earnings in relation to the transfer of benefits from a foreign superannuation fund to an Australian superannuation fund that is covered by an election under subsection 305-80(2) of the ITAA 1997 is treated as assessable income of the Australian superannuation fund. Therefore, this amount will not be treated as a non-concessional contribution to the Australian superannuation fund and will not count towards the taxpayer's non-concessional contributions cap for the relevant year.

The remainder of the superannuation benefit transferred from the foreign superannuation fund will be treated as a non-concessional contribution to the Australian superannuation fund and will count towards the taxpayer's non-concessional contributions cap for the relevant year. This will include the amount, if any, of the applicable fund earnings not covered by the election under subsection 305-80(2) of the ITAA 1997.

A person will be taxed on non-concessional contributions over the cap at the rate of 46.5% (subsection 292-80 of the ITAA 1997 and sections 4 and 5 of the Superannuation (Excess Non-concessional Contributions Tax) Act 2007). The person will be required to ask their superannuation fund to release an amount that is equal to the tax liability (section 292-410 of the ITAA 1997).

As a concession, to accommodate larger contributions, persons under age 65 in an income year are able to bring forward future entitlements to two years worth of non-concessional contributions. This means a person under age 65 will be able to contribute non-concessional contributions totalling $450,000 over three income years without exceeding their non-concessional contributions cap (subsections 292-85(3) and (4) of the ITAA 1997).

The bring forward will be triggered automatically when contributions in excess of the annual non-concessional contributions cap are made in an income year by a person who is under age 65 at any time in the year where a bring forward has not already commenced (subsection 292-85(3) of the ITAA 1997).

Where a bring forward has been triggered, the two future years' entitlements are not indexed.

Conclusion

Your client will need to advise the Fund the assessable amount (the applicable fund earnings) relating to the payment transferred from the Overseas Fund which your client elects to have included as assessable income of the Fund.