Edited version of your written advice

Authorisation Number: 1012719331110

Ruling

Subject: Lump sum from a superannuation fund

Questions

1. Is the lump sum payment from a foreign pension plan exempt under section 305-60 of the Income Tax Assessment Act 1997 (ITAA 1997)?

2. Is any part of the lump sum payment assessable as applicable fund earnings under section 305-70 of the ITAA 1997?

3. Can the taxpayer (the Taxpayer) choose to include all or part the applicable fund earnings (if any) in the assessable income of an Australian superannuation fund under section 305-80 of the ITAA 1997?

Answers

1. No.

2. Yes.

3. No.

This ruling applies for the following periods:

Income year ending 30 June 2015

The scheme commences on:

1 July 2014

Relevant facts and circumstances

During the 200X income year, the Taxpayer commenced employment with a foreign employer (the Employer) in an overseas country.

On a date during the relevant income year (the Residency Date), the Taxpayer returned to Australia permanently.

From the commencement of the employment with the Employer to the date of return to Australia, the Taxpayer was a non-resident for tax purposes.

Soon after the Taxpayer's return to Australia, an agreement was made between the Taxpayer and the Employer terminating the Taxpayer's employment with the Employer effective from a specified future date (the Termination Date).

The Taxpayer is a member of a foreign executive pension plan (Pension Plan) which is established and controlled in an overseas country.

In accordance with the terms of the Pension Plan, the Taxpayer's benefits account can be paid in the event of:

• retirement (if requested) if their employment contract ends when they reach age 65

• early retirement if their employment contract ends after the they reach the age of 60 and before they reach the age of 65,

• disability (if requested) and they are considered as totally and permanently unable to perform official duties according to their function, and

• death to their designated beneficiaries.

You advised the amount that was vested in the Taxpayer just before the day they became an Australian resident.

Both the Taxpayer and the Employer have made contributions to the Pension Plan after the Taxpayer became a resident of Australia.

During the subsequent income year, the trustee of the Pension Plan paid a lump sum benefit directly to the Taxpayer's overseas bank account. The benefit was paid more than six months after the Residency Date and less than six months after the Termination Date.

A few days later, the amount received by the Taxpayer from the Pension Plan was converted into Australian dollars and transferred to the Taxpayer's self-managed superannuation fund (the Australian Fund).

You state that the Taxpayer had to confirm details with the Australian Fund's bank account in Australia before they could transfer their benefit to the Australian Fund.

No part of the payment is attributable to amounts transferred into the Pension Plan from any other foreign superannuation fund during the period.

There are no previously exempt fund earnings.

The Taxpayer no longer had any interest in the Pension Plan after the lump sum payment was made.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 305-B

Income Tax Assessment Act 1997 Section 305-60

Income Tax Assessment Act 1997 Subsection 305-60(a)

Income Tax Assessment Act 1997 Subsection 305-60(b)

Income Tax Assessment Act 1997 Section 305-65

Income Tax Assessment Act 1997 Subsection 305-65(1)

Income Tax Assessment Act 1997 Section 305-70

Income Tax Assessment Act 1997 Subsection 305-70(1)

Income Tax Assessment Act 1997 Subsection 305-75(2)

Income Tax Assessment Act 1997 Subsection 305-75(3)

Income Tax Assessment Act 1997 Section 305-80

Income Tax Assessment Act 1997 Subsection 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 295-95(2)

Income Tax Assessment Act 1997 Subsection 995-1(1)

Income Tax Regulations 1997 Regulation 960-50.01

Reasons for decision

Summary

The lump sum payment (the Payment) from the Pension Plan is not exempt under section 305-60 or section 305-65 of the ITAA 1997.

In accordance with section 305-70 of the ITAA 1997, a portion of the Payment must be included in the Taxpayer's assessable income in the 2014-15 income year as applicable fund earnings.

The Taxpayer cannot elect to have all or part of the applicable fund earnings treated as assessable income of the Australian Fund because the Payment was not made into the Australian Fund but to the Taxpayer's personal bank account.

