Edited version of private advice

Authorisation Number: 1012617402503

Ruling

Subject: Lump sum payment from a foreign superannuation fund

Question

Is any part of a lump sum payment received from a foreign superannuation fund assessable as applicable fund earnings as worked out under section 305-75 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer:

Yes.

This ruling applies for the following period:

Income year ending 30 June 2014

The scheme commenced on:

During the income year ending 30 June 2014

Relevant facts:

Some years ago, you migrated to Australia from an overseas country (the Foreign Country). Prior to migrating to Australia, you became a member of a foreign pension scheme (the Foreign Scheme).

Subsequently, you became a resident of Australia for tax purposes. The date you became a resident of Australia for tax purposes is your Residency Date.

More than six months after the Residency Date, you transferred funds from the Foreign Scheme to Australia.

The funds from the Foreign Scheme were transferred to an Australian superannuation fund (the Australian Fund).

The Australian Fund is a complying superannuation fund.

The value of your Foreign Scheme pension on the Residency Date is converted to Australian dollars.

The value of your Foreign Scheme pension on the date of transfer is converted to Australian dollars.

No contributions were made to the Foreign Scheme after you became a resident of Australia.

No amounts were transferred from any foreign superannuation fund to your Foreign Scheme after you became a resident of Australia.

Since your benefits were transferred to the Australian Fund you have no other interest in the Foreign Scheme.

You could not access the benefits in the Foreign Scheme other than at retirement age.

You have made an election for an amount to be assessed as income of the Australian Fund and the rest of the transfer to be processed as a non-concessional contribution.

Assumptions:

None.

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.

Income Tax Assessment Regulations 1997 Regulation 960-50.01.

Reasons for decision

Summary

A part of the amount transferred from the Foreign Scheme to your Australian superannuation fund is assessable as the applicable fund earnings.

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 amount of applicable fund earnings, worked out under either subsections 305-75(2) or (3) of the ITAA 1997, is subject to tax at the person's marginal rates of tax. The remainder of the LSP is not assessable income and is not exempt income.

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 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.

Meaning of '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.

Therefore, there are three tests that a superannuation fund must satisfy at the same time if it is to be an Australian superannuation fund as defined in subsection 295-95(2) of the ITAA 1997. If a fund fails to satisfy any one of the tests at that particular time, it is not an Australian superannuation fund at that time, even if it satisfies the other two tests.

Based on the above, a superannuation fund that is established outside of Australia and has its central management and control outside of Australia would not qualify as an Australian superannuation fund and would, therefore be a foreign superannuation fund in accordance with subsection995-1(1) of the ITAA 1997. The fact that some of its members may be Australian residents would not necessarily alter this.

Meaning of 'superannuation fund'

'Superannuation fund' is defined in subsection 995-1(1) of the ITAA 1997 as having the meaning given by section 10 of the Superannuation Industry (Supervision) Act 1993 (SISA).

In accordance with subsection 10(1) of the SISA, superannuation fund means:

(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.

Meaning of '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.

It is evident that the Foreign Scheme is established outside of Australia. Similarly, the central management and control of the scheme is outside of Australia.

Based on the above, and the fact that you advised that you could not access your benefits from the Foreign Scheme other than on retirement, the Commissioner considers that the Foreign Scheme is a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997.

Applicable fund earnings

In your case, the payment from the Foreign Scheme was made more than six months after you became an Australian resident for tax purposes, therefore 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.

The amount included in your assessable income, and taxed at marginal rates of tax, is worked out under subsection 305-75(3) of the ITAA 1997 because you became an Australian resident after the start of the period to which the lump sum relates.

Subsection 305-75(3) of the ITAA 1997 states that 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 Foreign Scheme less any contributions you made since you became a resident of Australia.

Further, any amounts representing earnings during periods of non-residency, and transfers into the paying fund do not form part of the assessable amount when the overseas benefits are 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) of the ITAA 1997 requires that when applying section 960-50 of the ITAA 1997 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 Foreign Scheme at the exchange rate applicable on the day of receipt to Australian dollars; and

• deducting from this amount the Australian dollars equivalent of the amount vested in the Foreign Scheme at the exchange rate applicable on the day just before the Residency Date.

Amounts to be used in the calculation

Subparagraph 305-75(3)(a)(i):

This is the value of the benefit in the Foreign Scheme on the day before the Residency Date. However, in your case, the exchange rate on that day is not available as it was a weekend. Therefore the exchange date used is the one on the day before that day.

Subparagraph 305-75(3)(a)(ii):

From the facts provided no contributions have been made to the Foreign Scheme since you migrated to Australia. Therefore the value for this calculation is A$0.00.

Subparagraph 305-75(3)(a)(iii):

There have been no transfers into your account in the Foreign Scheme from other foreign pension funds. Therefore the value for this calculation is A$0.00.

Paragraph 305-75(3)(b):

Your benefits in the Foreign Scheme were paid out to you in the form of a one-off lump sum. Therefore, this is the amount vested in you when the lump sum was paid. This is converted into Australian dollars at the exchange rate that was actually applied on that day

Paragraph 305-75(3)(c):

'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. 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.

Paragraph 305-75(3)(d):

There are no previously exempt fund earnings in relation to the lump sum. Therefore the value for this calculation is A$0.00.

Summary of amounts to be used in the calculation

Applying subsection 305-75(3) of the ITAA 1997 to your circumstances, the amounts to be used in calculating the applicable fund earnings are as follows:

Calculation of the assessable amount of the payment from the Foreign Scheme 

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 is the applicable fund earnings.

Election

A taxpayer transferring their overseas superannuation benefits directly to an Australian complying superannuation fund more than six months after becoming an Australian resident, for tax purposes, 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 in the 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 of tax.

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, must specify the amount to be covered by the election and must 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.

As noted in the facts of this case, you will not have further interest in the foreign fund as all your benefits will be transferred to a complying superannuation fund in Australia. Therefore you will be eligible to make an election under subsection 305-80 of the ITAA 1997 to have an amount of up to the applicable fund earnings amount treated as assessable income of the Australian superannuation fund.

You have made an election to treat a specified amount of applicable fund earnings as assessable income of the Australian superannuation fund. Therefore the remainder will be a non-concessional contribution.