Edited version of your private ruling

Authorisation Number: 1012531887548

Ruling

Subject: Lump sum payment from a foreign superannuation fund

Questions:

Is any part of the transfer of funds from a foreign pension scheme to an Australian complying superannuation fund included in your assessable income as applicable fund earnings?

Is the value of the foreign pension scheme between the day just before the residency date and the date of transfer to an Australian complying superannuation fund determined according to the exchange rates on those specific dates?

Advice/Answers:

Yes.

Yes.

This ruling applies for the following period:

1 July 2013 to 30 June 2014

The scheme commenced on:

1 July 2013

Relevant facts:

You are under 65 years of age.

You became a resident of Australia for tax purposes more than five years ago (the residency date).

Before coming to Australia you worked for a company in a foreign country and were a member of the company pension fund (the foreign fund).

The value of your benefit in the foreign fund on the day before the residency date was provided.

No contributions were made for you or by you to the foreign fund after you became a resident of Australia.

You anticipate transferring your retirement savings to Australia into a complying superannuation fund during the 2013 calendar year.

You will no longer have an interest in the foreign fund.

You have advised that the foreign fund pays out benefits at retirement from the age of 55 years.

The current value of your benefit has been provided.

Relevant legislative provisions:

Income Tax Assessment Act 1997 Section 305-55

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 Paragraph 305-75(3)(a)

Income Tax Assessment Act 1997 Paragraph 305-75(3)(b)

Income Tax Assessment Act 1997 Paragraph 305-75(3)(c)

Income Tax Assessment Act 1997 Paragraph 305-75(3)(d)

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

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

Income Tax Assessment Act 1997 Section 305-80

Income Tax Assessment Act 1997 Section 307-65

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

Income Tax Assessment Act 1997 Subsection 960-50

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

Superannuation Industry (Supervision) Act 1993 Section 10

Superannuation Industry (Supervision) Act 1993 Section 62

Income Tax Assessment Act 1997 Section 292-80

Income Tax Assessment Act 1997 Section 292-85

Income Tax Assessment Act 1997 Section 292-85(2)

Income Tax Assessment Act 1997 Section 292-85(3)

Income Tax Assessment Act 1997 Section 292-90

Income Tax Assessment Act 1997 Subsection 292-90(2)(b)

Income Tax Assessment Act 1997 Subparagraph 292-90(2)(c)(ii)

Income Tax Assessment Act 1997 Subparagraph 292-90(2)(c)(iv)

Income Tax Assessment Act 1997 Subparagraph 292-90(2)(c)(v)

Income Tax Assessment Act 1997 Subparagraph 292-90(2)(c)(vi)

Income Tax Assessment Act 1997 Subsection 292-90(4)

Reasons for decision

Summary

Tax is payable on the applicable fund earnings.

The exchange rates used in determining the change in value of the foreign pension scheme are those that apply on the day before the residency date and the date of transfer to the Australian complying superannuation fund.

You can transfer $450,000 to the Australian complying super fund in one financial year by triggering the bring forward provisions.

In the fourth financial year you can transfer the remainder by triggering the bring forward provisions once again.

Detailed reasoning

Non-concessional contributions

Non-concessional contributions are contributions made to a complying superannuation fund which are not included in the assessable income of the complying superannuation fund. Certain contributions are excluded from being non-concessional contributions.

Non-concessional contributions made to a complying superannuation fund will be subject to an annual cap. In the 2013-14 income year the annual cap is $150,000. If the cap is exceeded, excess contributions tax is payable.

Non-concessional contributions include transfers from foreign superannuation funds, excluding amounts included in the fund's assessable income as applicable fund earnings.

Consequently, the transfer of moneys from your foreign fund to an Australian superannuation fund will primarily be non-concessional contributions.

Bring forward provisions

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.

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, where a bring forward has not already commenced in the previous two years.

For example, if you transferred an amount between $150,000 and $450,000 from your foreign fund to a complying Australian superannuation fund during the 2013-14 income year, you would automatically trigger the bring forward, and if transferring over $450,000, you would have an amount of excess non-concessional contributions (less any applicable fund earnings) which would be taxed at a rate of 46.5%.

Also, you would not be able to make any further non-concessional contributions in the 2014-15 and 2015-16 income years.

Acceptance of contributions by a superannuation fund

The Superannuation Industry (Supervision) Regulations 1994 (SISR) also limits the contributions that a regulated superannuation fund may accept.