Detailed reasoning

Lump sums received within six months of Australian residency

Subdivision 305-B of the ITAA 1997 deals with superannuation benefits paid from foreign superannuation funds.

Section 305-55 of the ITAA 1997 restricts the application of that Subdivision to lump sums received from certain foreign superannuation funds, or schemes that pay benefits in the nature of superannuation upon retirement or death.

Generally, where a lump sum paid from a foreign superannuation fund is received within six months after Australian residency or termination of foreign employment, the lump sum is not assessable income and is not exempt income. That is, it is tax-free (sections 305-60 and 305-65 of the ITAA 1997).

Where a lump sum paid from a foreign superannuation fund is received more than six months after Australian residency, section 305-70 of the ITAA 1997 applies to include any applicable fund earnings in assessable income.

However, before determining whether an amount is exempt under sections 305-60, or 305-65 of the ITAA 1997, or 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 Subdivision 305-B will not apply.

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.

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.

Therefore, there are three tests that a superannuation fund must satisfy at the same time if it is to be an Australian superannuation fund as defined in subsection 295-95(2) of the ITAA 1997. If a fund fails to satisfy any one of the tests at that particular time, it is not an Australian superannuation fund at that time, even if it satisfies the other two tests.

Based on the above, a superannuation fund that is established outside of Australia and has its central management and control outside of Australia would not qualify as an Australian superannuation fund and would, therefore be a foreign superannuation fund in accordance with subsection 995-1(1) of the ITAA 1997. The fact that some of its members may be Australian residents would not necessarily alter this.

Meaning of 'provident, benefit, superannuation or retirement fund'

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), that is:

(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;

The High Court examined both the terms superannuation fund and fund in Scott v. Commissioner of Taxation of the Commonwealth (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 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) 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.

Therefore, in order for the lump sum payment from the Pension Plan to be considered a payment from a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997, the Pension Plan must be a provident, benefit, superannuation or retirement fund as discussed above.

The information provided indicates that the Taxpayer could access their benefits in the Pension Plan only on their retirement. As such, the Pension Plan would meet the definition of a superannuation fund. In addition, it is clear the Pension Plan is established outside of Australia and their central management and control is outside of Australia. Therefore, on the basis of the information provided, the Commissioner considers that the Pension Plan is a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997.

Lump sum received within six months

In accordance with section 305-60 of the ITAA 1997, a superannuation lump sum received from a foreign superannuation fund is not assessable income and is not exempt income if:

• the taxpayer receives it within six months after they become an Australian resident; and

• it relates only to a period:

(i) when the taxpayer was not an Australian resident; or

(ii) starting after the taxpayer became an Australian resident and ending before they receive the payment; and

• it does not exceed the amount in the fund that was vested in the taxpayer when they received the payment.

For a payment from a foreign superannuation fund to be tax-free all of the conditions in subsection 305-60 of the ITAA 1997 must be satisfied.

In this case, the Taxpayer returned to live in Australia permanently on the Residency Date. It follows that the Taxpayer became a resident of Australia for tax purposes on this date. The lump sum payment was received by the Taxpayer more than six months after the Residency Date.

Therefore, as the lump sum payment from the Pension Plan was received by the Taxpayer more than six months after they became a resident, of Australia, the payment fails paragraph 305-60(a) of the ITAA 1997.

As the first condition of section 305-60 of the ITAA 1997 has not been satisfied it is not necessary to consider the other conditions.

Therefore the exemption under section 305-60 of the ITAA 1997 does not apply in this case.

Lump sum received within 6 months of the termination of foreign employment

In relation to a termination of employment in a foreign country and receipt of a superannuation lump sum payment, section 305-65(1) of the ITAA 1997, as far as relevant, states:

A superannuation lump sum you receive is not assessable income and is not exempt income if:

(a) you receive it in consequence of:

(i) the termination of your employment as an employee, or as the holder of an office, in a foreign country; or … and

(b) it relates only to the period of that employment, holding of office, or engagement; and

(c) you were an Australian resident during the period of the employment, holding of office or engagement; and

(d) you receive the lump sum within 6 months after the termination; and …

For a payment from a foreign superannuation fund to be tax-free all of the conditions in subsection 305-65(1) of the ITAA 1997 must be satisfied.

