Edited version of private advice

Authorisation Number: 1012640541651

Ruling

Subject: Lump sum transferred from a foreign fund

Question

Is any part of a lump sum payment 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 Act 1997 (ITAA 1997)?

Answer

No.

This ruling applies for the following period

Year ended 30 June 2014

The scheme commenced on

1 July 2013

Relevant facts and circumstances

You resided in an overseas country and became a member of a fund (the Fund) in the overseas country.

You migrated to Australia and became a resident of Australia for tax purposes at a specified date in the 200Xincome year (the residency date).

The terms and conditions relating to the Fund, indicate that you could not access the benefits other than for retirement purposes.

Under the law of the overseas country, for benefits to be transferred to an Australian superannuation fund, the fund must be a Qualifying Recognised Overseas Pension Scheme (QROPS).

You have advised that your benefits have been transferred from the Fund to a fund in Australia, (the Australian Fund) which is a QROPS for legislative purposes of the overseas country and a complying superannuation fund for Australian income tax purposes.

You have advised that you could not obtain a value in the Fund as at the day before you became an Australian resident.

The Commissioner considers it reasonable to estimate your total transfer value in the Fund as at the day before you became an Australian resident. This figure was arrived at by reducing the value of your benefits as at the date of transfer in the 2013-14 income year and by an agreed inflation percentage.

You have agreed with the estimated total transfer value of your lump sum benefits in the Fund, as at the day before you became an Australian resident.

At a specified date during the 2013-14 income year, your benefits from the Fund were transferred to the Australian Fund.

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

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

You are under the age of 65 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 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 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

The applicable fund earnings is calculated by translating the amount received from a fund in an overseas country (the Fund) at the exchange rate applicable on the day of transfer into Australian dollars (A$), and deducting from this amount the A$ equivalent of the amount vested in the Fund on the day just before you first became an Australian resident at the exchange rate applicable on that day.

Using the specified date during the 2013-14 income year (the transfer date), no part of your payment transferred from the Fund to the Australian superannuation fund is assessable as the applicable fund earnings relating to the payment transferred on this date is nil.

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.

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.

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) 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 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 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 SIS Act.

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, they 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 the Fund established in the overseas country, is not an Australian superannuation fund as defined in subsection 295-95(2) of the ITAA 1997.

The terms and conditions in relation to the Fund indicate benefits are only paid on retirement and these funds would meet the definition of a superannuation fund. 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 benefits are transferred 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 during the 200X income year and the payment was transferred during a specified date in the 2013-14 income year. As this was 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) as 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 as 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:

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 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 funds 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 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.

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 you finally received 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 (A$) at the exchange rate applicable at the time of receipt.

When the amount in the foreign fund that was vested in you just before you 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 1997) 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 A$ and deducting from this amount the A$ equivalent of the amount vested in the fund at the exchange rate applicable just before the day you first became an Australian resident.

Amounts to be used in calculation

Your total vested amount in the Fund the day before you became an Australian resident has been estimated.

The value of your benefits in the Fund on the day before you became a resident of Australia 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 Fund since you migrated to Australia. Since you became an Australia resident there has been no transfers into the Fund from other foreign pension schemes.

As at a specified date in the 2013-14 income year, your benefits in the Fund was paid out to you in the form of a one-off lump sum which was transferred directly into a complying Australian superannuation fund, (the Australian Fund). Therefore this is the amount vested when the lump sum was paid. This amount is converted into Australian dollars at the exchange rate that applied on that day.

In accordance with the Commissioner's view in ATO Interpretative Decision ATO ID 2009/124, '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, that period is from the date you became an Australian resident, to the specified date in the 2013-14 income year when the payment was made. You were a resident for the whole of all this 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.

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

Calculation of the assessable amount of the payment

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 together.

This total is then subtracted from the amount determined under paragraph 305-75(3)(b) of the ITAA 1997.

This figure is multiplied by the proportion of the total days determined under paragraph 305-75(3)(c) of the ITAA 1997.

To this figure we add the amounts determined under paragraph 305-75(3)(d) of the ITAA 1997.

As the amount calculated is less than zero, no amount of the benefits transferred to the Australian Fund will be included as assessable 'applicable fund earnings' in the 2013-14 income year.

Conclusion

No part of the payment transferred from the Fund to your Australian superannuation fund is assessable as the applicable fund earnings relating to the payment is nil.

Taxation consequences of subsequent withdrawal from an Australian superannuation fund

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