Edited version of your private ruling

Authorisation Number: 1012592401502

Ruling

Subject: Lump sum payment from a foreign fund

Question

Is any part of the lump sum payment to be transferred from a pension scheme in an overseas country to an Australian superannuation fund assessable as applicable fund earnings under section 305-70 of the Income Tax Assessment 1997 (ITAA 1997)?

Advice/Answer

Yes.

This review applies for the following period

Year ended 30 June 2014

The scheme commences on

1 July 2013

Relevant facts and circumstances

Over 30 years ago, you commenced membership with a fund (Fund A) in an overseas country.

Over 20 years ago, you arrived in Australia and became a resident for tax purposes.

You were advised that your benefits with Fund A had been transferred to another overseas fund (Fund B) during the 200X income year.

You were unable to provide the total value of your benefits at the time of transfer from Fund A to Fund B.

From the information provided the benefits in Fund B increase each year in line with inflation.

You have agreed with the estimated transfer value of your benefits (Amount 1) as at the day before you became an Australian resident. This figure was arrived at by reducing the value of your benefit as at a specified date in the 20XX income year by an agreed inflation percentage.

You have agreed with the estimated value of your benefits (Amount 2) transferred from Fund A to Fund B during the 200X income year. This figure was arrived at by reducing the value of your benefit in the 20XX income year by an agreed inflation percentage.

Fund B provided you with a quotation of the surrender value of your benefits (Amount 3) as at a specified date in the 20XX income year. This value is guaranteed for a specific time.

You intend to transfer your benefits in Fund B to a complying superannuation fund in Australia, (the Australian Fund).

You will no longer have an interest in Fund B after the benefits have been transferred.

No contributions have been made by you or anyone on your behalf since you became a resident of Australia.

From the information you have provided you could not access the benefits in Fund A or Fund B other than at retirement or death.

You are over the age of 55 years.

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 Paragraph 305-75(2)(a).

Income Tax Assessment Act 1997 Paragraph 305-75(2)(b).

Income Tax Assessment Act 1997 Paragraph 305-75(2)(c).

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

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

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

Income Tax Assessment Act 1997 Subsection 305-80(1)

Income Tax Assessment Act 1997 Subsection 305-80(2)

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 960-50(6).

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

Superannuation Industry (Supervision) Act 1993 Section 10.

Superannuation Industry (Supervision) Act 1993 Subsection 10(1).

Superannuation Industry (Supervision) Act 1993 Section 19.

Superannuation Industry (Supervision) Act 1993 Section 62.

Income Tax Assessment Regulations 1997 Regulation 960-50.01.

Summary

A portion of the lump sum payment to be transferred from Fund B to a complying Australian superannuation fund will be included as assessable 'applicable fund earnings'.

As you will no longer have an interest in Fund B after the transfer is made you will be eligible to make an election to have these applicable fund earnings treated as assessable income of the Australian superannuation 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 will be 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) 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.

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 (SISA), 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 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 SISA, 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 SISA applies only to 'regulated superannuation funds' (as defined in section 19 of the SISA), and foreign superannuation funds do not qualify as regulated superannuation funds as they are established and operate outside Australia, the Commissioner views the SISA (and its attendant 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 SISA.

Therefore, in order for the LSP 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). 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 purpose of the Fund

In the present case it is evident that Fund A and Fund B established in the overseas country are not Australian superannuation funds as defined in subsection 295-95(2) of the ITAA 1997.

The information provided in relation to the terms and conditions of Fund A and Fund B indicate benefits are only paid on retirement and both funds would meet the definition of superannuation funds. In addition, it is clear the payer of the lump sum payment is established outside of Australia with its central management and control outside of Australia.

Therefore, on the basis of the information provided, the Commissioner considers the LSP transferred for you from Fund A to Fund B are from foreign superannuation funds 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 over 30 years ago and the LSP is to be transferred in the 20XX income year. As this is 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(2) applies where the person was an Australian resident at all times during the period to which the lump sum relates. In this case you became a member of Fund B after you became a resident of Australia, so the period to which this lump sum relates commenced in the 200X income year.