In this case, it is accepted that the payment was made to the Taxpayer in consequence of the termination of their employment. The payment relates only to the period of the foreign employment and was received within six months of termination.

However, the Taxpayer was not an Australian resident during the period of the employment, therefore the exemption under section 305-65 of the ITAA 1997 does not apply in this case.

Lump sum payments transferred from foreign superannuation funds

Subsection 305-70(1) of the ITAA 1997 states that section 305-70 of the ITAA 1997 applies to a superannuation lump sum from a foreign superannuation fund if the recipient is a resident when the lump sum is received and sections 305-60 and 305-65 of the ITAA 1997 do not apply.

As sections 305-60 and 305-65 do not apply in this case, section 305-70 of the ITAA 1997 needs to be considered.

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, are assessable under section 305-70 of the ITAA 1997.

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.

Applicable fund earnings

The Taxpayer became a resident of Australia for tax purposes on the Residency Date and received the lump sum payment from the Pension Plan more than six months after that date. Therefore, section 305-70 of the ITAA 1997 applies to include the 'applicable fund earnings' (if any) in the Taxpayer'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) 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).

In short, the Taxpayer is assessed only on the income earned (the accretion) in respect of the Pension Plan less any contributions the Taxpayer made since they became a resident of Australia. Further, any amounts representing earnings during periods of non-residency, and transfers into the Pension Plan do not form part of the taxable amount when the foreign 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) of the ITAA 1997 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 the Taxpayer'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 payment the Taxpayer 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 at the exchange rate applicable at the time of receipt.

When the amount in the Pension Fund that was vested in the Taxpayer 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 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 Pension Plan 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 Pension Plan at the exchange rate applicable just before the day the Taxpayer became an Australian resident.

Amounts to be used in calculation

The value of the benefit in the Pension Plan on the day before the Taxpayer became a resident of Australia is converted into Australian dollars at the exchange rate that applied on that day.

From the facts provided, contributions were made to the Pension Plan by the Employer and the Taxpayer since the Taxpayer became a resident of Australia. Each contribution is converted into Australian dollars at the exchange rate that applied on the day it was made.

Therefore, the contributions from the Employer and the Taxpayer have been converted to Australian dollars.

There have been no transfers into the Pension Plan from other foreign pension schemes by the Taxpayer since becoming a resident of Australia.

The Taxpayer's benefits in the Pension Plan were paid to the Taxpayer as a lump sum. Therefore the amount paid is the amount vested in the Taxpayer when the lump sum was paid. This is converted into Australian dollars at the exchange rate that applied on the day of payment.

'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. The Taxpayer was a resident for the whole of that 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.

Applying subsection 305-75(3) of the ITAA 1997 to the Taxpayer's circumstances, the amounts to be used in calculating the applicable fund earnings in respect of the payment are as follows:

Calculation of the assessable amount of the payment from the Pension Plan

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, an amount of the lump sum payment from the Pension Plan should be included as assessable 'applicable fund earnings' in the Taxpayer's income tax return for the subsequent income year.

Election

The amount of applicable fund earnings, worked out under either subsections 305-75(2) or (3) of the ITAA 1997, is subject to tax at the person's marginal rates of tax. The remainder of the payment is not assessable income and is not exempt income.

However, a taxpayer transferring their overseas superannuation directly to an Australian complying superannuation fund more than six months after becoming a resident, may be able to elect under subsection 305-80(2) of the ITAA 1997 to have all or part of the payment treated as assessable income of the Australian superannuation fund.

As a result, the amount specified in the election notice will be included as 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 rate.

The election must be in writing, specify the amount to be covered by the election and comply with any requirements specified in the ITAR (subsection 305-80(3) of the ITAA 1997).

In this case, the lump sum was not paid by the Pension Plan into the Australian Fund but into the Taxpayer's personal bank account. Therefore, the Taxpayer cannot elect to have all or part of the applicable fund earnings treated as assessable income of the Australian Fund.