Edited version of your written advice

Authorisation Number: 1012696148279

Subject: Lump sum payment from a foreign superannuation fund

Question

Is any part of the amounts transferred from an overseas pension scheme assessable as applicable fund earnings under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following period:

The year ended 30 June 2014.

The scheme commences on:

1 July 2013.

Relevant facts and circumstances

Some years ago you migrated to Australia and have been an Australian resident for tax purposes since the date of migration (the Residency Date).

You held two pension accounts in a pension scheme (the Overseas Pension Scheme) established in an overseas country.

You have advised us of the value of your pension accounts on the date before the Residency Date.

You cannot access your benefits in the Overseas Pension Scheme other than at retirement.

There have been no contributions to the Overseas Pension Scheme since you migrated to Australia.

During the 2013-14 income year, you transferred the benefits from your first account in the Overseas Pension Scheme to a complying Australian superannuation fund (the Australian Fund).

At a later point during the 2013-14 income year, you transferred the benefits from your second account in the Overseas Pension Scheme to the Australian Fund.

You no longer have an interest in the Overseas Pension Scheme.

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(4)

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

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

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)

Income Tax Assessment Regulations 1997 Regulation 960.50.01

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

A portion of the first lump sum transfer from the Overseas Pension Scheme should be included as assessable 'applicable fund earnings' in your income tax return for the 2013-14 income year.

A portion of the second lump sum transfer from the Overseas Pension Scheme should be included as assessable 'applicable fund earnings' in your income tax return 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 ITAA 1997.

The applicable fund earnings amount is subject to tax at the person's marginal tax rate. The remainder of the lump sum payment is not assessable income and is not exempt income.

The applicable fund earnings is worked out under either subsection 305-75(2) or 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 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.

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.

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).

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'.

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 the Superannuation Industry (Supervision) Regulations 1994 (SISR)) 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 and the SISR.

It is evident that the Overseas Pension Scheme was established outside of Australia and has its central management and control outside of Australia. In addition, the information provided indicates your benefits in the Overseas Pension Scheme are only payable upon retirement.

Therefore, the Commissioner considers that the Overseas Pension Scheme is a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997.

Applicable fund earnings

You became a resident of Australia for tax purposes on the Residency Date and have received two lump sum payments in respect of your entitlements in the Overseas Pension Scheme on two different dates during the 2013-14 income year. As these payments occurred 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 for the relevant year.

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).

Furthermore, as you received more than one lump sum payment from the Overseas Pension Scheme, subsection 305-75(4) of the ITAA 1997 will apply alongside subsection 305-75(3) of the ITAA 1997 in relation to the second lump sum payment.

Subsection 305-75(4) of the ITAA 1997 states:

If the lump sum is not the first lump sum from the fund you have received to which this section applies, for subsections (2) and (3) the start day is the day after you received the most recent such lump sum.

The effect of section 305-75 of the ITAA 1997 is that you are assessed only on the income you earned on your benefits in the overseas pension scheme less any contributions you made since you 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. The applicable fund earnings is the result of a calculation from two other amounts and subsection 960-50(4) of the ITAA 1997 states that when applying section 960-50 of the ITAA 1997 to amounts that are elements in the calculation of another amount you need 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, the 'applicable fund earnings' should be calculated by:

• translating the amount in the Overseas Pension Scheme that was vested in you when the lump sum was paid at the exchange rate applicable on the day of receipt to Australian dollars (item 11 of the table to subsection 960-50(6)of the ITAA 1997); and

• deducting from this amount the Australian dollar equivalent of the amount vested in the Overseas Pension Scheme at the exchange rate applicable just before the start day (item 11A of the table to subsection 960-50(6) of the ITAA 1997. Refer to regulation 960.50.01 of the Income Tax Assessment Regulations 1997).

Amounts to be used in calculations in relation to the first lump sum payment

The value of your two accounts in the Overseas Pension Scheme on the day before you became an Australian resident is converted into Australian dollars at the exchange rate that applied on the day before the Residency Date.

From the facts provided no contributions have been made to the Overseas Pension Scheme since you migrated to Australia.

There have been no transfers into the Overseas Pension Scheme from other foreign pension schemes since the Residency Date.

During the 2013-14 income year, the benefits from your first pension account were transferred directly into the Australian Fund in the form of a lump sum payment. As this amount is already in Australian dollars, no further currency conversion is required.

You also provided the value of your second account in the Overseas Pension Scheme on the date of the transfer. This amount is converted into Australian dollars at the exchange rate that applied on the day.

'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 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 lump sum.

Calculation of the assessable amount of the first payment

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).

Consequently, you should include a portion of the first lump sum payment transferred from the Overseas Pension Scheme to the Australian Fund as assessable 'applicable fund earnings' in your income tax return for the 2013-14 income year.

Amounts to be used in calculations in relation to the second lump sum payment

You provided the value of your interest remaining in the Overseas Pension Scheme just before the start day (the start day in this instance being the day after you received the most recent lump sum). This value is converted into Australian dollars (A$) at the exchange rate that applied on that day. This amount is the amount in the Overseas Pension Scheme vested in you just before the start day.

From the facts provided no contributions have been made to the overseas pension scheme since the start day.

There have also been no transfers into the pension scheme from other foreign pension schemes since the start day.

Later in the 2013-14 income year, your remaining benefits in the Overseas Pension Scheme were transferred directly into the Australian Fund in the form of a second lump sum payment. As this amount is already in Australian dollars, no further currency conversion is required. This amount is the amount in the overseas pension vested in you when the second lump sum payment was received.

'The period' for the purposes of paragraph 305-75(3)(c) of the ITAA 1997 commences on the start day and ceases on the day the lump sum is paid. You were a resident for the whole of 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 lump sum.

Calculation of the assessable amount of the second lump sum payment

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).

Therefore you should include a portion of the second lump sum payment transferred from the Overseas Pension Scheme to the Australian Fund as assessable 'applicable fund earnings' in your income tax return for the 2013-14 income year.