Edited version of your written advice

Authorisation Number: 1012766719988

Ruling

Subject: lump sum payment from foreign fund

Question

Is any part of the lump sum payment received from a foreign pension scheme assessable as applicable fund earnings in accordance with section 305-70 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

This ruling applies for the following periods:

Income year ending 30 June 2015

The scheme commences on:

1 July 2014.

Relevant facts and circumstances

You became a resident of Australia for tax purposes on a date in 2008 (the Residency Date).

While living in a foreign country (the Foreign Country), you became a member of a foreign pension scheme (the Scheme).

The Scheme is a retirement fund established and managed in the Foreign Country.

Under the terms of the Scheme, benefits are payable to members at:

• retirement; or

• early retirement due to ill health; and

• early withdrawals for non-retirement purposes are not permitted.

In 2014-15 income year, your entire benefit in the Scheme was transferred to an Australian superannuation fund (the Australian Fund). The amount transferred was converted into Australian currency by the Australian Fund.

You are unable to obtain from the Scheme the exact amount that was vested in you just before the Residency Date.

Your preserved benefits in the Scheme were indexed in line with the consumer price index to a maximum of 5% per annum.

There have been no transfers into the Scheme from other foreign pension schemes since becoming a resident of Australia.

No contributions were made to the Scheme on or after the Residency Date.

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 306-70.

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 Subsection 10(1).

Superannuation Industry (Supervision) Act 1993 Section 19.

Superannuation Industry (Supervision) Act 1993 Section 62.

Reasons for decision

Summary

The 'applicable fund earnings' in relation to the lump sum payment is zero. Therefore, no part of the payment received from the Scheme will be included in your assessable income for the 2014-15 income year.

Detailed reasoning

Lump sum payments transferred from foreign superannuation funds

Section 305-70 of the ITAA 1997 applies to lump sum payments from foreign superannuation funds that are received more than six months after a person has become an Australian resident.

In accordance with subsection 305-70(2) of the ITAA 1997, so much of the lump sum as equals the applicable fund earnings, as worked out under section 305-75 of the ITAA 1997, is included in the assessable income of a person.

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 amount is 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.

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'

'Superannuation fund' is defined in subsection 995-1(1) of the ITAA 1997 as having the meaning given by section 10 of the Superannuation Industry (Supervision) Act 1993 (the SISA).

Subsection 10(1) of the SISA states:

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.

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.

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 Commissioner of Taxation (Cth) (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 one or more of the 'core purposes'; or for one or more of the core purposes and for one or more of the 'ancillary purposes', namely for the provision of benefits:

• on or after retirement from gainful employment; or

• on attaining a prescribed age; or

• on or after cessation of work on account of ill-health; or

• on or after termination of member's employment with an employer who had at any time contributed to the fund in relation to the member; or

• 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 its attendant 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 SISA.

In this case, it is evident that the Scheme is established outside of Australia; and its central management and control is outside of Australia. In addition, the information provided indicates your benefits in the Scheme are only payable upon retirement or early retirement in case of ill-health.

Therefore, on the basis of the information provided, the Commissioner considers that the Scheme is a foreign superannuation fund as defined in subsection 995-1(1) of the ITAA 1997 and section 305-70 of the ITAA 1997 applies to any payments from the Scheme.

Applicable fund earnings

You became a resident of Australia for tax purposes on the Residency Date and the relevant lump sum was paid more than six months after that date. Therefore, section 305-70 applies to include the 'applicable fund earnings' (if any) in your assessable income for the relevant year.

The 'applicable fund earnings' amount is 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 income 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 you are assessed only on the income you earned on your benefits in the 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

For the purposes of the ITAA 1997, subsection 960-50(1) of the ITAA 1997 provides that an amount in a foreign currency is to be translated into Australian currency.

Subsection 960-50(4) of the ITAA 1997 provides that in applying section 960-50 of the ITAA 1997:

(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 exception for 'special accrual amounts', as defined in subsection 995-1(1) of the ITAA 1997, is not relevant in the present context.)

The table in subsection 960-50(6) of the ITAA 1997 sets out the translation rules. Item 11 in that table applies to the translation of the amount of the relevant superannuation lump sum received. Item 11 applies to an amount of a receipt or payment, where none of the earlier items of the table apply.

Pursuant to item 11, the amount of the relevant superannuation lump sum is to be translated to Australia currency at the exchange rate applicable at the time of its receipt.

Item 11A in that table, which is inserted into the table by subregulation 960-50.01(1) of the Income Tax Assessment Regulations 1997, applies to amounts used in the method statements set out in to subsections 305-75(2) and (3) of the ITAA 1997 to work out an individual's applicable fund earnings in relation to a superannuation lump sum.

Item 11A applies to an amount (other than an amount of a receipt or a payment) to which none of the earlier items of the table apply. Amounts used in the method statements set out in subsections 305-75(2) and 305-75(3) of the ITAA 1997 are not receipts or payments.

Item 11A requires that an amount to which it applies is to be translated into Australian currency at an exchange rate that is reasonable having regard to the circumstances. The Commissioner considers that, in the circumstances of this case, the exchange rate at which it is reasonable to translate amounts used in the method statements set out in subsections 305-75(2) and (3) of the ITAA 1997 into Australian currency is the exchange rate applicable at the time of receipt of the relevant superannuation lump sum given that, as mentioned above:

• in essence, the amount of applicable fund earnings in relation to a superannuation lump sum to which section 305-70 of the ITAA 1997 applies is the part of the lump sum that is attributable to earnings that have accrued to the individual in the foreign superannuation fund during the period the individual is an Australian resident;

• a comparison must be made between the amount of a superannuation lump sum to which section 305-70 applies and the amount of the individual's applicable fund earnings in relation to that lump sum to determine the amount included in the assessable income of the individual under subsection 305-70(2) of the ITAA 1997; and

• the amount of a superannuation lump sum to which section 305-70 of the ITAA 1997 applies is to be translated to Australian currency at the exchange rate applicable at the time of its receipt.

Amounts to be used in calculation in relation to the lump sum payment

In relation to the lump sum payment received from the Scheme, it is noted that no contributions, or transfers from other foreign superannuation funds, were made to the Scheme after you became a resident of Australia.

For the purposes of paragraph 305-75(3)(c) of the ITAA 1997 'the period' 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 that period. Therefore, the Australian resident days and the total days are the same, and so the proportion to be used in the following calculations is 1.

Further, there are no previously exempt fund earnings for the purposes of paragraph 305-75(3)(d) of the ITAA 1997 in relation to the first lump sum.

Calculation of the assessable amount of the lump sum payment from the Scheme

The amount in the Scheme that was vested in you on the day before you became a resident of Australia is converted into Australian dollars at the exchange rate that applied on the day of receipt of the relevant lump sum.

In late 2014, a lump sum payment was made from the Scheme to the Australian Fund. This amount was converted to Australian Dollars by the Australian Fund, and is taken to be the amount vested in you when the lump sum was paid.

Applying subsection 305-75(3) of the ITAA 1997 to your circumstances, the applicable fund earnings is calculated as follows:

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) 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 is the amount that must be included in your 2014-15 income tax return as assessable 'applicable fund earnings' in respect of the relevant lump sum.