Edited version of private advice

Authorisation Number: 1012631574264

Ruling

Subject: Foreign lump sum transfer

Questions

1. Will any part of the benefit transferred from your client's first foreign pension scheme to a superannuation fund in Australia be assessable as applicable fund earnings under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997)?

2. Will any part of the benefit transferred from your client's second foreign pension scheme to a superannuation fund in Australia be assessable as applicable fund earnings under section 305-70 of the ITAA 1997?

3. Will your client be entitled to choose under section 305-80 of the ITAA 1997 to include all or part of the applicable fund earnings (if any) in the assessable income of the Australian superannuation fund?

Answers

1. No

2. No

3. Yes

This ruling applies for the following periods

Year ending 30 June 2014

The scheme commenced on

1 July 2013

Relevant facts and circumstances

Your client became a permanent resident of Australia a number of years ago.

Your client held interests in two foreign pensions and cannot access their benefits in the foreign pensions other than at retirement in the foreign country.

There have been no contributions to the foreign pensions since your client became an Australian resident for tax purposes.

Your client transferred their full amount of interest in the foreign pensions to a complying Australian superannuation fund.

You have agreed that to the values of the foreign pensions, on the day before your client migrated to Australia, to be used in the calculations.

In the 2013-14 income year, your client's benefits in the foreign pensions were transferred to the Australian superannuation fund.

Your client no longer holds any interest in the foreign pensions.

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 Subsection 305-70(1)

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 305-75 (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 Subsection 306-70

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 transferred from the two foreign pensions to the Australian superannuation fund is zero.

As a result, no amount of the lump sum payment from the foreign pensions will be included as 'applicable fund earnings' in your client's tax return for the 2013-14 income year.

If your client did have a positive figure for their applicable fund earnings, they would be eligible to make the election to have all or part of this included in the assessable income of the Australian superannuation fund.

Detailed reasoning

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 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 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.

An amount is only assessable under section 305-70 of the ITAA 1997 if the entity making the payment is a foreign superannuation fund.

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 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.

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 (the SIS Act).

Subsection 10(1) of the SIS Act provides that:

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.

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) 40 ALJR 265; (1966) 14 ATD 333; [1966] LB Co's Tax Serv 80; (1966) 10 AITR 290. 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. 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.

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.

The documentation provided indicates your client's benefits in the foreign pensions are only payable upon retirement and the funds would meet the definition of a superannuation fund. In addition, it is clear that both the foreign pensions which made the lump sum payment to your client were 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 lump sum payments received were from foreign superannuation funds as defined in subsection 995-1(1) of the ITAA 1997.

Applicable fund earnings

Your client became a resident of Australia for tax purposes a number of years ago. Your client received the lump sum payment in respect of their entitlements in the foreign pension schemes during the 2013-14 income year. As this was more than six months after your client became an Australian resident for tax purposes, section 305-70 applies to include the 'applicable fund earnings' in your client's 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).

This means your client is assessed only on the income they earned on the benefits in the foreign pension less any contributions your client made since they became a resident of Australia. Any earnings made 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 (A$). The applicable fund earnings is the result of a calculation from two other amounts and subsection 960-50(4) states that 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.

The table in subsection 960-50(6) of the ITAA 1997 sets out the translation rules. Only the following items are relevant to determining the issue in your case:

• item 11 which deals with a receipt or payment to which none of the other items apply, and

• item 11A which applies to amounts that are neither receipts nor payments and to which none of the other items apply.

Item 11 of the table in subsection 960-50(6) of the ITAA 1997 applies to a receipt or payment where none of the other items applies. The payment your client will finally receive is not included in any of the other items in the table so it will fall within item 11. Under this item, the payment is translated into Australian dollars at the exchange rate applicable at the time of receipt.

When the amount in the foreign fund that was vested in your client just before they became a resident of Australia (subparagraph 305-75(3)(a)(i) of the ITAA 1997) is determined, there is no actual receipt or payment of an amount. All that occurs is a determination of the vested amount expressed in the foreign currency.

Regulation 960-50.01 of the Income Tax Assessment Regulations 1997 (ITAR) modifies the table in subsection 960-50(6) of the ITAA 1997 to include item 11A that applies to amounts other than receipts and payments, and for which none of the other items apply. Consequently the vested amount is translated into Australian dollars at an exchange rate that is reasonable having regard to the circumstances.

Therefore, for the purposes of section 305-70 of the ITAA 1997, the 'applicable fund earnings' should be calculated by translating the amount received from the foreign fund at the exchange rate applicable on the day of receipt to Australian dollars and deducting from this amount the Australian dollar equivalent of the amount vested in the fund at the exchange rate applicable just before the day your client first became an Australian resident. Relevant exchange rates are published on the ATO's website.

Amounts to be used in calculation for the foreign pensions

Your client's total vested amounts in the foreign pensions on the day before they became an Australian resident are converted into Australian dollars at the exchange rate that applied on that day before residency.

From the facts provided no contributions have been made to the foreign pensions since your client migrated to Australia.

The amounts received in the 2013-14 income year are converted into Australian dollars at the exchange rate that applied on the dates the payments were received.

'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 for tax purposes and ceases on the day the lump sum is paid. In your client's case, that period would have been from the date they became an Australian resident to the date they received the payment, provided they were a resident for the whole of that period.

There are no previously exempt fund earnings in relation to the lump sum.

Calculation of the assessable amount of the payment from the foreign pensions

In accordance with subsection 305-75(3) of the ITAA 1997 the amounts determined at subparagraphs 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 same method is used to calculate each of the amounts involved in the two foreign pensions your client held.

As the amounts for both funds are less than zero, no amount of the lump sum payment from the foreign pensions will be included as 'applicable fund earnings' in your client's tax return for the 2013-14 income year.

Election

If your client did have a positive figure for their applicable fund earnings, they would be eligible to make the election under subsection 305-80(2) of the ITAA 1997 to have all or part of this included in the assessable income of the Australian Superannuation Fund.