Edited version of your private ruling

Authorisation Number: 1012553076981

Ruling

Subject: Lump sum payment from a foreign pension fund

Question

Is any part of a payment of the lump sum transferred from a foreign pension fund assessable as applicable fund earnings?

Answer:

No.

This ruling applies for the following period:

Year ending 30 June 2014

The scheme commenced on:

1 July 2013

Relevant facts and circumstances

You were a resident of a foreign country and a member of pension fund in that country (the Overseas Fund).

Information available shows members' benefits in the Overseas Fund can only be accessed in cases of retirement, illness or death and not for any other purposes.

You became an Australian resident several years ago.

Information was provided in relation to the value of your benefits in the Overseas Fund at the time you became an Australian resident and now.

During the 2013-14 income year you intend to transfer the balance of your benefits in the Overseas Fund to your complying Australian superannuation fund (the Fund).

You state the lump sum transfer value of your benefits in Overseas Fund will be transferred to the Fund in the 2013-14 income year.

No contributions have been made by you, or anyone on your behalf, to the Overseas Fund since you became a resident of Australia.

There have been no transfers into the Overseas Fund from other funds by you since becoming a resident of Australia.

The transfer of your lump sum payment from the Overseas Fund to the Fund will result in you no longer having any interests left in the Overseas Fund

You intend to lodge an election with the Fund to have all your benefits in the Overseas Fund transferred to it.

Relevant legislative provisions

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 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 960-50.

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

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

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 'applicable fund earnings' in respect of the lump sum payment paid from the Overseas  Fund, a foreign superannuation fund, is calculated as zero.

Consequently, no amount of the lump sum payment from the Overseas  Fund will be:

(i) included in your assessable income in the 2013-14 income year ; or

(ii) treated as assessable income of your complying Australian fund.

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 LSP you will receive 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.

The information provided indicates that in respect of the Overseas Fund the benefits are only paid on retirement and death which would meet the definition of a superannuation fund. In addition, it is clear the payer of the LSP is established outside of Australia with their central management and control outside of Australia. Therefore, on the basis of the information provided, the Commissioner considers the LSP you will receive is from a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997.

Applicable fund earnings

In this case, you became a resident of Australia for tax purposes several years ago and the LSP will be made from the Overseas Fund in the 2013-14 income year. As the payment will be made more than six months after you became an Australian resident section 305-70 of the ITAA 1997 applies to include the 'applicable fund earnings' (if any) in your assessable income.

The 'applicable fund earnings' are worked out under section 305-75 of the ITAA 1997. 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 (but before you received it) 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 remainder of 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 Overseas Fund 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 benefits are paid.

Foreign currency conversion

Subsection 960-50(1) of the ITAA 1997 requires that an amount in a foreign currency is to be translated into Australian dollars before being included in a person's assessable income.

Because applicable fund earnings is the result of a calculation from two or more other amounts, subsection 960-50(4) of the ITAA 1997 requires each foreign currency amount in that calculation to be individually translated into Australian dollars before the applicable fund earnings amount is calculated.

Amounts to be used in calculation

Your benefits in the Overseas Fund on the day before you became a resident of Australia was an amount. This is converted into Australian dollars at the exchange rate that applied on that day.

From the facts provided no contributions have been made to the Overseas Fund since you migrated to Australia. There have been no transfers into the Overseas Fund from other foreign funds by you since becoming a resident of Australia.

You state that in the 2013-14 income year your benefits in the Overseas Fund will be paid to you as a gross lump sum i.e. the LSP. Therefore this is the amount vested in you when the lump sum is paid. This is converted into Australian dollars at the exchange rate that applies on the day that the payment is made.

As the LSP has not been made, the exchange rate that applied on the date of your ruling application will be used in this instance to demonstrate how applicable fund earnings are calculated. It should be noted however that when the LSP is actually made you must use the exchange rate that applied on the date of payment.

'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, the facts provided show you are a resident for the whole of the period. Therefore, the Australian resident days and the total days are accepted as being 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.

Applying subsection 305-75(3) of the ITAA 1997 to the facts provided, the amounts to be used in calculating the applicable fund earnings for the Overseas Fund are as follows:

305-75(3)(a)(i) The amount, converted to Australian dollars, vested in you before you 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 you will receive, converted to Australian dollars

305-75(3)(c) 1

305-75(3)(d) Nil

Calculation of the assessable amount of the payment from the Fund

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, no amount of the lump sum payment from the Pension Fund will be included as assessable 'applicable fund earnings' in your tax return for the 2013-14 income year.

In your case it is noted that you intend to make an election for the transfer of all of the LSP from the Overseas Fund to be made to your complying Australian superannuation fund (the Fund).

As the above indicates there are no applicable fund earnings in relation to the LSP, it should be noted that:

(a) no amount of the LSP transferred from the Overseas  Fund will be treated as assessable income of your complying Australian fund; and

(b) the LSP will be treated as non-concessional contributions which will count towards your non-concessional contributions cap for the 2013-14 income year.