Subsection 305-75(2) of the ITAA 1997 states:

If you were an Australian resident at all times during 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 part of the lump sum that is attributable to contributions made by or in respect of you on or after the day when you became a member of the fund (the start day);

(ii) the part of the lump sum (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 income tax);

c) add the total of all your previously exempt fund earnings (if any) covered by subsections (5) and (6).

Subsection 305-75(5) of the ITAA 1997 defines previously exempt fund earnings as follows:

You have an amount of previously exempt fund earnings in respect of the lump sum if:

a) part or all of the amount in the fund that was vested in you when the lump sum was paid (before any deduction for foreign tax) is attributable to the amount; and

b) the amount is attributable to a payment received from a foreign superannuation fund; and

c) the amount would have been included in your assessable income under subsection 305-70(2) by the application of this section, but for the payment having been received by another foreign superannuation fund.

Subsection 305-75(6) of the ITAA 1997 states:

The amount of your previously exempt fund earnings is the amount mentioned in paragraph (5)(c) (disregarding the addition of previously exempt fund earnings under subsection (2) or (3) of this section).

Subsection 305-75(5) of the ITAA 1997 applies to each transfer, from one overseas superannuation fund to another, of the monies representing the lump sum payment. Accordingly, a calculation of the applicable fund earnings must be made for each transfer as if the amounts had actually been paid to you.

It should be noted that section 305-70 of the ITAA 1997 applies even where the lump sum is paid into an overseas bank or investment account.

In short, you are assessed only on the income earned (the accretion) in respect of Fund B, plus previously exempt fund earnings (if any) 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) 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

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

• translating the lump sum benefit received from the foreign fund at the exchange rate applicable on the day of receipt to Australian dollars (item 11 of the table in subsection 960-50(6)); and

• deducting from this amount the Australian dollars equivalent of the lump sum benefit vested in the foreign fund at the exchange rate applicable just before the residency date (item 11A of the table in subsection 960-50(6)).

Calculation of the assessable amount

Applying subsection 305-75(2) of the ITAA 1997 to your circumstances, the amounts to be used in calculating the applicable fund earnings for Fund B are as follows:

305-75(2)(a)(i) The amount, converted to Australian dollars of the contributions made by or in respect of you on or after the day you became a member of the fund.

305-75(2)(a)(ii) The part of the lump sum that is attributable to amounts transferred into the fund from any other foreign superannuation fund.

305-75(2)(b) The amount of the lump sum payment received, converted to Australian dollars

305-75(2)(c) The previously exempt fund earnings.

In accordance with subsection 305-75(2) of the ITAA 1997 the amounts determined at sub-paragraphs 305-75(2)(a)(i), and (ii) are added.

This total is then subtracted from the amount determined under paragraph 305-75(2)(b).

This total is added to your previously exempt fund earnings.

Therefore the applicable fund earnings has been determined. You should include this amount in your 20XX income tax return.

Election

A taxpayer who is 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 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, the taxpayer must, immediately after the relevant payment is made, no longer have an interest in the paying fund under subsection 305-80(1) of the ITAA 1997.

As you will no longer have an interest in the Fund B after the transfer is made you will be eligible to make the election.

Taxation consequences of subsequent withdrawal from an Australian superannuation fund

The amount of the payment transferred from a foreign superannuation fund to an Australian superannuation fund that is subsequently withdrawn, subject to meeting the preservation rules and conditions of release under the SISA, will be a tax-free component. A tax-free component is not assessable income and is not exempt income.

Conclusion

A portion of the lump sum payment to be transferred from Fund B will be included as assessable 'applicable fund earnings' in your tax return for the 20XX financial year, if the transfer is made to you during that financial year.

The exact amount will be dependent upon the value of the lump sum payment received and the date that it is made.

As you will no longer have an interest in Fund B you will be eligible to make an election to have the applicable fund earnings treated as assessable income of your Australian superannuation fund.