For a person under age 65, a regulated superannuation fund must not accept any fund-capped contributions in a financial year in respect of a member that exceed three times the amount of the non-concessional contributions cap, ie $450,000.

Fund-capped contributions are primarily non-concessional member contributions, excluding certain specified contributions. Benefits transferred from an overseas fund are not specifically excluded.

Subregulation 7.04(4) of the SISR provides that if a regulated fund receives fund capped contributions over the cap:

(a) the fund must return the amount to the entity or the person that paid the amount within 30 days of becoming aware that the amount was received in a manner that is inconsistent with subregulation ... (3)

Therefore, the full amount of a fund-capped contribution that exceeds the cap should be returned to the entity or person who made the contribution.

ATO Interpretative Decision ATOID 2008/90 Superannuation: Superannuation contributions: return of fund capped contributions by self-managed superannuation fund (ATOID 2008/90) outlines our view regarding the return of fund-capped contributions and states that a superannuation fund must not accept a fund-capped contribution for a member that exceeds three times the amount of the non-concessional contributions cap.

Consequently, if the amount you wish to transfer includes fund capped contributions exceeding the $450,000 cap, the Australian fund will only be able to accept $450,000.

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. Subsection 305-75(3) applies where the person was not 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. Federal Commissioner of Taxation (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'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 information provided in relation to the overseas fund indicate benefits are only paid on retirement after age 55 and the Fund would meet the definition of superannuation fund. In addition, it is clear the payer of the lump sum payment is established in a foreign country, that is, outside of Australia with its central management and control outside of Australia. Therefore, on the basis of the information provided, the Commissioner considers the lump sum payment you will receive is from a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997.

Applicable fund earnings

You became a resident of Australia for tax purposes more than five years ago and you anticipate receiving the lump sum payment in the 2013-14 financial year. As the payment will be received more than six months after you became an Australian resident, section 305-70 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 payment less any contributions you 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) requires that when applying section 960-50 to amounts that are elements in the calculation of another amount, one needs to:

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

· then, calculate the other amounts.

For the purposes of section 305-70 of the ITAA 1997, the applicable fund earnings should be calculated by:

· translating the lump sum payment received from the relevant pension plan at the exchange rate applicable on the day of receipt to Australian Dollars; and

· deducting from this amount the Australian Dollars equivalent of the payment vested in the relevant pension plan at the exchange rate applicable on the day just before the residency date.

The value in your foreign fund on your residency date is translated into Australian dollars at the exchange rate on that day.

Amounts to be used in calculation

You have not yet transferred an amount from your foreign fund. As an example of how applicable fund earnings are determined, the following example is provided. Any amount assessable to you as applicable fund earnings will need to use the actual figures applying to the transfer.

Note that the amount used for paragraph 305-75(3)(b) of the ITAA 1997 is the amount vested in the foreign fund at the time of the transfer and not the actual amount transferred.

The applicable fund earnings, however, can not be less than zero or more than the amount of the lump sum you transfer.

Applying subsection 305-75(3) of the ITAA 1997, the applicable fund earnings are as follows:

305-75(3)(a)(i) Value in Australian dollars on your residency date

305-75(3)(a)(ii) Contributions after residency date

305-75(3)(a)(iii) Transfers from other foreign schemes

305-75(3)(b) Value in $Australian vested in you on payment date

305-75(3)(c) 1 - as residency days and total days are the same

305-75(3)(d) Previously exempt earnings

Calculation of the assessable amount of the lump sum transferred

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).

The result of the above calculation is the amount of the lump sum payment from the foreign Fund will be included as assessable 'applicable fund earnings' in your tax return for the 2013-14 income year.

Under previously exempt provisions, any amounts in the lump sum paid to Australia by a foreign superannuation fund which had previously been transferred into that fund from a second foreign superannuation fund are included in applicable fund earnings (i.e. as assessable income) to the extent that they would have been included in assessable income if they had originally been paid to Australia instead of being transferred to the second foreign superannuation fund.

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.

To qualify, you must, immediately after the relevant payment is made, no longer have an interest in the paying fund (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 Assessment Regulations 1997 (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.

If you still have a further interest in the foreign fund, as a result of the fund capped amount discussed above, only some of your benefits have been transferred to a complying superannuation fund in Australia. If this is the case, you will not be eligible to make an election under subsection 305-80 of the ITAA 1997 to have all or part of the assessable income treated as assessable income of the Australian superannuation fund.