Edited version of your written advice

Authorisation Number: 1012720342518

Ruling

Subject: Lump sum from a foreign fund

Question 1

Will any part of the benefit transferred from an overseas pension fund (the Pension Fund) to a complying Australian superannuation fund (the Australian Fund) be assessable as applicable fund earnings under section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Are you able to choose under section 305-80 of the ITAA 1997 to include all or part of the applicable fund earnings (if any) in the assessable income of the Australian fund?

Answer

Yes.

This ruling applies for the following periods:

Income year ended 30 June 2014.

The scheme commences on:

1 July 2013.

Relevant facts and circumstances

You are an Australia citizen who worked for a foreign company in an overseas country.

You returned to Australia some time ago and became a resident for taxation purposes from that date (the Residency Date).

You held an interest in a foreign pension scheme (the Pension Scheme) which is a pension scheme established and controlled in an overseas country.

Some years ago, the foreign company you were working for was acquired by another company. As a result the Pension Scheme, which was in deficit at the time, was absorbed into another pension fund (the Pension Fund).

The Pension Fund was also established and controlled in an overseas country.

You cannot access your benefits in the Pension Fund other than at retirement in the overseas country.

There have been no contributions to the Pension Fund since you returned to Australia.

On a date in the 2013-14 income year, your benefits in the Pension Fund were transferred to a complying Australian superannuation fund (the Australian Fund). The date of the payment (the Payment Date) was more than six months after the Residency Date.

You have provided documentation to show that the amount transferred was converted into Australian dollars on the Payment Date.

You no longer have an interest in the Pension Fund.

You provided the value of your benefits in the Pension Fund as at another date prior to the 2013-14 income year.

You are unable to provide the value of your benefits in the Pension Fund as at the day just before the residency day.

Assumptions

The value of your benefits in the Pension Fund as at the day just before residency has been estimated. This amount (the Estimated Value) was calculated with reference to the value of the Pension Fund as at the transfer date and another date you provided prior to the 2013-14 income year.

The Commissioner considers it reasonable to assume that the value of your benefits in the Pension Fund on the day before residency was this amount. You have agreed with the Commissioner.

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 305-80(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 995-1(1)

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

Part of the payment transferred from the Pension Fund to the Australian Fund is assessable as the applicable fund earnings. This amount should be included in your income tax return for the 2013-14 income year.

As you no longer have an interest in the Pension Fund, you are eligible to make an election to have all or part of the applicable fund earnings amount treated as assessable income of the Australian 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, is 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 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.

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.

Subsection 295-95(2) of the ITAA 1997 defines 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.

Meaning of 'superannuation 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.

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

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 Superannuation Industry (Supervision) Act 1993 (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 Fund to be considered a payment 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 Pension Fund is established outside of Australia. Similarly, the central management and control of the fund is outside of Australia. In addition, the documentation provided indicates your benefits in the Pension Fund are only payable upon retirement. As such, the Pension Fund would meet the definition of a foreign superannuation fund.

Therefore, on the basis of the information provided, the Commissioner considers the lump sum payment transferred from the Pension Fund is a payment from 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 transferred your total interest in the Pension Fund to the Australian fund on the Payment Date. 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) in your assessable income for the 2013-14 income year.

The 'applicable fund earnings' amount is worked out under section 305-75 of the ITAA 1997. In your case, subsection 305-75(3) of the ITAA 1997 applies as 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, 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).

This means you are assessed only on the income earned on your benefits in the Pension Fund less any contributions made since you became a resident of Australia. Any earnings made during periods of non-residency, and transfers into the Pension 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$). For the purposes of section 305-70 of the ITAA 1997, the 'applicable fund earnings' should be calculated by:

• translating the lump sum payment received from the overseas superannuation fund 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 payment vested in the overseas superannuation fund at the exchange rate applicable on the day immediately before the residency date (item 11A of the table to subsection 960-50(6)).

Amounts to be used in calculation

The Estimated Value of your benefits in the Pension Fund on the day before you became a resident for tax purposes 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 Pension Fund since you migrated to Australia.

During the 2013-14 income year, your benefits in the Pension Fund were paid to you in the form of a lump sum which was transferred directly into the Australian Fund. Therefore this is the amount vested in you when the lump sum was paid. You provided documentation to show the amount you received in a foreign currency and the amount converted into Australian dollars.

'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 payment from the Pension Fund

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).

As the result of this calculation is positive, a portion of the lump sum payment transferred from the Pension Fund to the Australian Fund will be included as assessable 'applicable fund earnings' in your income tax return for the 2013-14 income year.

Election

A taxpayer who is 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 applicable fund earnings 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.

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 you no longer have an interest in the Pension Fund you are eligible to make the election.