Edited version of your written advice

Authorisation Number: 1012712019999

Ruling

Subject: Lump sum payment from a foreign superannuation fund

Question

Is any part of the amount transferred from an overseas pension scheme assessable to your client 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 ending 30 June 2015.

The scheme commences on:

1 July 2014.

Relevant facts and circumstances

More than six months ago, your client arrived in Australia from an overseas country and has been an Australian resident for tax purposes since that date (the Residency Date).

Your client held two pension accounts in a pension scheme (the Overseas Pension Scheme) established and controlled in the overseas country.

Your client cannot access the benefits in the Overseas Pension Scheme other than at retirement.

There have been no contributions or pension amalgamations to the Overseas Pension Scheme since your client migrated to Australia.

In the 2014-15 income year, your client's benefits in the Overseas Pension Scheme were transferred and credited into your client's superannuation account held in a complying superannuation fund in Australia (the Australian Fund).

Your client no longer has 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 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 subparagraph 305-75(3)(a)(i)

Income Tax Assessment Act 1997 subparagraph 305-75(3)(a)(ii)

Income Tax Assessment Act 1997 subparagraph 305-75(3)(a)(iii)

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 305-80(1)

Income Tax Assessment Act 1997 subsection 305-80(2)

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)

Income Tax Assessment Regulations 1997 regulation 960.50.01

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

Reasons for decision

Summary

A portion of the lump sum payment transferred from the Overseas Pension Scheme to the Australian Fund should be included as assessable 'applicable fund earnings' in your client's income tax return for the 2014-15.

However, the amount will instead be subject to tax at 15% if your client elects for the Australian Fund to treat that amount as the assessable income of the 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 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 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 that 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 that your client's 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

Your client became a resident of Australia for tax purposes on the Residency Date and received a lump sum payment in respect of his entitlements in the Overseas Pension Scheme in the 2014-15 income year. As this payment occurred more than six months after your client became an Australian resident, section 305-70 of the ITAA 1997 applies to include the 'applicable fund earnings' (if any) in your client's assessable income for the relevant year.

The 'applicable fund earnings' are worked out under section 305-75 of the ITAA 1997. As mentioned earlier, subsection 305-75(3) of the ITAA 1997 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).

The effect of section 305-75 of the ITAA 1997 is that your client is assessed only on the income they earned on his benefits in the Overseas Pension Scheme less any contributions they 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. 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 your client 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 Residency Date (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

The values of your client's two accounts in the Overseas Pension Scheme on the day before the Residency Date are added together. The resulting amount is then converted into Australian dollars (AU$) at the exchange rate that applied on that day.

From the facts provided no contributions have been made to the Overseas Pension Scheme since your client migrated to Australia. There have also been no transfers into the Overseas Pension Scheme from other foreign pension schemes since your client became a resident of Australia.

During the 2014-15 income year, the benefits from the two accounts in the Overseas Pension Scheme were transferred directly into the Australian Fund. The values of the two accounts in the Overseas Pension Scheme on the day of the transfer are added together. The resulting amount is then converted into Australian dollars (AU$) at the exchange rate that applied on that 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. Your client was 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 lump sum payment from the Overseas Pension Scheme

In accordance with subsection 305-75(3) of the ITAA 1997, the amounts determined at subparagraphs 305-75(3)(a)(i), (ii) and (iii) of the ITAA 1997 are added.

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.

The result of this calculation is the portion of the lump sum payment transferred from the Overseas Pension Scheme to the Australian Fund which must be included as assessable 'applicable fund earnings' in your client's income tax return for the 2014-15 income year.

Election

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 tax rate.

To qualify, the taxpayer 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).

As your client no longer has an interest in the Overseas Pension Scheme, your client is eligible to make the election.