Edited version of your written advice

Authorisation Number: 1012690426547

Ruling

Subject: Transfer of benefits from foreign funds

Question

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

Answer

Yes.

This review applies for the following period

Year ended 30 June 2014

The scheme commenced on

1 July 2013

Relevant facts and circumstances

Your client resided in an overseas country (the overseas country) and became an Australia resident for tax purposes, on a specified date (the residency date).

Your client was a member of a number of pension funds in the overseas country.

The value of your client's benefits in a number of the funds as at the day before the residency date) has been provided.

You have advised that your client could not obtain a value in a specified fund as at the day before residency date however your client's benefits increased by a specified inflation percentage.

The Commissioner considers it reasonable to assume that your client's estimated total transfer value in the specified fund as at the day before your client became an Australian resident. This figure was arrived at by reducing the value of your client's benefits as at a specified date and based on changes to an inflation percentage.

You have agreed with the estimated total transfer value of your client's benefits in the specified fund, as at the day before your client became an Australian resident. You have agreed with this amount being used to calculate the fund earnings (if any) in the specified fund.

You have advised that under the terms and conditions relating to the overseas funds, your client 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 during the 2013-14 income year, and more than six months after becoming a permanent resident, your client's benefits were transferred from the overseas funds to a fund in Australian (the Australian Fund) which is a QROPS for legislative purposes of the overseas country and a complying superannuation fund for Australian income tax purposes.

Your client no longer had an interest in the overseas pension funds when the benefits were transferred.

Since your client migrated to Australia there have been no contributions or pension amalgamations to the overseas funds with the exception of one of the overseas funds (Fund X).

During the 2009-10 income year, whilst your client was an Australian resident, additional contributions were made to Fund X.

There have been no transfers into the pension funds from other foreign pension schemes by your client since becoming a resident of Australia.

Your client is under 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 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 960-50(6)

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 regulations 960-50.01

Summary

The amounts calculated for each fund are to be included as assessable 'applicable fund earnings' and will be subject to tax at 15% in the Australian Fund for the 2013-14 income year.

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 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 remainder of the lump sum payment is not assessable income and is not exempt income.

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.

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 (SIS Act), 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 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 lump sum payments from the overseas fund to be considered to be payments 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) of the ITAA 1997. 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.

It is evident that the payers of the payments, made from the overseas pension schemes are established outside of Australia. Similarly, the central management and control is outside of Australia.

You have advised that under the terms and conditions of the overseas funds your client could not access the funds other than at retirement.

On the basis of the information provided, the Commissioner considers that the overseas funds are 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 during the 2009-10 income year and the payments were transferred from the pension funds in the overseas country during the 2013-14 income year. As this was more than six months after your client became an Australian resident, 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 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, 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).

In short, your client is assessed only on the income earned (the accretion) in respect of the overseas pension funds less any contributions your client made since your client 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 (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 client's 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 payments transferred for your client are not included in any of the other items in the table so the payments will fall within item 11. Under this item, the payments are translated into Australian dollars at the exchange rate applicable at the time of receipt.

When the amounts in the foreign funds that were vested in your client just before your client 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 amounts received from the foreign funds at the exchange rate applicable on the day of receipt to Australian dollars and deducting from these amounts the Australian dollar equivalent of the amount vested in the funds at the exchange rate applicable just before the day your client first became an Australian resident.

Amounts to be used in calculation

The value of your client's benefits in the overseas pension funds the day before your client became a resident of Australia are converted into Australian dollars at the exchange rate that applied on that day.

You have advised that since your client migrated to Australia there have been no contributions or pension amalgamations to each fund since your client become a resident of Australia with the exception of Fund X.

Whilst an Australian resident, your client made additional contributions to Fund X during the 2009-10 income year. As this day was a public holiday in Australia, this amount is converted into Australian dollars at the exchange rate that applied on the next working day. This amount is to be used in the formula to calculate the applicable fund earnings (if any) for Fund X.

Your client's benefits were paid from the overseas pension funds to your client in the form of one-off lump sums which were transferred directly into a complying Australian superannuation fund, (the Australian Fund). These amounts were vested for your client when the lump sums were paid.

The amounts were converted into Australian dollars at the exchange rate that applied on the day they were transferred.

'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.

Your client was a resident for the whole of all these periods. 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.

Applying subsection 305-75(3) of the ITAA 1997 to your client's circumstances, the amounts to be used in calculating the applicable fund earnings for each overseas fund with the exception of Fund X are as follows:

Applying subsection 305-75(3) of the ITAA 1997 to your client's circumstances, the amounts to be used in calculating the applicable fund earnings for Fund X is as follows:

Calculation of the assessable amount of each benefit

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).

Similarly, the amounts to be used in calculating the applicable fund earnings for your client's benefits from each fund include the amounts for both the lump sum received (paragraph 305-75(3)(b) of the ITAA 1997) and the value in each fund as at the day before the residency date (subparagraph 305-75(3)(a)(i).

Conclusion

A portion of the lump sum payments transferred from the overseas funds are to be included as assessable 'applicable fund earnings' and will be subject to tax at 15% in the Australian Fund for the 2013-14 income year.